There is no such things as the dark side of the moon ... and no such thing as "everyone is selling", says Nick Stewart.
There is no such things as the dark side of the moon ... and no such thing as "everyone is selling", says Nick Stewart.
Many people use the phrase "I'll see you on the dark side of the moon" to describe something mysterious, distant and unknown – it is ripe for metaphor.
For Kiwis this phrase is relatively apt as we are now two weeks into a four-week nationwide shutdown. And for music fans,the phrase will forever call up Pink Floyd's 1973 concept album.
But truth be told there is no "dark side of the moon".
The moon receives equal amount of sunlight on each side, during the lunar day. For example, if you were to set up camp on the moon and stay put, you would eventually see the sun rise and fall. You would experience both day and night, just like on Earth. There is no permanent dark side of the moon – at least, not in the way you might think.
The radio communications go "dark" when astronauts travel to the "far side of the moon", and people in the space industry would occasionally refer to the condition (not the place) as the dark side of the moon.
So, the "dark side of the moon" is a phrase mistakenly used by people when they mean to say, the far side of the moon – the side opposite to the one we see from our vantage point on Earth.
I think "dark side of the moon" could easily be one of those phrases where the incorrect usage of words does make sense. But it's still technically wrong.
The stock market too has a variety of sayings and catchphrases that attempt to sum up the market movements. A common statement we hear in times like these: "everyone is selling" – the notion that in down days sellers outnumber buyers.
Just like the dark side of the moon, "everyone is selling" is a technically flawed statement. It is true that many investors are anxious and worried about the impact of Covid-19 on their investments in the short term, and there's been a lot of noise in TV and print financial media in the past month.
But for transactions to occur there needs to be buyers and sellers transacting to create trades, even though those trades may occur at lower prices. And if the transactions are going through, it means someone sold and someone else bought at that price.
So, everyone is not selling.
"Remember that investing is a long-term game and panic selling can do more harm than good," says Nick Stewart.
When stock markets are down, some see it as an opportunity. The lower the prices, the larger number of investors become buyers, which would prevent stock prices decreasing forever. When buyers outnumber the sellers, the down cycle would eventually turn into an up cycle.
It's important to remember that investing is a long-term game and panic selling can do more harm than good to an investment journey.
That's why when the market completely surprises you — as with the unnerving situation like Covid-19 — you're better off by not panicking and sticking to an actual plan instead. One that doesn't consist of selling everything immediately to cut your losses.
Because if history has taught us anything, it's that staying the course may be the best way to make it through a downturn.
That's why investment portfolios that are globally diversified and not just invested in stocks are vital. Diversification helps lower portfolios' overall risk, so investors will take on even less risk compared with the equity-only scenarios.
The composition of our portfolios ranges anywhere from a low equity allocation for shorter-term goals with say a six-year time horizon, to a high — up to 97 per cent — for a longer-term goal like retirement (depending on your timeline).
The increased risk associated with equities may give you the opportunity for increased returns over your goal timeline. The thinking is that with a longer timeline, you may have more time to recover in the event of a downturn. So, you can likely afford a higher level of risk.
Investment portfolios are rebalanced whenever the asset allocation, or a mix of investments, gets off-kilter. When a downturn throws off a portfolio's asset allocation, we'll rebalance it to make sure that it is never concentrated in one type of investment.
Ultimately, the market is like a giant weighing machine. All those influences mentioned above are constantly being assessed by millions of participants. And prices continuously adjust based on those collective expectations as new information is coming into the marketplace.
The returns we expect from investing are not there every day, every month, every week or even every year. But the longer we stay invested, the more likely we are to capture them. And in the meantime, we can improve the reliability of outcomes by diversifying.
So, rest assured, even when prices are falling, there are still people buying. The market is doing its job, and the rewards will be there if you remain disciplined and diversified.
And remember that, there is no permanent dark side of the moon and not everyone is selling. See you on the other side, until then stay safe, stay home and stop the spread.
• Nick Stewart is an Authorised Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance and KiwiSaver solutions.
• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
