David Hargreaves says the NZ Super Fund's warning that we must not 'lose our nerve' in the face of short-term investment losses needs to be taken to heart by a nation still struggling to understand risk, reward and diversification

By David Hargreaves

I'm still trying to make up my mind whether it was very fortunate or extremely UNfortunate timing that saw the NZ Super Fund's warning about potential big losses from another GFC event coming out on the very day that global markets were tanking like a tanking thing.

I think I will say in the end that the timing was probably very fortunate indeed in that people did at least take notice of the wise words of the Guardians of NZ Super CEO Matt Whineray. Had the markets been rising strongly on the day then people may have taken one look, yawned, and gone back to sleep. But in the event, people did pay attention. Nothing focuses the mind more acutely than the prospect of lost money.

In some respects I'm saddened that the NZ Super Fund felt they needed to issue such a warning. But, sadly also, I think there's no doubt they needed to.

The Fund is very important for this country - particularly as our politicians continue to play chicken when it comes to taking responsibility over our ageing population and how the hell we can afford them (and I speak self-referentially here).

Year after year we have watched as the Super Fund has racked up incredible returns. But you do wonder the extent to which there is a realisation out there that such returns would not be garnered by just chucking the money into a bank.

The old saying that you've got to speculate to accumulate is fair enough, although perhaps speculate is not a good word because it perhaps carries connotations of gambling. 

The Fund takes risks. But calculated risks. It does so knowing that it's got a very long timeframe in which to invest the money before needing to pay any out and therefore over time the risk and reward equation will level out.

Stating the obvious that isn't obvious

This stuff should be obvious, but I don't think it is in New Zealand. As I've opined before, I still don't think our basic understanding of the concepts of risk and reward and of diversification is anything like good enough. Too often we as a nation can tend to think of things like share investment as a 'gamble' - whereas long term returns will tell you it isn't. Whereas the finance companies in the early 2000 were seen as a sure thing - but were actually a huge gamble.

It easy easy to be distracted though by short-term losses and volatility.

I'm prepared to admit I was even, ridiculously, caught out myself by the GFC in 2008. There I was in my day job as a finance journalist totally immersed in the grave goings on that for a time looked like ending in financial armageddon.

For a month, every waking hour was consumed by this.

And yet, at the end of that month when I received my next monthly update from our company super scheme I nearly fell off my chair when I saw that thousands of dollars of MY money had apparently just been hosed up against a big tree!

Yes, there was I writing stories every day about massive falls in the global sharemarkets as if that was in some way completely unrelated to what was happening with my own money. When I had picked myself up off the floor I had a good laugh at my own foolishness and shrugged and carried on.

As we now know, the recovery of sharemarkets from the GFC was remarkably swift. When I cashed out of that super scheme only about 14 months later when leaving the company I did so with all my money restored and then some, which was incredible really.

Riding it out

Whether such a recovery would be as swift again is debateable. And I see that some of our commenters were (I think with good justification) questioning the Super Fund's reckoning that it could recover its losses in about 20 months. At the moment we don't globally have the leeway we had in 2008 in terms of being able to drop interest rates and you also have to doubt whether governments around the world have access to the type of liquidity that saw them bailing out many financial institutions then.

But the point is, and it's the point that the Super Fund makes, with a long term investment focus it's possible to ride out the short term losses - even if they are big ones - in order to take advantage of longer term trends that will see value growth.

And when the Super Fund talks about how important it is that we don't lose our nerve and start ditching investments based on short term losses, you have to think those comments are as much as anything aimed at this and future Governments.

Such warnings really should not be necessary though and I think emphasise once again how far we've got to go in this country before we even begin to understand the real concepts of investment and building for the future.

With more and more of us now having increasingly significant long term commitments through Kiwisaver it is imperative that somehow a better understanding is created in this country of just what it is to invest for the future - and why that can't be done without some (calculated and measured) risk and why our timeframes need to be longer than the next five minutes.

That last bit's important. 

For whatever reason - maybe it's just the pace of the modern world and the immediacy of communications systems, for example - the world is increasingly working on short-term timeframes.

Whatever happened to forward planning?

A slow and plodding approach for companies with CEOs that have been in the business for a long time, understand it, and have worked to the top, has been largely replaced and seems to be seen as outmoded.

Now the thing is very much built around the idea of somebody coming into a company from outside, shaking things up quickly, achieving big bonuses based on short-term performance and then clearing out of the business before it starts to dawn on everybody what a mess has been made.

Look, the future is not simply about tomorrow. We need to look a bit further out than that.

The efforts of the Super Fund to get through to people that longer-term timeframes need to be adhered to should be appreciated. 

If we follow short-term trends then we will as a nation get ourselves into trouble.

We all need to bear that in mind.

And this and future governments need to make sure they stay the course with planning for the country's future. Don't mess with it.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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15 Comments

There is risk and there is uncertainty, two different concepts. Uncertainty is not amenable to statistical analysis of long term trends.
At the moment I would suggest risk concepts are not very useful: extrapolation of past trends and fluctuations is now dangerous. Uncertainties arising from mismanagement of the financial systems will likely dominate as they are currently inherently unstable as a result of lax lending standards, weak settings for macroprudential constraints, and low capitalisation of banks.

