What you need to know about the share market

This will be a time to remember. We will recall suffering, loss and hardship but hopefully we will also have memories about how we came together to overcome this pandemic – caring for others and building community.

This is especially a time of anxiety, including about our finances. As I write this, the prices of New Zealand shares are down 24 per cent from the peak a month ago, and globally by 35 per cent.

Many New Zealanders are facing uncertainty in their jobs and earnings.

As a charity supporting ethical investment, Mindful Money gets requests for advice. We can't give personal financial advice, but we can offer some reflections on good investment practice. Here are five principles that may be useful.

1. Don't panic

Shares go up and they go down. That's normal. When they go down, the natural instinct is to get out of shares, by moving to a conservative KiwiSaver fund or selling investment funds. But it is impossible to pick when it is the right time to sell. If you sell now, you risk locking in a loss.

Experience over the past century teaches us that share market falls are usually followed by larger rises. So, for example, there was a sharp decline in the Global Financial Crisis in 2008 but the index recovered all the lost gains over the next five years. It then rose by 117 per cent to the next peak at the start of 2020.

2. Be clear about when you need to access your savings

The most important thing you can do is be clear about what risk you are able to bear. If you need your money within a few years, you may need to accept some loss and go for safety. You may need access to your money for buying a house, for education or for retirement.

Recovery can take time. While it took five years for market prices to recover from the Global Financial Crisis, it took the share market 29 years to recover to its peak before the Great Depression in 1929.

This is the time to plan ahead to be clear about when you need to withdraw some or all of your savings. If it is soon, you may need to consider putting some of your funds into a lower risk category.

That would mean a conservative or defensive KiwiSaver fund. Or if you have investment funds, that might mean term deposits or even government bonds.

You may also decide to accept your losses and head for a lower risk fund if you don't trust the future. We currently have no idea where the Covid-19 crisis will end up, especially as cases rise in the US, UK and developing countries. The global economy is already severely disrupted and the downturn may yet be as large as the 56 per cent loss in share market value during the Global Financial Crisis.

You can use the risk calculator on the Sorted website to work out what risk category you should be invested in.

3. Avoid the avoidable risks

Once you know what risk category you are in, the next question is to ask whether there are some risks that you can avoid. One of those is investing in fossil fuels exploration and production. This is not only because burning fossil fuels causes climate change, but also because fossil fuels are a risky and declining sector.

The decline has been stark and long lasting. US coal companies lost an average of 28 per cent per year over the past ten years, and oil and gas companies lost half their value over the past five years.

Meanwhile, average share prices increased by 12.6 per cent per year.

The recent picture is even worse. Oil prices dropped by 30 per cent just after the outbreak of Covid-19 and now have gone down by almost 70 per cent, to below US$20 compared with the February peak of US$63.

This risk is one of the reasons that the Government recently announced that default KiwiSaver funds would be fossil fuel free from 2021 onwards. But that only applies to the small number of New Zealanders who have default KiwiSaver funds.

Fossil fuel investments are an avoidable risk. Anyone with a KiwiSaver fund can see what fossil fuel companies are in their KiwiSaver fund by keying in the fund name using the Mindful Money fund checker. It is free and easy to use.

Currently 97 per cent of KiwiSaver funds don't have a policy to exclude fossil fuels. Check out the 11 fossil-free funds. Avoid risk and help shift funds towards renewable energy alternatives.

4. It's a good time to go ethical

Amidst the havoc in share markets, ethical funds are holding up well. Data from research agency Morningstar shows that over February-March, ethical funds have done better than conventional funds.

It appears that the reason is not only that they are under-invested in fossil fuels, but also invest in sectors like health care and well-being that are crucial during the Covid-19 crisis.

By investing ethically, you can feel good about where your money is invested and do good with your funds. Check out Mindful Money's fund finder to see a range of funds that fit your criteria.

5. Look for the bright side

It is tough to say while so many people are suffering, directly from infection and indirectly from insecurity, personal loss, financial hardship and the burden of care for others, but some good will come out of this crisis. The Chinese character for crisis (wēijī) also means opportunity.

Already greenhouse gas emissions are down dramatically and air quality has improved. With the right responses, our recovery could put our economy on a more sustainable economic path. Times of disruption are the best times for change. The economic recovery package can help the transition towards a lower emissions economy.

It also offers time to build a more caring society. During the crisis, people are taking the time to help others, particularly seniors. This is our chance to offer random acts of kindness to others.

And it is a time to sort out our money. Be cautious but also be clear about your goals – not only the financial risks and returns, but also impacts of what you want your money to do in the world.

See the Stuff article here