What to invest in now stocks have slumped

As central banks around the world hike interest rates in an attempt to calm inflation, and recession fears grow, the shine has been taken off sharemarkets.

With much of the stock market facing a slump, many investors are looking for new places to invest to achieve a better return.

Investment experts say the bond market, small-cap index funds, and paying off debt may be good options to consider while growth stocks are in decline.

Bond funds

Pathfinder portfolio manager, Hamesh Sharma​ said, the sharp decline in share prices had caused many fund managers to hold higher levels of cash, and wait on the sidelines for a market recovery.

But from May to June, the fund manager has started to see more attractive investments appear in the bond and fixed income market, he said.

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Investment experts identified the bond market, small-cap index funds, and paying off debt as sections of the market to look to when growth stocks are in decline.

“For example Infratil listed a bond for a 6% yield, which is pretty attractive. The Reserve Bank has been very aggressive in terms of their interest rate hikes, and we are starting to see that reflected in the bond market,” Sharma​ said

Over the last few years the bond market became less appealing as low interest rates helped to stoke share prices but as interest rates rose so too did the risk-reward benefits for bond investments, he said.

But for everyday investors hoping to get invest in bonds, Sharma recommended using a managed bond fund because the market still required a lot of active bond trading and selling, in order to take advantage of the best prices on offer.

Small-cap index funds

Girls That Invest founder Simran Kaur​ said it seemed the entire market was a buying opportunity.

“A lot of people watching the market surge of 2020 might have been wishing they bought shares in the slump. Well now they have another opportunity because the market is almost back where it was,” Kaur​said.

Investors who had the risk tolerance to invest money in a volatile period might take advantage of a market rebound by investing in small-mid cap index funds.

“Smaller or newer companies are often in better positions to innovate when times are tough. Uber grew out of the GFC for example. They are able to adapt fast and make changes to survive in tough environments.”

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Simran Kaur and Sonya Gupthan are the founders of the Girls That Invest podcast.

Pairing a small to mid cap focus with an index fund, which buys a diverse range of companies in a single investment, was a way to curb some risk of investing in a volatile time, she said.

Pay off personal debt

Mint Asset Management sales and marketing manager David Boyle​ said while it was not a very exciting investment, often paying off personal and household debt was the best use of any available funds in a quieter market.

Tanking markets had eaten away at growth opportunities in much of the share market, and bank term deposits had not yet caught up with inflation, so there were very few options available to investors, he said.

But paying off personal debt could also pay dividends for a person’s future, he said.

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David Boyle​ says paying off personal and household debt is the best use of excess capital in a down market.

“Paying off debt is also investing. With mortgage rates going up, higher repayments will be putting stress on households. If you do have money to spend, increasing your mortgage repayment contribution might mitigate the higher interest rate as you are paying off the debt earlier,” Boyle​ said.

If an investor had a lump sum of money tucked away, paying off a mortgage, and reducing the term of the loan might give you more money over time than investing, he said.

“It sounds counterintuitive, but if you are paying off debt early, you are reducing the cost of debt and ultimately paying less interest. You will likely be saving money in the long run,” he said.

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