Times are changing, so what should you do with your investments?
The Reserve Bank’s recent decision to reduce the Official Cash Rate (OCR) to 5.25% signals a shift in the economy, with further cuts expected later this year. While challenges persist in the labour market and the cost of living remains high, these changes indicate that the economic tide is beginning to turn. At the same time, global share markets have seen steady growth in 2024 and new government regulations are reshaping the property landscape. With these shifts underway, here’s some sage advice on how to get the most from your investments for long-term gains.
Stay invested despite market drops
You might have seen in recent headlines that global share markets have fallen. But thanks in part to strong international markets, investors experienced smooth returns in 2023 and 2024. KiwiSaver assets jumped by around $7.8 billion from January to March 2024, with 80% of the growth due to market returns. The US Share market index, driven by AI advancements, played a big role in this growth.
On average, share markets should have at least five daily declines above 2% per year, and a 10% decline every two years. Over the past 18 months, the US share market index only had one daily decline greater than 2%. While the recent decline happened faster than usual, the size of the downtown is well within the bounds of “normal” market behaviour – something that’s been sadly forgotten in the media!
US equity returns following sharp downturns have historically, on average, been positive. The figure below shows how gains on stock investments can add up following steep market declines. After declines of 10%, 20% and 30% between July 1926 and December 2023, average 5-year returns (cumulative) all exceeded 50%.
When markets take a dive, you might feel tempted to cash out your investments or switch to another fund. But we believe there are only two good reasons to sell your portfolio: 1. you’ve realised something new about your risk tolerance; or 2. your investment goals have shifted. If you wait on the sidelines until things “settle down,” by the time markets are more stable, you could miss out on a significant part of the recovery. For most long-term investors, the biggest risk is not a market downturn. It’s being out of the market during a significant up-tick. Compounding gains over long periods of time is near-reliant on being invested during high performance periods. In fact, missing just ten of the “best days” in the last 50 years leads to less than half the return (Baird).
Of course we can’t guarantee positive returns after every decline, but we can look to the past to help us predict the future. Since World War II, after every decline of over 10%, the average returns over the following 12, 24, and 36 months were positive. By sticking to your plan and staying invested, you increase your chances of benefiting from the recovery.
Think ‘short-term’ as mortgage rates come down
With the RBNZ’s recent OCR cut, mortgage rates are beginning to fall, offering relief to borrowers who have been riding out the storm.
If you’re taking out a new mortgage or your mortgage is up for renewal soon, consider opting for a short-term fixed rate (6-months to 1-year) or a floating rate. This flexibility allows you to take advantage of further rate drops and avoids locking in a rate for an extended period when better options may arise. That said, floating rates are currently high, so a floating rate mortgage may only make sense if you need the flexibility of making extra payments. And if you’re thinking about breaking a fixed-term mortgage, ensure that the new rate offers substantial savings over your break fee and refinancing costs.
It’s prime time for investing in property
Seldom have the conditions for investing in residential property been this favourable! Interest rates are coming down, property prices are low and rental yields are high. The bright-line rule for property investors has also been shortened, meaning if you invest in property now, you can decide to sell after two years of the purchase date without the burden of having to pay income tax on any gains. Plus, if you’re a landlord, you can now claim 80% of your mortgage interest expenses. Even better, the government plans to allow 100% deductibility by April next year, leading to even more savings for you.
If you can manage the short term outlay of buying a residential property in the current market, either as an investor or first-time buyer, you’re likely to do well over the next decade. As interest rates continue to decrease, wages rise, and the population grows, property values are likely to increase, building equity that will improve your portfolio!
What about term deposits and savings accounts?
Cash investments can be great for short-term savings goals or those seeking low-risk options, but they may not be the best choice for long-term wealth growth. Historically, term deposits have shown lower long-term returns compared to other assets like shares or bonds.
Interest rates on term deposits and savings accounts are likely to fall over coming months, in line with predicated rate cuts, so parking money in the bank may become a less attractive option for you. You’ll need to move quickly if you want to secure a decent return.
Market fluctuations are a given, but preparation makes all the difference. With over 35 years of experience and a wealth of data-driven insights, we provide expert, unbiased investment advice to help you navigate the market’s ups and downs. We’ll work with you to craft an investment strategy that focuses on what you can control and supports you through turbulent times, keeping you focused on your long-term goals. Whatever financial success means to you, we’re committed to guiding you throughout your financial journey.