The flight to cash

Issue

Stock markets worldwide are susceptible to irrational exuberance and irrational anxiety.  Prices of stocks are affected by people’s behaviour just as individuals investment portfolios are affected by ‘misbehaviour’.

In NZ we are particularly exposed to just such reaction because the majority of accumulators are ‘new’ investors, KiwiSaver being their primary means of capital market experience.  The majority of whom have not invested via a plan and therefore do not understand the rationale for various investment principles.  The expected various peregrinations which constantly afflict capital markets.  They bought a product not a plan.

In a similar vein as more kiwis retire, being part of the large body of baby boomers (born between 1946-64) they too are ‘new’ investors.  And ‘new’ investors with lump sums of money which they hope will see them through a 30 year lifestyle in retirement are even more precious about capital preservation – and so the flight to conservatism often becomes herd like.  People panicking for no other reason than so too are others.  The pro cyclical nature of ‘following’ the markets, both up and down.  Crystallising losses and buying at market tops.

The problem with this particular behaviour can become fatal from an investment perspective.  Chasing returns or attempting to beat the markets by timing (when to get out and when to get in) is a fools errand.  Even the professionals cannot do it consistently.  Attempting to select stocks which you think will ‘outperform’ – consistently, is another fallacy.  The successful do not buy and sell.

The reason for the topic of this blog is an attempt at calm.  A recent social media frenzy called for ‘likes’ to follow him into cash.

Rationale

From a KiwiSaver perspective there are major considerations.

1. KiwiSaver is new and markets have recovered rapidly from 2009 (coincidently the timeframe KiwiSaver has been in force).
2. KiwiSaver investors are not solely focused to retirement planning.  Many of them will or have taken advantage for home purchase.
3. Transparency.  Over 65% of Kiwis in KiwiSaver are with major banks, and thus ‘online’.
4. Social media.  

1. When the global financial crisis hit NZ it coincided with the launch of KiwiSaver.  This had a dramatic affect in Wellington especially because it meant money from employees and money from employers channelled from retail consumption to fund managers coffers (predominantly banks).  The Wellington effect was exacerbated by state servant redundancies.  When the GFC hit KiwiSaver was brand new and balances minimal.  Eight years later, balances are far from minimal but investors, especially those in balanced and growth funds have experienced exceptional growth. (The growth of stocks to new record highs post GFC).  Market volatility will be a new experience.  But volatility is not loss.  Declines are normal.

2. Quite rightly some short to medium term KiwiSaver investors saw the product as a means to get into their first home – and some have more recently woken up to this opportunity.  For that reason a more defensive or conservative asset allocation makes sense.  The reason being the timing of withdrawal and the short timeframe for which it will be required to purchase a home.

3. We know from academic studies that ‘superannuation’ products perform best when left alone by their owners and investors.  In other words – set and forget.  This will not be the case with the majority of NZ’s in KiwiSaver because most of them will be in banks and the banks have led their customers away from advice – and into ‘online’.  This transparency is enjoyed by many especially when it comes to spending – people can check their balances.  The same does not apply when investing long term.  Temptation to fiddle is inevitable – especially among men.  Fiddling with investment is costly and seldom profitable.  ‘Fiddling’ would or could encompass – stopping contributions, changing asset classes, chasing performance, running to cash. (see my opening remarks under – ISSUE).

4. Herding is a natural human behaviour.  Unfortunately it can and is contagious but especially when investing.  Investment booms and busts have significant pages in history.  With the arrival of social media the temptation to take advice from one’s peers has become epidemic.  The dangers are obvious but sometimes the solution less so when emotionally caught in the event – from whom should one take advice at important times.

Recommendation

1. All successful investing is goal orientated and therefore planning driven.  All unsuccessful investing is performance orientated and therefore market driven.
2. You cannot react your way to financial security.
3. An investment portfolio is the servant to the plan.
4. Market volatility is quite normal – there have been 13 bear market recessions since the second world war and the average turnaround from market high to market low back up to a new record market high is 40 months (including ‘the depression’ and ‘the GFC’).
5. US small company stocks have averaged 12% since 1926.
6. NZ’s stock market has outperformed most others since my time in the markets (1967) - (11.8%).
7. Stock market growth is permanent whilst declines are temporary.
8. Take advice from investment professionals – not the media.
9. Volatility is not risk of loss – it is a measure of regular market adjustment to mean.