The past week has been an anxious time for share investors. Local share prices took a dive as the shock of the United States credit downgrade reverberated through world markets.
Over two days the main NZX sharemarket fell more than 5.5 per cent, recovered half the losses the next day,
and then lost some more.
Millions of dollars were trimmed from company valuations and share portfolios - undoing a lot of the investment gains secured over the past year.
In these volatile financial times, sharemarket experts' advice to small investors is to "avoid panicking and hold tight".
Mark Lister, head of private wealth research for nationwide Craigs Investment Partners, says: "If you are a long-term investor, then these periods are something you ride out. At some point buying opportunities emerge. The key is to keep a cool head, make sure you have good stocks, and their dividends are sustainable."
He says people should understand they are investing in shares for 10 years and they can live off the dividends, which keep rolling regardless of prices.
Lister says that during a volatile period it is important for investors to check their portfolios and make sure they are comfortable with their allocations. They should be investing in defensive stocks that are not affected as much by the economic fluctuations or have less overseas exposure.
They are companies operating in the healthcare, infrastructure and utilities sectors, and which have strong balance sheets, low levels of debt, a solid earnings stream and good dividend yields.
Port of Tauranga, TrustPower, Contact Energy, Woolworths, Auckland Airport and Ryman Healthcare, are examples Lister names. "They will hold up better during a period of market weakness."
He says the latest panic selling was an emotional reaction. "Can the market go down further? Of course it could. If you can't sleep at night, then maybe you should be taking some money off the table." But here's the rub. Lister believes Reserve Bank Governor Alan Bollard will backtrack on increasing the official cash rate in the short term because of the change in the United States' financial circumstances and the continuing worries about European debt. Therefore,
deposit rates at the banks won't increase.
When small investors, sitting on cash, take inflation and tax into account they may get from their bank deposits only 1 to 2 per cent. An investor with a portfolio of blue chip shares can still achieve returns of 7 to 7.5 per cent. "You have to live with the fact that even good quality shares will go up and down. We've seen it before and come through it. Investors have done well in the inevitable upturn."
The big difference, this time, is investors know what the problems are. "It's not like 2008 when Lehman Brothers closed and we didn't know what would pan out. Households here have been reducing debt and living within their means over the past three years.
"We've known that United States and a few European countries have had high debt for a number of years and it's the governments that have to sort out their issues this time around.
"The corporate companies are in better condition, they have reduced their debt, and that's why investors should stick with low risk, defensive shares," Lister says.
Russell Garland, an investment adviser for Forsyth Barr in Tauranga, agrees that this is not a good time to sell shares.
"You might be holding cash and you are not there when prices rebound. The best thing is to stay put, providing your shares are good quality. Even if their share prices drop, their earnings remain on track and they become undervalued."
He says no one likes to see their wealth disappear, but this isn't a time to panic. "We saw it in 2008. Ultimately, the shares that were valued based on their earnings withstood the volatility."
Garland also favours infrastructure, utility and healthcare for defensive stocks. Other leading companies, such as Fletcher Building, and Fisher and Paykel Healthcare, are more affected because of their exposure to the exchange rate (high New Zealand dollar) and receive lower export returns.
As the uncertain financial times roll on, how should people balance their investments. Lister suggests that 60 per cent of investment funds should go into property and shares, and 40 per cent into term deposits, corporate bonds, government stock and cash.
Mr Garland suggests a third of investments in property, another third in shares and a further third in fixed interest. "People have to set their risk factor, and there's a greater weight in fixed interest."