Share markets globally have had a really good run. Despite a flat return for 2021, the ten-year gain for the New Zealand market has been a very healthy 15 per cent per annum.
This dream run for shares has seen balanced and growth KiwiSaver funds far outstrip returns from the safer cash and conservative KiwiSaver funds.
As investors we know there is much we can’t control – changes in inflation, interest rates, geopolitical conflicts, extreme weather events, pandemics – frankly it’s an endless list in our complex world. As investors we can plan for these events, but how things actually play out will often take us by surprise.
We do need to remember there are also factors we can control. We can control what we buy for our portfolio, we can control how diversified our portfolio is and we can also control when we buy.
When markets have had a great run and we want to invest more we need to think about the timing of our buying. Do we buy now, or wait, or even sell?
Any experienced investor will tell you that picking share market peaks and troughs is notoriously tough. Timing markets sounds so easy, but it’s not. Sometimes you might think a market going up is ‘wrong’, whether shares, property or cryptocurrency, but it can keep on staying ‘wrong’ for a very long time.
One strategy for investing when you’re nervous about the market peaking is to ‘average in’. This means don’t invest all at once, but spread your new investment over time. Whether you have $5000 or $5 million to invest, you can ‘average in’ putting part into the market now (say a third), part in a few months’ time (say another third) and the remainder later in the year.
‘Averaging in’ changes the potential upside and downside for the additions to your portfolio.
If markets keep rising from now and don’t pull back, then the best course of action would of course be to fully invest now. But if you know you will be full of regret if you buy now and markets sell off in the next three or six months, then may be don’t fully commit right now.
That’s where ‘averaging in’ helps, it reduces the average cost of entry if the market falls. Many regard this as the position of least regret – if markets go down you can buy in at a cheaper overall price, while if markets go up you still get the market gains with what you have invested (although you’ll also be investing more at higher levels).
Contributing to KiwiSaver through your monthly salary is a form of averaging in, giving you an overall entry price reflecting the ups and downs of the market for the year. When the market dips you are buying at a cheaper price.
2022 will be a different year for investors to 2021, and many expect markets will be increasingly volatile.
If you’re wanting to invest in shares over 2022, do some thinking about whether ‘averaging in’ could be useful. Given there’s so much about investing we can’t control, we must do a good job of managing those things we can control.
-John Berry is co-founder and Chief Executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, the first B Corp certified fund manager in New Zealand which is part of Alvarium Wealth. This commentary is general information only – it is always a good idea to seek professional financial advice for your personal circumstances.
(This article was originally published by Stuff January 6, 2022)
Why you should be thinking about this key KiwiSaver question for 2022
By John Berry on | 3 min. read
Pathfinder chief executive John Berry says active or passively managed funds is a key question for KiwiSaver members in 2022.Read more
Driving KiwiSaver risk and return
By John Berry on | 3 min. read
Truly democratising investing would let all Kiwis have the opportunity to invest. We can, through KiwiSaver, says John Berry.Read more
Series: Crypto Explained - Part Three: What’s in it for me and is it in my KiwiSaver?
By Simon Crotty on | 4 min. read
Now let’s look at what this whole development could mean for you.Read more