New investment strategies in a volatile world
Investors and retirees everywhere are wondering what went wrong. They thought they were secure, they thought they understood. What lessons can they learn from the upheaval of the GFC?
Yes, thanks to the GFC, investments, savings and superannuation funds throughout the world have gone backwards … many by well over 50%. The retirement plans of a great many over 50s, have been thrown into chaos. A once comfortable future is looking far less attractive. What strategies should investors look at to help them restore their future? We think there are six fundamental strategies to consider:
1 Too good to be true?
Perhaps the most obvious reflection is the age old realisation that if something looks too good to be true, it probably is. And further, the only thing “free” in this world is trouble! In fact, the Global Financial Crisis is first and foremost a financial problem. The root cause lies with greed, and the boom in crazy investment practices, driven by the world’s (once) leading financial institutions. Creative, elaborate and complex risk products, offering wonderful returns, ultimately failed.
And it sucked in the smartest of investors. And trillions of dollars too. People invested because of who the promoters were, not on the fundamentals of the investment. The lesson? if you don’t understand it, don’t invest.
2 Short term or long term?
Every day the news broadcasts today’s prices for world share markets, oil prices, gold and foreign exchange. It creates an awareness and a sense that investors need to urgently take action or they might miss out.
Curiously, it is often thought that investors are driven by greed or conversely, fear. We believe that the drivers of investor behaviour are deeper than that. When the markets fall suddenly and everyone is worse off, investors are reflective and philosophical.
If an investor suffers alone, this causes grief. Similarly, if a particular opportunity is seen as the next big thing, the feeling of being left behind relative to the “smart” investors, will drive often irrational action by individual investors, even if they do not understand the investment.
Perhaps the lesson for most investors is to take a long term view and to not be distracted by short term aberrations in the market.
3 Hindsight
Hindsight is a wonderful thing. After two years of extraordinary volatility in all investment markets, it is easy to be drawn into a multitude of “what if” scenarios.
- What if investors had sold their equities and properties in November 2007 at the peak of the market and invested in high interest cash?
- What if they then invested into equities in March 2009 at the bottom of the market and when interest rates had fallen to historical lows?
- Would this have been clever or lucky?
At Fordham, we believe that this is at the end of the day, short term thinking and speculative at best. The very best investment advisors use asset allocation as their primary tool for managing risk and return across market sectors.
4 Asset allocation
In their study into the long term impact of different investment strategies, Brinson, Hood and Beebower (Financial Analysis Journal, 1986) concluded that the timing and selection of asset allocations in an investment portfolio, accounted for an extraordinary average of 93% of the long term historical performance. It even outperformed the best punters in the long term!
At Fordham, we use asset allocation as our primary tool for driving our clients’ portfolio strategy. We conduct our own research into the world-wide economic markets to help us understand financial risks between financial sectors and within financial sectors. This drives our thinking behind the asset allocation for our “Model Portfolio”.
Our Model Portfolio typifies a business owner who seeks a risk refuge for wealth extracted from their trading business, or perhaps a former business owner or investor, who seeks to preserve their capital above all else. While this risk profile does not suit all investors, it reflects the attitude to wealth accumulation and protection that is shared by most … and particularly Fordham clients.
As at November 2009, our Model Portfolio asset allocation is:
- 40% Australian shares
- 12% International shares
- 2% Property trusts
- 42% Interest bearing securities
- 4% Cash
5 Is this an Australian miracle?
No doubt our economy dodged the recession bullet. While growth has returned, the impact of the GFC remains a significant hole in many pockets.
Consumer and business confidence surveys would indicate that it is all behind us now. The stock market also seems to support that view with a massive 50% increase in the last six months. But 42% of that gain is represented by just six stocks, including the four banks.
Looking forward, we remain concerned that there are still fundamental challenges facing the world economy and, in spite of our Chinese relationship, these challenges could still cause Australia significant pain in the future.
This leads us to the view that the next ten years, will see a return to the market turbulence and “choppiness” similar to that experienced in Australia in the 1970s.
Accordingly, the asset allocation for our model portfolio remains unashamedly conservative. This resonates well with Fordham clients, who are concerned at the underlying value of assets and their ability to sustain income levels.
Similarly, not all sub-sectors warrant investor attention going forward as many (such as financial services) will still suffer aftershocks of the GFC for some time to come.
Perhaps the lesson is to hasten slowly.
6 Know what you don’t know
Everybody loves a “tip”. Be it the Melbourne Cup or the next boom gold mining stock. Australians love to gamble!
But don’t confuse gambling with investing. Investing in any market requires unemotional skill, knowledge and patience. No more so than in equity markets.
Understanding the individual companies that sit behind an ASX code is the key.
- What are the quantitative and qualitative assessments that can be made about the company?
- Do you understand it’s exposure to gearing?
- What is the dividend yield?
- What is management’s strategy and vision?
- Have they delivered on earlier plans?
- Is management competent?
Our business owner clients understand these fundamentals in their own business. In fact, if they ever consider buying a competitor or exiting their business, they will know every business “driver” that builds long term value.
So why do so many investors abandon such rigour when it comes to investing?
It comes to knowledge. Very few investment advisors have a similar philosophical approach to investing in public companies, as a business owner would, for investing in a competitor.
The lesson? Get help from a competent advisor who understands what they are doing! Naturally, Fordham can help!