KEY POINTS:
Last week a Herald on Sunday reader wrote: "Since paying off the mortgage on our Auckland home six years ago, we have saved cash in a savings account. We also have a retirement savings scheme through my employer where
4 per cent of my salary, matched by my employer, has been invested in a balanced fund for the past 10 years, and we have both joined KiwiSaver.
"We selected a balanced fund rather than the cash-fund option based on the consensus among investment advisers to diversify. We had accepted there would be an element of risk and some volatility, however nothing like we have seen over the past couple of months.
"My employer plans to wind up the company scheme next year due to the introduction of KiwiSaver, so I will not have the option to ride out this volatile period but will be forced to cash up. At this stage it appears this will be at a considerable loss and I don't feel I will have the nerve to re-invest. I now feel the concept of diversification is fundamentally flawed when it comes to the share market, due to the global marketplace."
My advice is: don't give up on diversification.
Diversification does work over a longer period of time even though there may be quite close correlation between the markets in the short term (especially in the extraordinary times as we have now). Not all markets move together _ even at the moment, some have been worse affected than others.
More importantly, diversification means being in different asset classes _ for example, your balanced Super fund will have a good proportion of bonds and other fixed-interest investments, which are likely to have done very well as interest rates have fallen.
Diversifying into these other assets (such as bonds) by owning a balanced fund will have cushioned the fall in your investment (even though it will still have been bumpy).
You may not realise it but you are enjoying the effects of diversification _ your losses would have been much greater if you were in an undiversified fund based on one country.
Diversifying across countries and investments will still give you more safety and less risk than someone who has not diversified.
It is a shame your Super fund is being wound up _ it was a good deal for you. But you do have the chance to ride out the slump by transferring the money you receive on winding up to another fund (you could use your KiwiSaver account).
Ensure this new fund is close to the current fund you have in terms of its asset allocation _ you should resist the temptation to select a more conservative fund as this would mean you will have sold out of equities.
If you move out of equities at this time, you will have had the worst effects of this crash but not be there to enjoy the bounce when it inevitably comes.
At your age, 40, you are investing for at least a few decades. With this timeframe, you could actually be in a more aggressive fund _ such as one with an even greater proportion of shares.
You may not be comfortable with this _ you will experience more volatility.
But when you look back in 20 years, the higher returns should make you pleased you did. I'm not sure we are yet at exactly the right time to be loading up on shares. However, you are effectively dollar-cost averaging by drip feeding into the markets and therefore you will be buying shares regularly, making timing less important.
Having purchased expensive units over the past 10 years, it makes no sense to get out now when these units are cheap.
Remember that old saying: buy in gloom, sell in boom.
I know it is harder for you to do than it is for me to write, but you should feel the fear and do it anyway. You will eventually be glad that you did.
Each week best-selling financial author Martin Hawes shares strategies to help you grow your wealth. You can email your personal finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz
On the web: www.wealthcoaches.net
