Canny View: How to invest during a downturn

Don't try a new investment philosophy during economic downturns. Photo / Supplied

Over the past few weeks, I have been answering lots of money and market related questions that members of our community have asked.

Not surprisingly, a lot of the questions have had to do with the market volatility and how that can, or should, affect their investments. Below, I've rounded up the top questions asked and answered on investing during this downturn.

How exactly does an investment portfolio recover after a market downturn?

When the share market falls, that means most shares on the market have lost their value and a diversified investment portfolio generally includes lots of different stocks. This is the reason your portfolio balance goes down. But here's the thing: If you leave your money invested and the markets go back up, then the value of your investment portfolio would also go back up.

So generally, one of the worst things to do would be to withdraw the money after the market drops. This would lock in your losses, and you won't have the opportunity to let your portfolio value go back up. That is why we recommend keeping your money invested, even when the markets are down, and focusing on the long-term outcome.

For historical context, if you invested in the stock market in 1929 (right before the Great Depression) and then withdrew, it would have taken you more than 25 years to recover your investment.

If instead, you had invested at the beginning of every year after that (thus, buying into the market at lower prices), it would have taken you less than seven years to recover. If you had invested at the market's peak in late 2007 and then stopped, you'd have recovered in about five years; if you'd invested regularly, you'd have recovered in less than two years.

If I rebalance my portfolio, would I be "locking in my losses"?

Rebalancing is selling some investments, typically the high performing assets, and buying others to adjust the ratio of shares, bonds, and other investments that make up your investment portfolio. That wouldn't be considered locking in your losses. Generally, we would say you lock in your losses if you were to sell your investments for cash and not reinvest that money. Rebalancing is a risk management strategy that we do for our clients on a structured timeframe.

Nick Stewart

What are your thoughts on investing in a single company's stock?

We don't consider ourselves to be experts at picking stocks, or even industries. History and research have proven that nobody can do that reliably, which is why most actively managed mutual funds underperform year after year.

We recommend investing in a diversified investment portfolio that includes shares and bonds from different companies or issuers as well as from different global regions. History has shown that this has been a more reliable way to grow your money by investing.

What's considered "long term" in investing?

When we talk about investing for the long term, we typically mean 10 to 15+ years. For that timeframe, we may recommend more shares than bonds for your portfolio when you start depending on your goals. But as you get closer to your goal date, our investment recommendations may include less shares and more bonds to lower your portfolio's overall risk.

What should I do with my short-term investment goals?

Generally, we recommend keeping any money you're saving to use in the next year or two in a savings account or a fixed-term deposit.

But if you already invested and your investments dropped, that is a tough situation to be in. If you can, it may be a good idea to leave the money where it is to potentially benefit from any recovery the market might make before you need it. That being said, it's impossible to know whether markets will rise or fall in the short term, so we recommend you seek help from a professional to assist your decision.

What is your investment philosophy during an economic downturn?

We don't have a different investment philosophy during economic downturns, and here's why: When we design investment portfolios for our clients, we build in the expectation that downturns like this one – and worse – might happen. That includes making sure your portfolio is well-diversified, rebalanced periodically and that the amount of investment risk you are taking matches up with the timeframe you want to stay invested.

• Nick Stewart is an Authorised 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 and 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