For many investors who cut their teeth in the 1980s, the crash of 1987 left holes in their wealth and lasting scars. Is there a danger investors today react the same to a similar event? David Boyle drills into the past for lessons on how to avoid the horror…
If you are a certain age and someone mentions the Murder House, it is quite likely the following will happen to you without even thinking:
- your smiling face will drop to a contorted painful look of sheer horror;
- you will make some involuntary noises like ooooh, arggh and take a sudden gasp of breath;
- the buzz of the drill and the smell of methylated spirits will flood your senses;
- your memories will drag you back to the dreaded death-walk to the building that housed the wooden leather chairs, swirling sucking saliva tubes, bright lights and a spitting-bowl covered in blood; and,
- memories of scary fairies and snowmen dangling above your face, smiling like the clown from Stephen King’s IT, with the demonic whisper of “open your mouth wide” said in a slightly sadistic way, as your nails dig deep into the arms of the chair, followed by the bone-chilling screams from the person beside you.
Even writing this now, the thought of the Murder House still sends a shiver down my spine. Of course, I’m not talking about the latest slasher movie. I’m talking about the trauma a generation, including my good self, went through when going to the school dental nurse.
That experience changed my behaviour forever around maintaining my teeth. Instead of regular annual checkups I still, today, avoid going to a dentist at all costs until I cannot take the pain anymore. I suspect some readers are thinking, ‘toughen up kid’. However, I believe many, if not all, of my fellow Gen Xers and Boomers might have a little more sympathy because I bet most have had a similar experience.
So what does this have to do with financial wellbeing you might ask? Well, you could conclude that I have had to spend a lot more money over the years than those who regularly kept their teeth in good order. Why? Well, we all know how much it costs when what could have been a simple filling, if caught early enough, turns into a root canal.
However, my story is actually all about how a particular experience can stop you from doing the right thing, even when you know it is likely the best move you can make in the long term.
An example that comes to mind was how the 1987 share market crash affected the Boomer generation. This was the age of excess where everyone thought they could make money in the share market. Amid the rise of share club wine afternoons, picking stocks emerged as the social activity of the day – a sure sign things were going to end badly. Greed and the ‘fear of missing out’ – now condensed to the familiar FOMO of internet chat fame – drove investors to break all the risk management rules many of us know today. And those investors paid a heavy price.
When the party ended with a crash in 1987 those who were most impacted as their investments turned to dust, subsequently saw shares as terribly risky and not a place to invest their hard-earned cash.
The dark aura surrounding equities cascaded over to the next generation, based on the horror stories that were told over the dinner table with classic lines like ‘invest only what you are prepared to lose in the share market’ and ‘don’t invest in the share market because it is too risky’.
Of course, if you are only investing in a few stocks without any research then that dinner-table advice probably still stands true today, given diversification was a word that was never used much in those days.
This is where KiwiSaver, since its inception, has acted as a very good vehicle for many to save effectively for their retirement with plenty of younger investors choosing to take a little more growth along the way. This makes perfect sense given their time to retirement.
However, recent Financial Markets Authority (FMA) research into how people behaved during the uncertain times at the start of the Covid-19 pandemic found those aged between 26 to 35 moved over $1.2 billion from growth funds to conservative funds as the market correction took place in the first quarter of 2020.
So what would this mean for a 30-year-old who earns $65,000 a year and had around $40,000 savings in a growth fund? Well, if they had moved their investment at the bottom of the market they would not only have crystalised the capital loss of their savings (around 20 per cent), but by moving to a conservative fund they would have missed the following market upswing. Worse still, they moved their future retirement savings into the slow lane, which over the long term, means they will have missed out on the general market growth.
From my back-of-the-envelope calculations, the loss of savings would be around $130,000 compared to riding out the storm and keeping their funds in a growth fund: something that I think most would agree would be quite a costly outcome.
With a little bit of advice, or at least having a chat with their current KiwiSaver provider, it might have mitigated the long-term impact driven by one negative experience. What really worries me is what will happen when there is another correction (and it won’t be if, but when): how will KiwiSaver members react especially if it is a far longer prolonged correction than the latest one during Covid-19?
How many more billions could be lost if we see that type of investor behaviour again? The impact on the financial wellbeing of this generation could be significant without better support and access to advice.
As I write this article, I have made the decision to go to my local dentist once a year to help mitigate any future long-term negative outcomes from my experience at the Murder House. For those reading this, go and have a look at your KiwiSaver today. If the examples I have used above sound familiar, then get some advice or talk to your KiwiSaver provider and see what other options might be best for your own personal circumstances.
I’m sure it won’t be as painful as my next visit to the dentist and the benefits will be significant.
Disclaimer: David Boyle is Head of Sales and Marketing at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice.
Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here.