Good thing the fund Guardians have a high degree of independence and are a “double arm’s length entity”. Luckily it’s not up to the chickens in this comment section. Matt will stay the course. Short term fluctuations mean nothing in the long run.

With the ever increasing risk of a global correction, why do you not liquidate now and wait? You could possibly lose 10-20% of gains but gain a larger base for when the market bottoms?

Over the past 6 months most of my financial portfolio has liquidated to cash due to various opportunities and i currently cannot justify the high asset prices to buy into. My theory is if i hold high amounts of cash (gaining nothing in short term) then i have more to invest hitting the downturn. Down to 35% select equities only and with the crazy high market i don't actually want to invest higher...

Thoughts everyone?

I'm repeating myself from a previous comment, but - It is exceedingly difficult to accurately time a crash and recovery. The CEO of the NZ Super Fund acknowledges this - http://www.youtube.com/watch?v=h1SdW8KmJrk&t=7m59s

You have to take a long term view. Someone that invests in an aggressive fund and leaves it there untouched for 40 years will almost certainly come out the other end better off than someone that chops and changes, attempting to time the market. Better to stay the course and leave it to the fund manager to adjust their ratios as they see fit - perhaps a bit more liquidity when trouble looks to be on the near term horizon. Growth funds will take more of a short term hit in the event of a global financial crisis, but it is the long term outcome that counts.

Most of the people that happen to accurately predict a crash are people that are constantly saying that a crash is just around the corner for years on end. And when one finally comes along they say “I told you so”. But the reality is that even a blind squirrel will find a nut every now and again, and even a broken clock is right twice a day.

You are correct , Its impossible to read a looming crash , but there are always warnings, and as you get older to become more in-tune to the signals

I have sold out of almost my entire share portfolio , and I did it too soon , but I sleep well at night

At my age I cannot afford another 19 October 1987 crash , I dont have enough years in my life to ever recover .

At current prices , your money on the stock market is about as safe as putting the money into a machine at Sky-city casino .

Yes, I agree that the closer you are to retirement the more conservative your investment should be.

If the Aussie real estate bubble pops the banking sector is fragile and NZ banks are subject to bail in stipulations. Is cash any safer?

In a safe or deposit box away from the prying fingers of OBR might be a wise move. Depends how fragile you thing the banks are, and whether you are willing tio forego the pitiful interest of a term deposit. Alternatively, cash in an overseas banks.. but then you have FX rate risk.

We've had a couple of good 50% crashes in the last 20 years, but they were quite unusual last century. There's no guarantee we'll see another big crash any time soon. That said, I have been slowly dropping my shares but that's mostly to buy a house shortly.

The article is right. Long term thinking & actions are what will weather the storm. D
And don't forget, when things tank 50% that's a great buying opportunity. Probably the best shot you'll get at it. Sure, lower your risk in the short term, with current share markets 'fully priced' I think is the term, but that still the greatest source of long term wealth there is. The article is also right in that our understanding of risk & reward needs further work. If they taught it at school, I must have been away that day. To understand where you sit on the risk-reward line/chain is critical to your future - wealth, relationships & sanity. We are all slightly different creatures and we all do things slightly different to anyone else. That's what makes us (the West) great as a culture. Okay, we get hit from time to time, that's life. Get up, dust yourself off and get on with it. That's also life.

Look , the next downturn seems to have already started so its a bit late to try and adjust quickly to a major market adjustment .

The Fund is massive , and exiting a specific investment will need time ( to place the investment ) , we are not talking a few hundred shares like my wife and I might own .

Of course any major shift in the investment mix may mean we would need to take a haircut on exiting , so steely nerves are required to stay put

Frankly , given the nature of our Super fund , it should be extremely conservative , they should only be investing in gilts and bellwether stocks overseas , and half of all investment should be right here at home in Government Bonds

From the interview with Matt Whineray:

"At the moment we're not expecting to have any sustained [fund] withdrawals for more than 30 years, into the 2050s"

With a 30+ year time horizon, it would be a huge missed opportunity to invest the money conservatively. This would be far from a risk-free approach, as we'd have a massive risk of getting sub-standard returns.

What processed parts of the planet are they expecting to buy in 30 years time, David?

Has anyone checked whether there is an underwrite to the expectation?

I suggest there are going to be a lot of p-----ed off bunnies at some point, gunning for the givers of 'investment' advice. In the long term, there is no return.

With interest rates so low they should have borrowed some money to invest, they would have made a killing over the past few years. Hows that for eloquent?

Light rail is a reasonably profitable form of mass transit for high density neighborhoods. Therefore expect the NZ Super Fund investment in Auckland light rail to start being profitable when there is high density from Westgate to Mangere. Maybe post 2150, maybe post 2250 - at current trends.

Definitely thinking long term is not a problem for NZ Super Fund. Stupidity might be a larger problem.