Mark Lister, 15 February 2018

After the rollercoaster week we saw across financial markets, it feels like things have settled down, for now.

US shares were down more than ten per cent at one point, officially making this a correction, while the local market fared better.

We had the good fortune of a public holiday on the most volatile day, which probably saved a few people from selling in panic and making things worse. By the time the NZX reopened, offshore markets had calmed down.

It’s difficult to predict where things will go from here. For what it’s worth, my guess is that this isn’t the beginning of another 2008-style collapse in global sharemarkets.

For that to occur we’d probably have to see another global recession ensue. In that regard, there are no alarm bells ringing. All of the major economies are looking strong, so unless we see signs of that changing, this is probably your garden-variety market correction.

We also need to put the sell-off into perspective. At the lows from last week, the US market had still only fallen back to levels from late November, barely three months earlier.

That doesn’t mean we shouldn’t be worried. These moves could well be a sign of things to come, and they are a timely wake-up call to some investors.

Volatility has been exceptionally low in recent years, and those who are relatively new to investing in shares could be in for a shock as things normalise.

There are roughly 250 trading days in a year and, on average, about 50 of these will see markets move one per cent or more, in either direction. Last year, we saw just eight days with moves of that magnitude, the least since 1966.

For many investors, the turmoil needn’t trigger a change of approach. Owning shares in quality businesses remains a great strategy for wealth creation, not to mention inflation protection. While disconcerting, periods of volatility and weakness are simply the price we pay for superior long-term returns.

Investors in the ‘accumulation phase’ of their retirement planning life cycle shouldn’t be bothered by what we saw last week. This goes for anyone with no need to draw on their savings for 10 years, or longer, including those in KiwiSaver growth funds.

In fact, those investors should be hoping for even more turbulence in financial markets. In hindsight, the KiwiSaver contributions people made in 2008 and 2009 turned out to be some of the most astute buying anyone could’ve done.

On the other hand, those who might need to rethink their strategy are those heavily exposed to shares, who might need to call on their money sometime in the near future.

If you wouldn’t be able to ride out a temporary hit to your capital, or if you’re saving for a house deposit or similar, maybe it’s time to take some risk off the table.