Conditioning for Uncertainty
Investors will inevitably endure uncertainty in the short-term. If you’re new to investing, then you’ve likely heard tales of “underwhelming” returns, or horror stories of investors losing large sums of capital. You may have also heard some fantastical stories of people making huge fortunes in a very short space of time. Both extremes are true, and there’s an enormous space in between.
At Munro Financial, we like to avoid extremes. Market cycles can be described like that of the passing Seasons: Without the Winter there can be no Spring, nor Summer. We’ll plan to remain invested through the “dreary” months and yet, there can be some pretty amazing periods under those darker skies. We'll hunker down when it's stormy, and we'll plant ahead of the Spring. (We yield less if we plant too late. Equally, plant too early and the frosts may take their toll). Not planting is never an option, not if we want to build sufficient stores to ensure our long-term security. Pests, fires, droughts, floods, winds, (market prices)... they're all unpredictable events that will interrupt our plans. We'll have to work through them all, and still survive.
We know that over long periods (ten years plus), there are few occasions when the return from investing in business (Share Markets) has not delivered a superior result than most other sectors. Yes, even residential real estate - if we take ‘gearing’ out of the property market, many will be surprised at how perceptions moderate. That said; there are many different markets. Within those, we will engage specific sectors to achieve a suitable spread: ‘diversification’ is the only strategy we have found, which consistently protects the investor from extreme outcomes over any period.
Some investors think they diversify by holding a multitude of companies, in the same market. While certainly less risky than holding one company, the risks to businesses operating in the same market are usually highly correlated. Conversely, an investor can spread their risks so wide that they rob themselves of the very return they wanted. We know that without risk, there is no real return, but as we age and near retirement, we will prefer a growing safety net of "low risk" assets.
Everyone is different, but we ultimately face the same challenges. To our mind, investing is personal and the typical “common or garden variety”, “one size fits all” approach has never been our preferred style. With just a bit of effort, better things can be achieved but, no matter how complex or simple the strategy, there will always be unpredictable events that can upset our plans mid-season.
Always think about your short, medium and long-term goals. We recommend developing a strategy that commits parts of your capital to those goals. In all else that we do in life, we balance off “cause and effect”, to minimise the risk of a different outcome. Investing is no different. Remember, “A goal without a plan is just a wish” Antoine de Saint-Exupéry
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.