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.