by Nick Stewart

In times of old, soothsayers used the entrails of animals to ‘predict’ the future. Nowadays, they use the dissected remains of failed banks.

The end of 2022 and the start of 2023 saw some spectacular failures in financial headlines. The fall of FTX was another hefty blow to the confidence of crypto lovers by proving (once again) that cryptocurrency wasn’t removed from the risks of traditional financial products. Then we saw Silicon Valley Bank fall in America, followed by Credit Suisse in Europe. The idea of a global recession was bandied around, which made many investors nervous as they remembered the 2008 Global Financial Crisis.[i]

Back home we were reeling from the worst weather event since Cyclone Bola in the late 1980s, on top of an ever-worsening cost of living crisis and a dire OCR/interest rates correlation. Talking heads discussed recession as an inevitability, picking it would hit in the second half of 2023.

It was observed during this tumultuous global period that many chart-watching investors moved their cash out of stocks and into short-term bonds. Billions of dollars were moved into short-term bonds and money market mutual funds in the US as stock chasers looked to make the most of the over 5% rates.

Modern soothsaying in action, for those ‘professionals’ who encouraged others to do so.

What came of these early 2023 predictions?

Well, we are in recession. New Zealand’s recession arrived earlier than predicted and is predicted to be a long, shallow one – though as always, only time will tell.

In terms of those who sold up their stocks.

Those who sold up and went into short-term bonds missed the best 3 months in US financial market history. The S&P500 index rose 14% from its shaky mid-March through the end of June, and the Nasdaq-100 index rose by 27%. Not only did the Nasdaq-100 index rise – it also had its best first-half increase ever at 39% over its December 2022 close.

Tech giants like Apple and Tesla also reported outstanding performances, with Apple becoming the first company ever to top USD $3 trillion and Tesla smashing records with 466,140 vehicles delivered in the second quarter.[ii]

If the investors had stayed their course, they would have been able to capture these highs as they happened. Instead, they followed the dubious wisdom of stock picking and tried to outsmart the market.

If there’s one thing history definitively proves, it is that the movement of markets is random and cannot be predicted by man nor machine. Anyone telling you otherwise is just trying to sell you something.

The year is not over yet. We might see any kind of movement in future. The key is not to anticipate the direction of volatility, but to spread the risk of volatility across assets, industries and countries.

Short-term speculators are notoriously bad at beating the market over the long haul. Past returns are not predictors of future performance. History does repeat itself to an extent (what goes up must eventually come down, and vice versa), but never as precisely as these modern soothsayers would have you believe.

Thankfully, you do not need to speculate to be a successful long-term investor.

Best to stick to the tried and true, with the guidance of a trusted fiduciary. Professionals who are worth listening to will never tell you which stocks to invest in, but rather which investment strategy is best for your lifestyle, timeframe and goals.

Investment portfolios should be built with a variety of asset classes to support long term goals and plans. They are rebalanced based on market targets or weighting changes. They should consider various scenarios to ensure there is no need to panic, and if someone is drawing down, spending is accounted for in the short term.

What matters for individual investors is whether they are on track to meet their own long-term goals detailed in the plan designed for them. Unless you need the money next week, what happens on any particular day is neither here nor there. It is the long-term returns that count.

As to what happens next… no-one knows for sure. That is the nature of risk. In the meantime, you can protect yourself against volatility by diversifying broadly across and within asset classes, while focusing on what they can control – including your own behaviour. If you’re after a second opinion or need some help demystifying your financial roadmap, getting in touch with a trusted fiduciary for a chat is always a good place to start.

·         Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 313.

·         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 a 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

[i] https://www.stewartgroup.co.nz/we-love-to-write/silicon-valley-bank-why-nz-investors-need-not-panic

[ii] Chart-watching market timers fail again, By David H Bailey