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Volatility can be your friend

10 Nov 2020 by  Russell Investments

You read about it, hear about it and see it flash across screens – it's your regular helping of market volatility, served routinely like a morning cup of tea or coffee.

You'd be forgiven for thinking that investment markets and global economies are constantly booming one day and busting the next.  Human emotion (fed by rapid reporting and analysis) is often to blame for a wild ride, with investors buying and selling based on fear, greed and a herd instinct instead of on fundamental value.

So is it something to lose sleep over? Not really. It all comes down to the way you think about volatility.

We've put together a few reasons to help you think differently about the ups and downs, so the next time someone tries to unnerve you with a dose of volatility doom and gloom, you can nod, smile and move on.


1. A balanced diet

Just as a varied diet of different food groups keeps your body strong, a diversified portfolio from different sources of returns will help your KiwiSaver stay healthier in the long run. Often, in order to access higher long-term returns from growth assets like shares, you may experience short term ups and downs.
Having a diverse portfolio can help smooth out the experience. This means thinking about asset classes and geography:

  • Are your investments diversified across a variety of asset classes, such as shares, bonds, and cash?
  • Are your investments spread locally and internationally?

Great news – your KiwiSaver is already diversified across asset classes, investment funds, investment managers and countries if it’s invested in one of the Aon Russell LifePoints® funds.


2. Your most valuable asset

As an investor, if you were to ask us what your most valuable asset is, we’d say:

  • It's all about the value of your future earnings – your human capital. When you first start working, your savings are low, but this is the optimal time to invest: not just in education and training, but also in your KiwiSaver. Assuming you are not using your KiwiSaver to buy your first home, you can take advantage of the highs and weather the lows, welcoming volatility for the opportunities it opens up over a long investment horizon.
  • As you head towards retirement, you will have amassed financial assets while the value of your future earnings is diminishing because there are less working years left to earn it. This is when most people get more conservative and look for ways to protect their capital. But even in retirement, volatility can be your friend. Maintaining some higher-risk assets such as shares in your investment strategy can help your savings grow faster than inflation to maintain your purchasing power after 65.


3. Buy low, sell high – you’re already on to it

Volatility is nothing more than exaggerated market movement – and it takes movement to create gains.

Did you know that you already have a powerful strategy that can help you weather the ups and downs of volatility?

It’s called dollar-cost averaging, in which regular contributions are invested at set intervals regardless of the share price.

How does dollar cost averaging work?

If you are contributing to your KiwiSaver on a regular basis then every time we invest your money in various asset classes and the prices are lower, your money buys more and when the prices are higher, it buys less.

This averages your buying costs as the market moves up and down protecting your savings from extreme volatility. So you automatically take advantage of this buy- low, sell-high strategy.


The bottom line

The next time markets hit a bumpy patch, just remember – while market volatility may not feel great in the short term, it can be beneficial in the long-run for disciplined investors.

 

Important information
The information contained in this publication was prepared by Russell Investment Group Limited on the basis of information available at the time of preparation. This publication provides general information only and should not be relied upon in making an investment decision. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant Russell Investments’ fund having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant Product Disclosure Statement or Information Memorandum prior to making an investment decision about a Russell Investments’ fund. Accordingly, Russell Investment Group Limited and their directors will not be liable (to the maximum extent permitted by law) for any loss or damage arising as a result of reliance being placed on any of the information contained in this publication. None of Russell Investment Group Limited, any member of the Russell Investments group of companies, their directors or any other person guarantees the repayment of your capital or the return of income. All investments are subject to risks. Significant risks in respect of the Aon Russell LifePoints® funds are outlined in the Aon KiwiSaver Scheme product disclosure statement  Past performance is not a reliable indicator of future performance.

Copyright © 2020 Russell Investments. All rights reserved. This information contained on this publication is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments.

Russell Investments

Russell Investment Group Limited is one of the four underlying investment managers that manage funds that you may invest into with Aon KiwiSaver Scheme.