Don't make the classic investor mistake
Now is not the time to be selling or shying away from good investments. It’s a time for buying, with a cautious eye. Assets that provide us with daily liquidity are volatile, principally because “Business” is always shifting. Good management plan for highs and lows & they adjust their strategy to meet the market. Some shareholders may choose to sell, which may push prices down (but of course, someone is buying at this new price). Then, as sentiment slowly changes, prices push up as more buyers enter. The fact that we can buy or sell on any given day, reflects the more extreme shifts that can occur in listed asset prices. So ultimately, are we buying Shares, or are we buying Businesses? It is an important distinction.
The returns from Cash or Fixed Interest will never be enough to combat long term tax or inflation (I don’t see that changing any time soon). So if we’re not buying Businesses, then the alternative is to buy Real Estate and yet, that sector is by no means cheap either. Property is traditionally less volatile than Share Markets, because it does not have the liquidity of Shares. It therefore feels safer, but truly, this is illusionary. If we sell at the wrong time, this asset class is every bit as risky - indeed more so if debt has been essential to acquire the asset, and little has been repaid prior to its sale (the bank always gets its capital first).
In the short term, the only certainty is uncertainty, and therefore we do what we have always done, we diversify. We have many eggs in different baskets and we avoid mistakes. We buy what good research suggests are sustainable Businesses and we’re alert to avoid excess debt. To succeed, we develop a plan and we stick to the strategy, beyond just today’s price. Cash and Fixed Interest are short-term solutions (i.e; up to five years). Real Estate and Business are long-term investments, and while Shares and Real Estate usually outperform Cash and Fixed Deposits, sometimes they just need more time.
Extracts from Devon Funds Management December 2018 End Economic Commentary:
The US Dow Jones Index recorded its worst December since 1931 and for the first time ever, 2018 saw December deliver the worst returns of any month during the year. With headlines dominated by trade wars, a US government shut down, Brexit and the Federal Reserve shrinking its balance sheet and hiking interest rates, the Dow Jones Index finished the month down 8.7%, while Australian shares recorded their worst December-quarter since 2011. The question now is whether 2019 will prove that the recent volatility was a sign of worse things to come, or rather, this has been an opportunity.
Additionally, the potential for policy error in areas such as trade between the US and China is offering more fuel for the “Bears” out there. Unfortunately, this backdrop presented itself in not just a challenging December, but rather a tough 2018 - with almost all major stock exchanges finishing the year in negative territory. The US S&P500 closed the year down just over 6% whilst the Shanghai Index and the UK’s FTSE100 Index fell by 25% and 12% respectively. Commodities faced similar treatment with Copper down 20% and Crude Oil collapsing 24%!
The economic recovery and the financial returns that have been enjoyed since the GFC have been extraordinary, but at this juncture there is a heightened level of disagreement amongst investors and commentators as to what the medium-term outcomes will be. Although the noise surrounding international politics and central banks seems louder than ever, the fundamentals of equity markets in general appear supportive.
In closing: Investing today is about future returns. Capital to be used today should be extracted from Cash or Fixed Deposit holdings (the short-term stuff). Our “investments” are doing exactly as we’d expect, and given this most recent quarter was one of those challenging periods we’ve warned about before, now is not the time to make large reductions (indeed, this may well prove to be the best time to be buying more…).
Tony Munro CFPCM AFA
The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client.
A disclosure statement is available on request and free of charge.