Why investors should embrace a market sell-off

After a very strong period that has seen global sharemarkets hit new highs, volatility has returned.

Despite economic activity holding up well, concern over high share prices and the booming AI space has seen optimism turn to caution.

Even a better-than-expected earnings release from tech heavyweight NVIDIA couldn’t turn things around.

The S&P 500 index in the US ended last week almost five per cent below its recent highs, while some of the higher-octane areas of the market have fallen more heavily.

The tech sector is down ten per cent, while Bitcoin is more than 30 per cent below October levels.

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Of the Magnificent 7 cohort of stocks, Meta (25 per cent off its highs) has fared the worst while Alphabet and Apple have proved most resilient.

These moves will be causing a lot of consternation among investors, particularly those who have entered the fray in recent months.

However, it’s not unusual for markets to experience a sell-off such as this, particularly after such a good run.

For new investors, rough markets can be your friend. These are periods to look forward to, rather than fear.

I don’t know about you, but I’m not a huge fan of buying investments at all-time highs.

I’d much rather put my hard-earned cash to work when prices are five, ten or even twenty per cent lower.

For someone on the cusp of selling their share portfolio for retirement, periods of market weakness can be awful.

If you’ve had that house deposit sitting in a high growth fund, a portfolio of tech high-fliers or worse still, crypto, you’ll be a little nervous right now.

The truth is that anyone in that situation should’ve invested much more conservatively.

Growth assets like shares or real estate are only appropriate for your long-term money.

If that’s the case and you’ve got an investment time horizon of five years or more, relax.

In fact, if you’ve got capital to invest or you’re still in the accumulation phase of your investment journey, you should be rubbing your hands together and hoping for more volatility.

You want those next few KiwiSaver contributions to pick up some assets at lower prices, right?

In the past 15 years we’ve seen nine occasions where the S&P 500 has fallen 10 per cent or more, so they come pretty frequently.

Two of these developed into bigger falls of more than 20 per cent, once during the COVID recession and the other in 2022 when interest rates were rocketing higher from near-zero levels during the pandemic.

Right now, US recessions indicators aren’t flashing red, inflation is contained and while the timing is debateable, interest rates are likely to go lower, not higher.

The other seven examples saw an average decline of about 15 per cent, and were driven by nervousness over various issues from a Chinese economic slowdown to Trump’s tariffs earlier this year.

The S&P 500 could fall ten per cent in the coming weeks and months, or it could rebound and recover tomorrow.

Nobody can predict the short-term movements of sharemarkets with any level of certainty.

Besides, the former would simply take us back to where we were in June, which would hardly be a disaster.

If the ups and downs continue, don’t panic, just keep in touch with your investment adviser or your KiwiSaver manager.

They will have navigated periods like this before, probably many times.

They’ll help you stay disciplined, keep your cool and remain on track.

Those nine sell-offs since 2010 have lasted an average of three months, so these periods tend to blow over quickly.

If we do see a bigger correction in the months ahead, don’t squander it.

Before you know it, you might be looking back and wishing you’d done more buying.

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