It will be a hot topic for the media for the next few days as the share markets throughout the world have had the first big pull back after a long and strong run.
For some context please see the link to an article below written by Anton Tagliaferro from Investors Mutual where he explains about the recent events and gives them context.
Our clients know that things don’t go up forever and planning for these events is a key part of our process with each family.
For a while now we have been explaining that the outlook is bookended by the following two scenario’s:
The case for continued nice returns going forward includes:
- ongoing low interest rates –Even if the US is rising gradually they are likely to remain much lower than historical levels.
- With all major economies growing at the same time it means the higher demand can increase profits and growth. This is referred to as synchronised world growth.
- US corporate tax cuts and a pro growth agenda from Trump.
- Continued strong growth in china with an apparent success in moving from an investment driven economy to more of a consumer economy which is considered more stable and balanced.
- The fact that our active fund managers can avoid over priced investments and seek out investments that still offer good value provides opportunity even in flat markets.
All this means that even though nothing is really cheap in the investment markets, our investment portfolio’s may still deliver us reasonable returns going forward.
The case for a substantial fall in markets include:
- Nothing is cheap when current valuations are compared to the longer term historical valuations.
- Massive Government debt levels in China, the US etc.
- Massive household debt in Australian. Ie on average a families debt is way higher than ever before.
- Trump in the Oval Office.
- Geo political risk with ongoing tensions between countries.
- Australia’s 30 plus years without a recession.
- The unwinding of the “quantative easing experiment” which was the artificial suppression of interest rates and increasing of money supply that was carried out by the US, Europe and Japan following the GFC to stimulate growth. Cheap interest rates has pushed up the value of most investments. Think Sydney housing, bond markets and share markets.
All this means if there is a crisis and property and share markets dropped 25% then people would look back and say “well the writing was on the wall wasn’t it”.
We then discuss appropriate investment strategies given these two possible outcomes and we generally come back to the following decisions:
- That you can’t NOT be invested because over the long term quality investments we hold generally recover and do well.
- If you are retired then you hold sufficient cash to ride out a downturn so your not a forced seller.
- If you have reserves or are still investing, look forward to these downturns as opportunities to invest at cheaper prices.
- And again buy quality assets at the right price and avoid poor quality assets or over priced assets.
As for this latest sell off, the big question is whether it’s the start of a major correction which could see share markets down 20% or more. We are certainly due for it and the valuations are stretched enough to justify it. However as stated above there are some strong reasons for growth so it may just be a temporary blip and in a couple of weeks things could be back to normal.
The next question for clients who have cash to invest is when is the right time to do so and that really does require a crystal ball to answer. We won’t pick the bottom but we certainly will help people decide when is right for them to start investing if there is a decent pullback. However regardless of the decisions, because most of our client’s money is managed by “active managers” rather than “passive or index ” strategies, and those active specialist fund managers have been positioned for this type of pull back, they have cash ready to invest into this type of weakness. Its times like this where they rotate out of more defensive boring investments into opportunities they like which were too expensive previously.
For more information on this process you can read our previous blogs linked here:
- Active vs Passive investment strategies
- Active Management – Inbuilt discipline to take profits
- A blog from January 2016 when the last decent shakeout happened
In this video clip from last year Anton Tagliaferro outlines his 4 rules of investing and he gets pretty passionate to make some good points.
The December 2017 quarterly report from Platinum International is also an interesting read given at the time Bitcoin was $19,000, now $6830 at the time of writing this blog. They also discussed the positives for the market outlook, the risks and their positioning which at the time was only a 3.5% net exposure to the US share market and 18.4% net cash holdings.
If you have any further questions of course don’t hesitate to contact us to discuss your thoughts, ideas or concerns on 08 9274 2888.
The information and articles as well as the blogs provided on this page are general information/advice only and are not personal advice. The information/advice does not take into account any personal objectives, needs and situations of any individual/s as such prior to making any decisions regarding your investment strategy or acquiring a financial product, you should seek personal financial advice from an authorised adviser. The appropriateness of the information/advice should be considered on an individual basis and advice sought as to suitability. Past performance is not a reliable indicator of future performance. You should also obtain a copy of and consider the Product Disclosure Statement before investing with any fund manager. Bennett Wealth Group is a Corporate Authorised Representative of Bennett Financial Services Pty Ltd (ABN 26 142 752 225) Bennett Financial Services Pty Ltd holds an Australian Financial Services Licence and Australian Credit Licence No. 357917.