OPINION: My guess is the recent turmoil on share markets is temporary. I doubt very much that it is the harbinger of a GFC-like crash.
The global economy is very strong and companies are growing their profits, and while those profits keep growing I will remain fairly bullish.
Ironically, the bears who are pushing the market down are also selling because they too think the global economy very strong.
Their worry is that this economic strength will flow through to higher interest rates, which may rise more than anyone expected.
Ultimately, higher interest rates reduce consumer spending and eventually diminish company profits.
However, for my money, while the global economy remains in such good shape, it seems unlikely that there will be a major market crash. I think the recent market falls are a market correction caused by prices getting a bit ahead of profit growth.
In any event, a sharp fall like this serves a very useful reminder that no investment is a one-way bet – there are always risks.
I think that regardless of how confident you are that only good times lie ahead, there is a basic rule of investment that says you ought to be able to cope with (even benefit from) a good crash whenever it comes, or however deep it is.
No matter how good the global economy may seem, we should not get ahead of ourselves – the price of safety is eternal vigilance.
Good investment management means you must expect the unexpected.
I have learned to be prepared for a market crash, even though I do not expect one – I am ready for a crash today because I am always ready for a crash.
In fact, I invest in such a way that a market crash is not something to be feared but, instead, an opportunity to pick up some great bargains.
There are two things that I do which mean I can welcome a crash: first, I keep my portfolio trimmed.
Trimming the portfolio is to do some selling in good times to keep the amount that you have in shares in line with your risk appetite.
During times of high investment returns (as we have had over the last few years), it is easy to end up with swollen positions.
This means that some investments have grown in value so that they represent a very large (too large!) proportion of the portfolio.
Secondly, always hold some cash. When the market turns down, cash is king. If you do not have some cash, you cannot avail yourself of some of the bargains that are presented in a crash.
In good times, cash is a drag on portfolio returns. But in bad times it comes into its own and commands a kingdom with bargains galore.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.