What is sharemarket volatility and what should I do about it?

Ever checked your KiwiSaver balance only to find it has dropped dramatically overnight? Welcome to the world of sharemarket volatility, the financial rollercoaster that affects everything from your retirement savings to your investment portfolio. In this guide, we'll demystify sharemarket ups and downs for everyday Kiwi investors. We'll explore what the sharemarket actually is, what causes those heart-stopping dips, and how to keep your cool when the market seems anything but stable. 

What is the sharemarket? 

The sharemarket (sometimes called the stock market or stock exchange) is a place where people can buy and sell shares (individual units of ownership) in publicly traded companies. It functions as a marketplace that brings together people who own stakes in businesses. As these businesses grow or change, so does the value of their shares. The sharemarket acts as a dynamic environment that reflects not just company performance, but also investor sentiment, economic news, and global trends.  

Major sharemarkets include the New York Stock Exchange (NYSE), the London Stock Exchange and the Tokyo Stock Exchange. In New Zealand, our local sharemarket is the New Zealand Stock Exchange (NZX). There are also sharemarket indexes that track the performance of publicly traded companies, like S&P 500 (Standard & Poor’s 500) and MSCI World Index. These indexes are widely considered a benchmark for the overall sharemarkets and often used as a stand-in for the health of the economy. 

For many people, picking individual shares and monitoring the market every day can feel overwhelming or time-consuming. That’s where managed investment schemes come into play. Instead of choosing shares one by one, you can invest in a fund (a collective pool of money from many investors) that is overseen by professional fund managers. These experts make investment decisions on your behalf, using research, strategy and diversification to balance risk and opportunity. 

What is market volatility?  

Market volatility refers to how much and how quickly the prices of investments like shares, go up and down over a given period. Think of it as the mood swings of the financial world. Some days the market feels confident and optimistic, while other days it feels uncertain and reactive. When prices rise and fall sharply within short timeframes, we call the market ‘volatile’.  

But volatility isn’t necessarily a bad thing; it’s just a measure of movement. A calm and stable market has low volatility, while a rapidly shifting one has high volatility – making it more unpredictable. Volatility presents opportunities for active managers, like MAS, to enhance returns for Members. 

Market volatility is a natural part of investing. Market corrections are normal and large intra-year moves are not uncommon, even in years when positive annual returns are achieved as seen in the chart below. 

This chart shows that every year has a red dot below zero, which means that drawdowns (the decline from a peak to a trough) happen regularly, even in years with positive returns. Despite these drawdowns, the blue bars show that most years ended positive, which shows that recovery is common. So, if the red dots are the storms and the blue bars are the harvest, then over time, the harvest has consistently outweighed the storms. 

What causes sharemarket volatility? 

Volatility stems from a complex range of factors that can influence investor behaviour and economic conditions. Some of these are below. Understanding these volatility drivers can provide context for market movements and help inform investment decisions. 

• Economic news: When major economic indicators like employment reports, inflation figures or GDP growth rates are published, markets often respond immediately. Exciting data can trigger buying sprees, while disappointing numbers can spark selloffs as investors recalibrate their expectations. 

• Central bank policy decisions: Interest rate changes by central banks like the Reserve Bank of New Zealand (RBNZ), have strong effects on markets. Interest rate hikes typically increase borrowing costs, potentially slowing economic growth and pressuring share prices. While interest rate cuts can stimulate markets by making borrowing cheaper and encouraging investment. 

• Political events and geopolitical tensions: Elections, policy changes, international conflicts and trade disputes, can create uncertainty. Investors often react to these events by adjusting risk exposure, causing price swings as they try to anticipate how political developments might affect performance. 

• Global events like natural disasters or public health crises: Unexpected events like earthquakes, hurricanes or pandemics, can severely disrupt supply chains, consumer behaviour, regions, and entire economic sectors. Market reactions to these events can be swift and severe as investors scramble to assess the potential economic damage and recovery timeline. 

• Shifts in investor emotional sentiment: Markets are driven partly by human psychology. When investor sentiment shifts from optimism to fear or vice versa, it can trigger self-reinforcing cycles of buying or selling that amplify price movements beyond what might be reasonable. 

• Company earnings announcements: When companies report profits significantly above or below expectations, their share prices can move dramatically. These movements can ripple through companies in related sectors as investors reassess growth prospects for similar businesses. 

• Industry disruptions: Technological breakthroughs, regulatory changes or new competitive threats, can rapidly transform industry landscapes. Investors might then revalue companies based on their perceived ability to adapt to these disruptions or capitalise on new opportunities. 

Is this why my investment balance goes up or down? 

Yes, market volatility directly impacts your investments and can cause your balance to fluctuate. When you notice your KiwiSaver scheme or investment fund account balance going up or down, you're seeing the real-world effects of these market forces at work.  

These movements are normal and expected – even the most conservative funds experience some degree of volatility, though less than more aggressive fund options. For example, conservative funds have a lower level of risk so generally fluctuate less but have lower expected returns. While growth funds have a higher level of risk with more ups and downs but a higher potential for returns.  

Understanding this connection between market volatility and your personal investment balance can help you maintain perspective during market swings and stick to your long-term investment goals. 

What should I do when the sharemarket is volatile? 

Staying the course through market swings historically leads to growth. If you panic and pull out during a drawdown, you risk missing the rebound that often follows. Successful investing through volatility combines appropriate risk assessment, diversification across and within asset classes, and maintaining a long-term perspective. Here are some things you can do:

• Review your risk appetite: Periods of volatility provide an excellent opportunity to honestly assess whether your current investment approach matches your comfort with fluctuations. If market drops are causing sleepless nights, it might be time to consider a more conservative allocation that better aligns with your tolerance for uncertainty. You can check out our Fund Finder to learn about our 7 different types of funds with various levels of risk.  

• Diversify your investments: Spreading investments across different asset classes, industries and geographic regions, can help soften the impact of volatility. Different investments often respond differently to the same market conditions – when one area struggles, another might thrive, helping to smooth your overall returns. 

• Maintain your long-term investment horizon: Remember that short-term volatility matters less for long-term goals. For KiwiSaver scheme and retirement savings investors especially, focusing on your 10, 20 or 30-year horizon can help maintain perspective during turbulent markets. 

• Active investment management: Some fund managers (like the managers of the MAS Schemes) employ strategies specifically designed to navigate volatility. Fund managers may adjust holdings defensively during downturns or opportunistically purchase quality investments at discounted prices. This can potentially add value beyond what passive approaches might achieve which just follow market indices.  

• Keep calm and carry on: Often the worst investment decisions are made during emotional reactions to market swings. Historical data consistently shows that staying invested through volatility, rather than trying to time markets by moving in and out, typically leads to better long-term outcomes for most investors. 

When will the sharemarket stabilise?  

No-one can predict with certainty when sharemarkets will stabilise after periods of volatility. Even the most experienced financial experts and economists struggle to consistently forecast market turning points with accuracy. 

Rather than trying to predict when stability will return, most financial advisers recommend focusing on what you can control. This includes maintaining a diversified portfolio appropriate for your time horizon and risk tolerance, and avoiding emotional decisions during downturns. Try and remember that market volatility is a normal part of investing. 

Talk to an expert 

At MAS, we offer a range of investment options that can help you achieve your goals and grow your wealth. If you need some guidance, you can speak with one of our MAS Advisers in person or on the phone for general financial advice. For example, ensuring you make the right fund choice to meet your savings goals. If you would like to talk to a MAS Adviser, you can phone 0800 800 627 or email info@mas.co.nz.