In the News

Diving In And Out Won't Catch The Wave

Herald Sun - 4/6/2009

The recent rally in the share market in March has enticed some investors to think about getting back into the market after pulling their money out. The trouble is that firstly, the rally may not be sustainable and if it is, by the time we re-enter it has already risen over 20% or more from the trough. Investing is a lifelong journey; it is not something that we can precisely time in the short term.

With large daily movements in financial markets plus the prospect of a looming global recession we can be tempted to take a sideways step from our investment journey and try to rejoin it only after markets appear to have recovered. History shows us that the booms and busts of financial markets have been happening for a long time and jumping in and out never works. By the time we get back in it is usually too late.

Knowledge of history is essential to understand investment markets. Investors need to be aware that they will live through periods of both euphoria and depression during their investment journey. It is pointless to try to second guess to avoid downturns.

From time to time we lose sight of the relationship between risk and return. Invariably assets that ultimately produce higher returns can sometimes deliver gut-wrenching risk. We need to be prepared for both the good and bad years and appreciate that part of the investment experience is the acceptance that there will be years where our investments may fall in value.

The key here is to avoid putting all our eggs in one basket or having an over concentrated portfolio. We should maintain an all weather approach by holding a broad range of investments within different asset classes. This is best achieved by diversifying across a range of domestic and international shares, property, bonds and cash.

When markets were booming, the dream of riches caused too many of us to throw caution to the wind. Too often investors enter markets after they have already performed strongly in the belief that these returns will continue indefinitely. Unfortunately this overconfidence rarely bears fruit. History is punctuated with market crashes following periods of strong returns and inevitably those who invest only after markets have performed strongly end up being the ones who get hurt the most when the market bubbles burst.

Many who lived through the Great Depression, the Poseidon Bust of the early 1970’s, the share market crash of 1987 and the Tech Wreck of 2000-02 were scared away from investing forever after suffering significant losses. Paradoxically, after all these downturns, the returns for the following years were some of the best we ever experienced. Some people eventually returned to financial markets but only after the markets had recovered too much to make it worthwhile.

We need to learn to be sound investors and not just speculators. Taking time to learn about investments, along with the benefits of diversification and planning, will help us avoid the expensive tuition fees served up by markets when they teach us a lesson.

The daily and even hourly reports on the market seem to only focus on the short term. The current downturn is a case in point where our fears and concerns can dramatically impact whether we end up achieving our long-term goals.

Large falls in financial assets over the past eighteen months have caused many investors to ‘throw in the towel’ even though now many shares are priced at substantial discount. Warren Buffet famously summed up that investors should “be greedy (buy) when others are fearful and be fearful (sell) when others are greedy”. It is easier said than done so a disciplined, pre-determined strategy needs to be developed to take us through the inevitable downturns.

More important than looking at what will occur in the next 6 months it is critical to understand that the next six years hold enormous promise as markets often recover sharply when they do start to pick up. Having a longer time frame puts our investment decisions into perspective.

Over time the purchase price of a growth asset may vary and it certainly does take courage to maintain a strategy during a prolonged period of falling markets. In spite of this we are rewarded by being able to purchase more units at lower prices if we have additional cash at these times. A balance between shares and fixed interest and rebalancing will be the best way through the crisis.

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