"It's not the information overload; it's filter failure." - Clay Shirky.
By Nick Stewart
What a week. What a month. What a year. Over the past couple of days, I’ve been thinking a lot about the importance of meaningful conversations in times like the present. During one of my recent telephone conversations with our clients, a client commented, “Thanks for taking the fear out of the current market situation.” And I was reminded how much talking to one another matters, especially in times of difficulty and inconvenience.
With so much to decipher on a daily basis, between the stock market and the number of new COVID 19 cases confirmed, it is at times like these that our worst behavioural impulses come to pass due to the overload of information.
While the recent losses in the value of KiwiSaver balances, Mum and Dad investment portfolios are undoubtedly painful; the poor decisions that we will make as a result of this disruption will likely prove more damaging to our long-term outcomes. As Berkshire Hathaway CEO Warren Buffett says, “you can’t predict the market by reading the daily news.”
We are all desperate for more information that will put this entire thing in context, help us wrap our heads around it and know what to do next. But the overabundance of information presents a challenge of its own, as many KiwiSaver members and retirement savers become overwhelmed by headlines and analysis.
I’m not downplaying the fact that there are many valuable tools and reports out there, but there is also a lot of noise — and it makes acting on the facts that matter increasingly difficult.
It’s not all doom and gloom.
This week we saw the Reserve Bank dropping the Official Cash Rate (OCR) to a new historic low of 0.25%. Many retail banks have since responded to the cut by reducing their home loan rates. The Reserve Banks says the OCR will remain at this level for at least next twelve months to give some “rate certainty”.
Also, New Zealand government unveiled a massive $12.1bn economic response package to combat COVID 19 – which is worth a whopping 4 per cent of GDP – and the majority of that (about $8.7bn) will go towards businesses that have lost more than 30% of their income as a result of downturn and wage subsidies. Other money will go toward health costs, income support, and the airline industry.
The government retains additional spending capacity to respond to this downturn and is expected to announce further measures in May.
Optimism pays better than pessimism.
We are deep in a global pandemic. The positive news is governments are swiftly responding to contain the virus and save as many businesses and jobs as possible.
Stock markets don’t rise all the time, but they do gain and recover most of the time. It generally pays to take the optimistic view, so why are so many financial journalists and investors inclined to pessimism?
Journalists have always tended to be more cynical about market declines than they are positive about market gains, according to Prof Diego Garcia. His study The Kinks of Financial Journalism examined market coverage in the New York Times and the Wall Street Journal over the last century and found it had barely changed over that time, with virtually all authors emphasising negative returns, ignoring significant positive market moves. Why?
As described well by Collaborative’s Morgan Housel, “pessimism is intellectually seductive in a way optimism only wishes it could be”.
Tell someone that everything will be great and they’re likely to either shrug you off or offer a sceptical eye. Tell someone they’re in danger and you have their undivided attention.
All studies aside, you need to have clarity around decisions.
An investor jumping to cash or a KiwiSaver member fleeing the growth fund creates a decision-making chain. When exactly, do they feel safe? What signals do they use and what noise do they disregard? How do they successfully identify their re-entry point when there is no certainty around the bottom? There may be false starts before the recovery thoroughly gathers a momentum. How does someone not confident enough to sit tight find the confidence for their re-entry?
My answer: There is no crystal ball. It’s important to remember that a market recovery will follow, but no one knows when.
It’s good to have a dependable financial adviser on your side who would make sure that you stick to your plan and not make impulsive changes. It’s also beneficial to understand the benefits of rebalancing a portfolio after a fall. After market falls, expected returns increase, and it can benefit investors in the recovery.
Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, A Hawke’s Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are general only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
