Understanding your investing DNA is key to making good choices.

By Frank Jasper, Member of ASB’s Investment Committee

Choice is a wonderful thing, and a curse. As investors, we face a plethora of choices in how we invest our money – but arguably the most important choice we make is the level of investment risk we are prepared to take.

Do we invest conservatively and accept traditionally lower average returns or be more aggressive, seeking potentially higher investment returns but accepting more bumps in the road? How do we make this choice?

The keys to making a choice you can live with and successfully grow your wealth are: knowing your goals, investment timeframe and, most importantly your investment DNA; knowing yourself.

Return and risk are inseparable. We all love the idea of extra return, especially if markets are strong. However, markets don’t always go up and the falls, like during the Covid pandemic, can be painful.

Successfully growing wealth requires navigating those tough years and, most critically, the emotions that come with them. The quickest way to derail successful long-term compounding of returns is whipsawing our portfolios from one strategy to another in response to the market’s gyrations.

So how do we choose between the relative “safety” of a conservative approach and the increased long-term return potential that more volatile growth or aggressive investment strategies might offer? How do we find an investment strategy we can live with year after year? We suggest a three-step plan:

1. Know what you need – An important first step is having a clear understanding of your investment goals, be it to fund retirement, to buy your first home or for another specific purpose. Focus on achieving these goals, rather than trying to make as much money as possible. Morgan Housel - author, investor and psychologist, puts it well: “Never risk what you have to reach for something you don’t need.”
2. Know your timing - Time can help or harm. Investment in growth assets like shares typically generates a higher return over the long term but with it comes more significant bumps in the road. When share prices fall, it can take a long time to recover. For instance, the average time to regain lost ground for the US share market, measured by the S&P 500 index, following a fall of 20 per cent or more, is 19 months and has been as long as 69 months. This can be an opportunity for the patient investor; buying shares at depressed prices is a great way to build wealth but can be disastrous if you need to use your money in the short term. That’s why knowing the timeframe for achieving your goal is just as important as the goal.
3. Know yourself - how we respond when markets fall, and to the urge to sell or change strategies, is key to choosing investments we are comfortable with. Looking at your past investment decisions is a really useful gauge of how you may respond to shifts in the market. We can also take some cues from research. For instance, if markets have been strong in recent years, research suggests we might overestimate our comfort with risk. Similarly, if markets have been brutal, we probably underestimate our comfort. Community influences are also important. If friends and family are comfortable with high levels of investment risk, we are also more likely to be and vice versa. Thinking through these influences may help you better understand your own investing DNA.

In investing we deal with variability and with powerful human emotions. By understanding this, and how we behave, we can make investment choices that we can live with even in the inevitable difficult times, and let the power of compounding grow or maintain our wealth over the long term.

Speaking to an expert can be a helpful next step in ensuring your investment decisions align with your goals and appetite for risk. ASB offers a range of investment options and advice services to help customers with their goals and needs, including the option to invest in new Aggressive Funds it has recently launched.

The Aggressive Funds, available within the ASB KiwiSaver Scheme and ASB Investment Funds, aim to provide customers with the highest investment returns over the long term of all its funds, with the largest movements in value up and down. If you would like to get in touch to hear about how ASB can help you with your investment choices, speak to the team in branch, online at asb.co.nz, or on 0800 108 084.

Disclaimer: This article contains general information only. It is not financial advice and does not take into consideration your personal needs and financial circumstances. You should consider seeking financial advice before making any investment decision.

Interests in the ASB KiwiSaver Scheme and the ASB Investment Funds (Schemes) are issued by ASB Group Investments Limited, a wholly owned subsidiary of ASB Bank Limited (ASB). ASB provides Scheme administration and distribution services. No person guarantees interests in the Schemes. Interests in the Schemes are not deposits or other liabilities of ASB. They are subject to investment risk, including possible loss of income and principal invested. For more information see the Product Disclosure Statements for the Schemes available from ASB’s website and the register of offers of financial products at disclose-register.companiesoffice.govt.nz/ (search for ASB).