Published in NZ Herald, Hawke’s Bay Today

New Zealand's economy shrank 1.6 per cent in the March quarter, which is the biggest fall since early 1991. According to the Finance Minister Grant Robertson, the decline is expected to be worse in the June quarter.

In its latest interest rate decision on 12th August, the Reserve Bank of New Zealand maintained its official cash rate at 0.25 per cent but also raised the possibility of going into negative territory as the country faces the severe economic impact caused by the pandemic.

The current rate is at a historic low of 0.25 per cent, introduced earlier this year and the Reserve Bank pledged it would keep at that level until March 2021.

Most of the economists in New Zealand are now forecasting the RBNZ to cut the Official Cash Rate (OCR) to -0.25 per cent in April 2021 with a possibility of further easing.

The Reserve Bank has been undertaking a programme of work on alternative monetary policy tools, including negative interest rates, for some time. Since late 2019, this work included ensuring that the Reserve Bank's systems can operate with negative interest rates, and understanding the retail banks' operational preparedness for negative interest rates.  In the address last week retail banks were told to be ready by this Christmas.

Lowering interest rates would typically slash lending and deposit rates, which is positive news for businesses and individuals looking to invest and spend more — actions that help the economy to grow. But it will hurt more than a third of New Zealanders with term deposits or savings in the banks (mostly Australian-owned).

It is calculated that it costs kiwis somewhere between $400m and $900m a year in lost interest – depending on how the numbers are crunched.

Without sound financial education, there will always remain a group of people who live by the "no risk" mantra. These people most likely park their money in low-risk investment options like bonds, bank term-deposits, and as returns dwindle, they either cut back, defer spending or eat further into their asset base.

Then comes a pain point – like negative interest rates. That's not to say cash doesn't have benefits. If you want to offset risk, save for a significant purchase or keep a fund for emergencies, cash is the way to go. But in the long term, your money in the bank is a bad idea.

Stock market risk vs volatility – what you need to know

Financial planning for your future retirement can easily become a daunting task without proper guidance. Throw in some stock market volatility, political discord, and the twenty-four-hour news cycle, and it may make you impatient and worried. Our view is that you either take the time to understand how the market works, so you can ask the right questions and protect your wealth, or you allow your emotions to drive your decisions.

Stock market risk simply put is the probability of losses relative to the expected return on any particular investment or investment vehicle. To give an example, a risky stock or investment could go up big time, but it also comes with a larger potential to be a big loser.  Picture a tech stock – that is hoping to be the next Google or Facebook, but with the risk of becoming another long-forgotten social media platform.

Stock market volatility is another fancy way to describe the unpredictable fluctuations in the value of an investment. In plain English, it refers to the movement of the stock market both up and down, or down and up over and over again.

Diversification is your friend. Sound investment starts identifying the risk worth taking and minimising the risks that don't come with an expected reward. You can reduce risk and increase flexibility by diversification.

Seeking investing help

While it may be normal to be scared during the roller coaster ride of market volatility, the chances of you achieving and maintaining financial freedom without at least some investments are not very high.

You don't have to go on this journey alone.  You can work with an investment fiduciary who should be able to help you reassess your attitudes towards investing and the inevitable stock market volatility. All your financial decisions should be made based on your specific financial goals, time frames, and risk tolerance.  Just be aware that too little risk, may cause you to run out of money in retirement.  The one thing you were hoping to avoid by not taking more risks.

Face your financial fears and take proactive steps towards your important financial goals. Having a financial plan can you make smarter financial choices over time. If you know where you want to be, it can make getting there easier.

• 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 of a general nature 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