7 things you can do when your investment value falls

By its very nature, investing involves risk. When you invest any amount, whether it's in an investment property, KiwiSaver Scheme, shares, or a managed fund, you accept the risks associated with that particular investment. That means you must accept the probability your investment value may go down at some point. The good news is in nearly all investment markets, you can expect values to rise over long periods of time. This is the reason why so many people invest.

But what to do when your investment falls in value? Whether it's because the central bank increased interest rates, technological change has impacted an industry, or because of a war overseas, investment markets will nearly-certainly drop in value at some point – which will probably include your personal investments too.

Let’s explore investment strategies for dealing with a market drop. With these tips and some solid advice, you can sail steadily through stormy investment waters.

Understanding Market Drops

Rookie investors often react to falling prices by selling their investments, driven by the fear of further losses.  Behavioural finance teaches us that people hate losing more than they like winning. This means that when we lose money, it hurts more than it feels good to make the same amount. It’s loss aversion that makes people sell their investments at the bottom of a downturn.

Resist the temptation to move your money impulsively. When markets take a significant hit, it's generally the worst time to sell your shares, according to personal finance educator Bola Sokunbi. "You haven't actually lost anything unless you sell it," says Sokunbi.  

Keep in mind that investment markets are constantly evolving and they follow a pattern of ups and downs. Therefore, it's often wiser to wait until share prices recover before considering selling them. Price changes can range from minor to significant, but they are a part of the investment journey. Enduring these price shifts is essential for pursuing long-term gains.

The same principle applies for property (real estate), and most other investment assets.

Strategies for Dealing with a Market Drop

1. Stay Calm

Staying composed when your investments decline is vital. It's tough to watch your investments lose value, but maintaining a rational approach is essential to avoid making impulsive decisions that might harm your long-term investment goals. One of the best things you can do is to leave your investments alone.

During a financial downturn, many investors feel the urge to either sell their investments or switch their strategy, especially in managed investments like KiwiSaver Schemes. For example, they might shift from a KiwiSaver growth fund to a more conservative one. While this may seem like a wise move to safeguard your money, it often means locking in your losses. Because, after the market rebounds, you'll be left with safer but lower-return investments like cash and bonds, which make up most of the investments in conservative funds. In contrast, growth funds are mostly made up of shares, which tend to bounce back with the market.

2. Invest More

One of the oldest pieces of advice in the investment game is “buy low, sell high”. So, a downturn is often the best time to invest more, if you can afford it. This applies equally to investments such as in the stock market (‘share market’), real estate, managed investments such as KiwiSaver Schemes, and so on.

Think of it this way, let’s say you own shares in a business with a competitive advantage. This business is profitable, growing strongly, and well-managed. You consider it to be a great investment that suits you and your needs. Then, suddenly the price of the business drops, and as you’ve got a little spare cash you can now buy more of it. You go ahead and buy more shares in this great business, but now at a discount. You know it’s only a matter of time before this investment pays off.

A good piece of advice to keep in mind comes from one of the world’s greatest investors: Warren Buffett.

He said when investing, "…be fearful when others are greedy, and greedy when others are fearful."

That means investing in a downturn. Some of the wealthiest individuals take advantage of the drop in asset prices to increase their investment portfolios. Although you might not have the money of Warren Buffett, you can still use his techniques to invest. Depending on your life stage, you might be:

• A first-time homebuyer who can now enter the housing market.
• Move your managed investments from a conservative fund into a growth fund.
• A homeowner with substantial equity in their property. You could leverage this equity to purchase a holiday home or an investment property.
• Thinking of putting cash savings into a managed investment portfolio.

If we understand the way markets work in cycles, then investing more at lower prices can pay off handsomely. In this way, the fear of others can work in your favour. This means that when the markets drop, and prices are low it can be the perfect time to invest more – if you’re able to do so, of course.

