We’ve had a good run in share markets since the Global Financial Crisis (GFC) of 2008. Initially this growth was underpinned by central banks engaging in quantitative easing – otherwise known as ‘printing money’. Central banks released funds into circulation through purchasing securities as a way of reducing the likelihood of economies going into recession after the GFC. Much of this money found its way into share markets, with the increased demand for shares driving up prices. Now the threat of recession has considerably lessened, central banks are easing off their money printing and may begin to reverse the process. At the same time, we are facing increased political tension and uncertainty around the world. The higher markets rise, the more nervous investors become. One piece of bad news could be enough to see a sharp drop in share markets. This is the nature of market cycles – what goes up, must eventually come down.
As we go into what could be a volatile period, it will become very important to match your investment strategy with your investment time frame. Your investment time frame is the time when you plan to spend your funds. The shorter the time frame, the more certain you need to be about the value of your investment. To have certainty you need to choose investments that don’t change much in value such as tem deposits and bonds. This may mean accepting a lower rate of investment return. Investing in shares should give you a higher rate of return in the longer term (five years or more) but you need to be prepared to leave your money invested until market cycles have worked through. Investors who lose money in shares do so for two reasons – their investments are not sufficiently diversified or they sell at the wrong time.
Liz Koh is an Authorised Financial Adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847. For free eBooks, go to www.moneymax.co.nz and www.moneymaxcoach.com