Market Volatility in January - Up, Down and Up Again

11 February 2022 / Published in Your Money

Many sharemarkets around the world pulled back in January. You might have seen your ASB KiwiSaver Scheme balance or your Invested Funds dip as a result. Here's what you need to know - and the first thing is to stick to your plan.

Late last year, we wrote a blog about the September-October sharemarket dip, and its effect on some of our customers' KiwiSaver balances. Seeing your balance drop can create understandable concern, especially after a long period of steady and strong growth. 

It was a timely reminder that sharemarket volatility is part of the investment game. Back then we said the best plan was to ride out the turbulence and keep to your long-term investment strategy. Over time, holding a steady course generally gives you better results, despite the expected downs that can come with the ups.

Sure enough, international sharemarkets rebounded to rise to new record-setting heights over November and December. The dip became a blip. 

Now we're in a similar situation. In early January, sharemarkets dipped again. The US S&P 500 index, which represents the combined share values of 500 of the largest publicly listed businesses in the US, dropped around 10%. Technically that makes it a "correction". You might have seen your investment balance drop as well, but not by 10%, thanks to our diversified investing strategies. We always invest in a range of different types of investments in our funds.

What's caused this latest dip?

World sharemarkets have enjoyed a strong period of growth since 2009. There have been many dips and corrections along the way, and the massive drop caused by COVID-19 in 2020. But despite these dips, $1,000 invested in late 2008 would have become over $5,000 today.1

Such a long period of growth creates questions. Were we overdue for a correction? Or have underlying pressures changed, so instead of historic crashes, we now only see minor temporary dips?

And then there's the effect of Covid.

In 2020, the world's central banks feared Covid would lead to a serious economic recession. Central banks around the world, and our own Reserve Bank (RBNZ) dropped interest rates to record-low levels to support economic activity. Governments also provided massive fiscal support to businesses and households.

These actions have worked - economic conditions held up far better than initially feared at the start of the pandemic in 2020. Sharemarkets recovered from the 2020 plunge quite quickly as confidence returned. Low interest rates supported borrowers including households and businesses, but also meant that traditional savings accounts and term deposits were less of an attractive option for investors. Other investments, especially shares and property, became more popular in the search for yields and returns once investors gained confidence in the outlook. 

What is happening in early 2022?

Now economies are starting to overheat. Unemployment has fallen to low levels both here and abroad. We're now seeing high inflation around the world. Just this week, New Zealand's Consumer Price Index reached nearly 6%, the highest annual inflation rate in three decades.

The world's major central banks and the RBNZ have mandates to target inflation. In the case of the RBNZ, the goal is to keep consumer price inflation between 1-3% - so now inflation is way too high from the RBNZ's perspective.  It's a similar story offshore, with economic growth and inflation getting stronger.  Accordingly, central banks are starting to remove some of the extremely low "emergency" interest rate settings that were put in place during the pandemic. This process is well underway here, with the RBNZ raising its Official Cash Rate twice last year. Other central banks are starting to follow the RBNZ's lead. Interest rates are increasing - from bond yields to term deposit and mortgage rates. Property prices have surged during the pandemic, but borrowers are facing higher interest rates than a year ago, and that's impacting the outlook.

Inflation and interest rate developments have been a major focus for sharemarket investors over recent months, and the situation has rattled some investors. We also have some international tensions, with Russia looking threatening on the Ukraine border, the Omicron variant of Covid, and concerns over the Chinese economy.

As a result, some investors both here and all around the world have taken fright and decided to sell their shares. The result was a dip in share prices, and thus a dip in our funds that invest in growth assets. Rising interest rates are also a headwind for some of the income assets (like cash and bonds) within funds.

Through mid-January, the US share market was very volatile, with high volumes of selling and buying. Most of this activity was from retail investors. But many people see this dip as an opportunity - after all, for every seller there is a buyer. At the time of writing in early February both the local and international sharemarkets have lifted several percent off the mid-January lows.

Our own investment advisors, BlackRock, have said they think there may be a little more volatility ahead, but they still think 2022 will be a good year for sharemarkets. They also point out that this dip is very mild compared to others over the last decade or so. You can read more analysis from BlackRock here

What can you do to protect your investments against dips?

If you had already taken the time to choose the right fund to achieve your investment goals, the best thing to do is nothing. Sorry. That can be a little frustrating. We know the feeling. It's natural to want to protect your money when it looks like it's dropping in value. Instead, take a step back and do the following:

Check back in with your goal or get advice. Your investment goals helped decide your best choice of fund, and of course it's always good to regularly review your strategy.

But it's important not to react to short-term events with long-term changes. History shows us that over time, sharemarkets always recover from falls. Over time, as markets recover each correction looks like a very small notch on the steady long-term growth of your savings. 

Not convinced? Look at this chart and all the events that have rattled the sharemarket over the last 100 years or so. Regardless of the dips (and some are large), sharemarkets have shown strong recovery over time.

Remember: every cloud has a silver lining

If you're adding to your KiwiSaver savings/investments regularly, and still have several years before you'll need your funds, then temporary dips can actually be good news.

Continuing to add money to your savings while the market dips is good investing. You're buying at a lower price, so every dollar is buying more units in your fund than usual. Over time as the market recovers, these bargain-basement buys can potentially turbo-charge your overall returns (or the value of the units you hold).

If volatility isn't for you, take control

If changes to your balance are unsettling, one simple option is to hide your investment balance in your online banking. Instead of looking at every day's rise or fall, you can just check in every six months or so. You'll have a more long-term view over your savings. 

If you really want to make a change, we encourage you to review your goal or get advice before committing to any change.

We have a range of investment options that suit different risk profiles and investment timeframes - selecting a lower risk fund can reduce your risk of dips, but could also mean lower long-term returns. 

Being in a lower risk investment is usually better when you need your money soon.

You can choose a fund that has less exposure to shares and invests more in cash deposits and bonds instead. These tend to be less volatile, so the funds rarely show big dips in value. But the returns are generally lower over time compared to funds with more growth assets as well. 

You can compare our different ASB Investment Funds and ASB KiwiSaver Scheme funds and find the right one for you. But please consider the risk before limiting your long-term potential growth.

Talk to us if you want to discuss your options

If you'd like to discuss your KiwiSaver account or managed investments, remember you can always contact the ASB Wealth team. For the ASB KiwiSaver Scheme, call 0800 272 738, or for ASB Investment Funds call 0800 108 084. You can also request to be called back here. The team is happy to help, and their advice is totally free.

You can also use the ASB KiwiSaver Scheme Calculator to see the effect of different options on your returns.

Returns are a reflection of past performance and are not a guarantee or indication of future performance because returns fluctuate (move up and down). Returns can be negative and you may receive back less than the total amount of your contributions.

Interests in ASB KiwiSaver Scheme and ASB Investment Funds (Schemes) are issued by ASB Group Investments Limited, a wholly owned subsidiary of ASB Bank Limited (ASB). ASB provides Schemes administration and distribution services. No person guarantees interests in the Schemes. Interests in the Schemes are not deposits or other liabilities of ASB. They are subject to investment risk, including possible loss of income and principal invested. For more information see the ASB KiwiSaver Scheme and ASB Investment Funds Product Disclosure Statements available from ASB's website and the register of offers of financial products at www.business.govt.nz/disclose (search for ASB KiwiSaver Scheme or ASB Investment Funds).


1 S&P index on 30 November 2008 was 736. On 2 February 2022, it’s 4557 or so, which is a 519% increase.


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