Nick Stewart: Don't lose sleep over market volatility

Downturns come with an expiry date, so don't sweat them, Nick Stewart advises. Photo / Supplied

When markets are volatile it is natural to feel anxious.

Your sense of apprehension can be fuelled by dramatic-sounding news headlines and dated TV file footage of traders with their heads in their hands.

We'd all love for the market to go on a winning streak forever. Reaching record highs and blowing minds; but the truth is downturns are a reality, particularly if you are a long-term investor.

The fact that downturns are inescapable can be scary, and off-putting to be quite honest. Add to this the reality that we have no idea when the next downturn is coming or how long it will last. In fact, for individual investors, there can be a natural tendency to want to "do something" in response to volatility. It's built into our human mentality, a "fight or flight"" acute response to the perceived threat. However, acting on those emotions can end up doing you more harm than good because if history has taught us anything, it's that staying the course may be the best way to make it through a downturn.

It's important for investors to have financial adviser on their team to consider their investment strategy and to have factored in the expectation of future markets falls. This is done via a three-step asset allocation process.

Step 1 – Risk tolerance
Your risk tolerance is how comfortable you are watching market volatility potentially affect your money in your account. With market upswings, you could see your account grow in size, but as with market downturns, you could also watch your money in your account shrink.

Step 2 – Risk capacity
Your risk capacity ensures you are well placed to deal with inevitable stock market volatility.

Financial advisers design investment portfolios that are diversified and not just invested in stocks (equities). Diversification helps lower a portfolio's overall risk, so investors will take on even less risk than the equity-only scenarios.

Typically, the composition of investment portfolios ranges anywhere from a low equity allocation for shorter-term goals like a home goal, with say a six-year time horizon, to a high — up to 99 per cent — for a longer-term goal like retirement.

That's because 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 greater level of risk.

Step 3 – Risk required
The last step is based upon how much annual return you require from your portfolio to meet your goals. This figure changes over time and needs to be monitored. For example, you may start with requiring an annual return of 8.0 per cent pa, but after some years of superior performance, this figure may fall to 6.0 per cent pa. At this point, you have a decision to make – do you alter your goals and spend a little more? Or do you take less risk to increase the likelihood your goals will be achieved? It is the role of a good financial adviser to ensure you are on the right track to make informed decisions.

Downturns aren't pretty, they are hard to forecast, and you will likely encounter some during your investing life. But remember, downturns come with an expiration date, it's just uncertain when this will be. So don't sweat the downturns.

Having a fee-only independent financial adviser can ensure you are on the right track to meet your financial goals. They put together a well-thought-out investment strategy so you are prepared for the next stock or bond market fall, and also the one after that.

• Nick Stewart is a 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 & 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