Slump! Tumble! Plunge!

The worst decline since the last decline: what’s going on with the stock markets?

This week’s sharemarket tumble has been an opportunity to get some of the financial industry’s favourite dramatic words – ‘bloodbath’, ‘plunge’, ‘tumble’, ‘plummet’ – back into the headlines:  But what does this mean for investors? Co-founder of Sharesies Leighton Roberts explains.

For anyone following share markets or browsing the headlines, you may have heard that there’s been uncharacteristically strong growth in share prices during the last few months following a small hiccup in February.

On Thursday, however, the share markets decreased in value. The last time the S&P 500 index (aka the largest 500 public companies in the US) traded at Thursday’s levels was in June this year, though if you had made your purchase in February or March, you’d still be pretty happy.

What’s caused the decline?

Thursday’s drop has largely been put down to expected interest rate increases in the US. While Reserve Bank interest rate increases do not directly affect the stock market, they do impact companies in other ways. That may ultimately lead to a change in stock price.

For example, for companies and customers, an increase in interest rates leads to a higher cost to borrow money. For a company that may lead to an increase in expenses, and for a customer it will increase the cost of debt — home loans and credit cards, for example. As a result, for both, there will be less money to spend. Both of these impact a company’s profit, and in turn, their share price.

The stock market rollercoaster

New Zealanders are heavily invested in share markets in the US, particularly through our KiwiSaver funds. Given the US is such a dominant player we see the flow on impacts making their way to our share markets too.

What does this mean for investors?

If trading stocks is your passion, then you’d probably be enjoying the return of the roller coaster to the markets as a chance to try and make a quick profit. But if you’re investing for the long-term, then now is not the time to panic. In fact, it’s likely that in a few months’ time you won’t even remember that this dip happened. Stock markets regularly go up and down and if the companies were a good investment yesterday—then it’s unlikely to have changed today.

It’s proven very difficult for people, even experienced managers, to pick the ups and downs, and ultimately beat the market. The best advice we can give anyone is to value ‘time in the market’ over ‘timing the market’.

Personally, I’ll stick to my guns and do my best enjoying buying at lower prices. I trust that my well-diversified portfolio will come out the other side just fine. I also know through experience that if I choose to sell by trying to ‘time the market’, it’ll inevitably lead to a bad result.


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