KEY POINTS:
Investment markets work on two predominant emotions - fear and greed - and at the moment it is fear that is dominating most investors' thoughts.
With the sub-prime crisis carrying on unabated and property and share markets in disarray, there are plenty of people sitting on big losses.
So when there is chaos and devastation on the markets what should an investor do?
The first thing is to re-frame the situation so you can see it for what is. The bear markets we have in both shares and property will represent an opportunity to be grasped rather than a threat to be avoided or ignored.
Money is made when you buy - and one day, the turmoil we have in our markets will see prices that look like shopping at Boxing Day sales.
Many wealthy people made their money because they happened to be cashed-up and able to invest at a time when markets were down.
That they were cashed up may have been luck (such as receiving an inheritance or selling their business) or it could have been by design (for instance, they predicted the market fall and had cashed up to take advantage of it).
Whichever it might be, a market crash represents a transfer of wealth, from those who sell out to those who pick up top investment assets at bargain prices.
A colleague has been holding and building up cash for the past five years because his assessment of the markets has been that they are too expensive.
Aged 50, he believes that he may only have one more opportunity to "enjoy" a good crash.
The second thing is to re-visit your investment goals and strategy.
If your investment aims remain the same you should reaffirm the asset allocation that you have and sit tight.
For example, if you are a high-growth, aggressive investor you will have a high proportion of shares and property in your portfolio and you should have expected this sort of volatility to come along at times. If your investment aims remain the same, stay with the strategy.
This is just as true for KiwiSaver investors. Most people should be in aggressive funds which have a high proportion of shares and property.
Only older investors who are within 10 years of retirement and young people using KiwiSaver to save for their first houses should be in conservative funds.
If you are in an aggressive KiwiSaver fund, do not change because returns are poor at the moment - you would in effect be selling shares and property at a bad time. As long as this turmoil in the markets lasts, you will be buying units in your KiwiSaver fund cheaply - something you will profit from when markets rise again.
KiwiSaver and similar investments are for the long term and you should tolerate the volatility, secure in the knowledge that an aggressive fund will eventually give the best returns.
It is hard to know when and at what level this fall will bottom out. Although shares are starting to look well-priced, they may yet get cheaper.
Housing markets still look expensive and they could take a few years to fully recover.
You will never time this exactly but at some point there will be good buying in both of these markets. Ensure you are in a position to take advantage of the opportunity to buy good assets on the cheap.
Each week best-selling finance author Martin Hawes will share his strategies to help you grow your wealth. You can email questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz On the web: www.wealthcoaches.net