3. Learn to Earn: Understanding Investing

Knowledge is power, so getting good at investing and understanding how markets work will make you more confident as an investor. Studying investing and reading about investing will help you stay calm and make smart choices when the markets drop. Renowned American entrepreneur, author, and speaker Jim Rohn said having a lack of knowledge about investing and risk is like only speaking "the language of the poor." In essence, the more you educate yourself about investments, the better equipped you'll be to remain in control when markets decline, ultimately leading to better financial outcomes.

Rohn pointed out that all risks are relative. By this, he meant that being fearful and not investing your money might be even riskier. Because it takes money to make more money. When you understand how money works, you can make smart choices, seize opportunities, and make sure your money situation is secure.

4. Keep a Long-Term Perspective

Most investments are made with a timeframe of many, many years in mind. So, fluctuations in value today mean little. Even if you purchased a home recently that has fallen in value, unless you sell it immediately, any loss is 'un-realised,' which is to say it’s not real. It’s important to keep your long-term perspective.

If you are retired and are withdrawing money from your investment nest egg, say from a diversified portfolio of assets, then it’s likely some of your investment will still have to last many more years to keep sustaining you with that same retirement income.

5. Match Your Investments to Your Investing Goals

Before you withdraw or put down money in any investment, it is important you establish your investor profile.

To establish your investment profile, you need to consider:

• Goals: What are your financial objectives, both short-term and long-term?
• Horizon: How long are you willing to invest your money before needing it?
• Risk: How comfortable are you with investment fluctuations and potential losses?
• Knowledge: What's your familiarity with different investment types?
• Income/Expenses: Your current financial situation, including income and expenses.
• Liquidity: How much do you need readily available set aside for emergencies?
• Tax: Are tax considerations important in your investment choices?
• Values: Do ethical or social values influence your investments?
• Diversification: Are you open to spreading investments across different assets?
• Capacity: How much can you invest without impacting your overall financial well-being?

The answers to these questions help shape your personalised investment plan.

If you’re unsure what your investment profile is or want to talk about your goals, get in touch for a complimentary financial health check.

It’s a good idea to double-check your investor profile every year or so and every time you have a life event (such as the birth of a child or a change in living situation), as your investment strategy will change as your life does.

6. Stay Goal-Orientated and Be Wary of Hyped Markets

In recent years, everyday investors in New Zealand and around the world have flocked to share trading apps to purchase meme stocks and NFTs. In both these cases, extraordinary amounts of hype drove the prices sky-high. But when the inevitable market downturn occurred, it's not surprising that meme stocks and NFTs bore the brunt of the losses. Now their values are just a fraction of their previous highs. In early 2022, Justin Bieber hopped onto the NFT train by acquiring a Bored Ape Yacht Club NFT for over $2 million. Today, the value of this NFT has since plummeted by a staggering 95.65%, leaving it with a current price of $89,000.

The future of meme stocks and NFTs remains uncertain, but it's important to note that amateur investing of this kind has been a widespread concern both locally in New Zealand and on the international stage. Investing through apps has become so common the U.S. Securities and Exchange Commission, the world's largest market regulator, has initiated a public awareness campaign urging investors to conduct thorough research before making investment decisions.

When you invest, conduct comprehensive research and make your investment choices in alignment with a strategy that suits your long-term financial goals. Avoid the latest investing trend.

7. Diversify

Diversification spreads risk and makes you more financially robust. We know that putting all your eggs in one basket is risky, which is why the first rule of investing is to diversify. Diversification is the easiest way to minimise the impact of a fall in the value of one type (asset class) of investments. Done well, diversification can help you roll with the punches that life is sure to throw your way.

The Bottom Line - What to Do When Investment Values Drop

Investing always involves risk, which means you must accept the probability your investment value may go down at some point. The good news is in nearly all investment markets, values steadily rise over long enough time periods.

Stay calm, stay diversified, check your goals and situation match your investments, and if you can invest more! Then, when the investment values pick up again, you’ll be in an excellent overall position.  

It would be a pleasure for one of our highly trained professionals to assist you in growing your assets. If you'd like to learn more, simply get in touch.