Riding the Storm
The first Covid lockdown in New Zealand was well over a year ago – I am sure that we all remember the large fluctuations in our KiwiSaver accounts, and other investments.
During that time, we certainly remember having to reassure clients not to panic and ‘ride the storm’. This was obviously nerve wracking for some when some funds fell by over 15%.
What makes people panic?
We are finding though, that many new clients are still concerned about ‘losing their money’ when there is a downturn in the market and this is because many people think of their investments as “money”, rather than an “asset”.
We think of our home as an asset, but not our money.
How KiwiSaver accounts and Managed Funds work...
With managed fund investments (including KiwiSaver), remember that any contributions (whether lump sum or regular contributions) purchase ‘units’ within that fund, and during market fluctuations these units rise and fall in value. When investment markets fall, you still own those units that you have purchased – all that happens is that the value of those units has temporarily reduced. Similarly, when investment markets rise, you still own those units that you have purchased – but the value of those units has increased.
You don't get off a rollercoaster half way through the ride
As an example, suppose you invest $100,000 in a fund where you purchased units priced at $1.00 each. What you effectively own (the asset) is 100,000 units in that fund. Now if the market price of those units drops by 2%, the value of those units has dropped to $98,000. Similarly, if the market price of those units increases by 2%, the value of those units has increased to $102,000. The important thing to realise is that you always retain the number of units you originally purchased and the only way you lose units is by withdrawing funds.
This is exactly the same as the value of your property. When property markets fall, you do not lose money unless you are selling at that time. If not, you still own the asset (your home) which will increase again in value once the property market picks up.
How to turn a positive into a negative
When making regular contributions to your managed fund investment or KiwiSaver, market downturns can help boost your returns. This is because when the market falls, units become cheaper to buy thus allowing you to purchase more units for your money.
We totally understand caution and concern when investing your hard-earned money but by understanding the basics of how investments work, you can actually remove the anxiety of investing and allow yourself to just ride the wave.