Happy Holidays – Into 2022… ‘What is the Downside?’

Written by Tom Stanley, Investment Adviser, 24 December 2021

My note this month is a combination of Christmas cheer and Christmas caution. I don’t mean to be the Grinch, but sometimes we need to check our enthusiasm, so the question I want to entertain as we roll into a new year is ‘What is the downside?’

2021 has been a tough year for many, with COVID variants rolling through, with new restrictions, conflicts around vaccines, and many businesses and people fighting to keep their ‘heads above water’. I personally moved back to New Zealand (and joined team Amicus) to be closer to family as COVID made our old ‘normal’ of free flowing borders and international travel impossible. Despite the tough year we’ve had, there are many reasons to be happy, the festive season brings summer bbqs, beach days and a well deserved break for many, furthermore markets and investment returns have been more buoyant than ever – this market fervour is what I want to talk to today.

Sorted’s Smart Investor tool is a great resource, and shows that up to March 2021 (sorry this is the latest data) the average performance for an ‘Aggressive’ KiwiSaver fund in 2021 is +36.01% with funds such as Booster’s Geared Growth Fund returning +46.38% (see chart below) – Those are some crazy numbers, and my concern is that investors (locally and internationally) are looking at those returns as ‘normal’, and are flocking to invest in more aggressive forms in the hope of ‘getting rich quick’.

Image source

Bloomberg’s recent article titled ‘Stock Funds Took in More Cash in 2021 Than Two Decades Combined’ highlights that:

‘Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 — exceeding the combined total from the past 19 years — according to analysts at Bank of America Corp.’

There are many factors influencing those flows, not to mention the loosest fiscal and monetary policy on record, but, if I have ever seen a statistic that summarises the idea of FOMO (Fear Of Missing Out), I feel like this is it.

My personal KiwiSaver is in Booster’s Geared Growth Fund (and has been for some time) I am grateful for the upside captured this year, but is it reasonable to expect a repeat of this sort of performance? – Warren Buffet’s yardstick says no. But, as I cannot touch those funds for 30 odd years, I can happily take the long view and look through ups and downs.

Per my introduction, ‘What is the downside’ of my KiwiSaver? The past does not predict the future, but starting with the worst ‘drawdowns’ markets have seen on record is reasonable. The below table from David Stein summarises the worst sell offs on record and how long each asset class took to bounce back.

Booster’s Geared Growth fund and other ‘Aggressive’ KiwiSaver funds invest primarily in growth assets, namely stocks and real estate per the above table. So the question I ask myself is, can I sustain a -60% loss in value of my KiwiSaver and have the patience and discipline to wait 4+ years for it to bounce back? My personal answer is ‘it will hurt, but… yes’, knowing that over my +30 year investment timeframe I will likely achieve higher returns maintaining my investment discipline and having a diversified allocation to growth assets.

This note does take a simplified view, and there are many other complexities in the current investment climate. But the point remains, as investors and investment advisers, we have to have reasonable expectations for what the future may hold, and we must work with our clients in prudent and responsible ways. I am not trying to scare, or discourage investment activity, all I am trying to highlight is that what we have seen in markets and asset prices since March/April 2020 is unprecedented, and it is wise to temper our expectations and proceed with caution.

The question I pose again, ‘are you aware of, and comfortable with, the potential downside of your investment(s)?’

If your answer is ‘yes’ – great!

If you’re ‘not so sure’, give us a call, we’re here to help.

Have a great Christmas and Happy New Year from the investment advisory team at Amicus.

Happy reading, stay safe and don’t forget – We are Locals Investing for Locals, and here to help. If you have any questions or queries, contact Amicus today.

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