This is our August market update, the purpose of which is to let you know what we are thinking about when constructing and reviewing portfolios.
Daily media headlines are never a good guide for making long-term investment decisions.
Local and global news outlets are back at it again with their alarmist headlines, very frequently a contraindication of what most investors should be doing when aiming to build, manage and protect wealth.
Recent evidence of this was the January 2016 (flawed) advice of Royal Bank of Scotland (RBS) to its private client base and the wider investment community – “Sell Everything” we are headed for “Cataclysmic” market falls the headline read (https://www.smh.com.au/business/markets/rbs-tells-investors-sell-everything-20160112-gm3ssa.html).
This proved to be less than sage advice as global share markets almost immediately did the opposite of this and went on a significant bull run with the US Share market (S&P 500) index increasing in excess of 50% over the following 24+ months rising from 1,880 index points to more than 3,000.
Nonetheless, we do recognise such hyperbolic headlines can impact (even seasoned) investor sentiment.
There is no question that we are now again in a period of relative uncertainty, with several geopolitical and economic issues impacting markets and causing large movements in prices both up and down.
As such, it is important to continue to ensure portfolios are well diversified across all major asset classes (cash, fixed income, equities, property, infrastructure, alternatives) and that exposure to long term growth asset classes are aligned to appropriate individual time frames for investing.
All traded markets are constantly being revalued and therefore move up and down in price, with some periods displaying wider ranges in price movement than others. Trying to time these movements is effectively impossible – i.e. there are many ‘investment professionals’ who have been calling for a large correction for 3+ years and have missed significant market gains – they will eventually be right as even a broken clock is right twice a day.
The table below shows that this current market volatility is not anything new for our long-term clients – we have experienced it for many years. The table below shows that markets (US share markets in this example) fall at some point during every year (red dots), yet statistically provide a positive return over the full year approximately 75% of the time (dark bars). The key takeaway being that market corrections (price falls) intra-year are common-place and riding these out are required when targeting long-term returns which are above the rate of inflation and the typical interest paid on bank deposits.
Markets Valuations are Reasonable
Most developed markets are trading at or near long-term averages for the multiple of earnings an investor would usually expect to pay for 1 dollar of profit (‘pe ratio’).
This is illustrated in the chart below with the line tracking the price to earnings ratio for the share market being approximately middle of the long term range.
In the short-term emotion and public sentiment drives the pricing of investment markets – and we expect emotions could run a little high in coming weeks and months – but we must keep our focus on the longer-term if we are to stick to a plan that has a high probability of achieving the individual financial goals we set and aspire to.
We hope you have found this informative.
Sam Adams and Glen Orbell
All charts and figures sourced from Epoch, Grant Samuel and J P Morgan Guide to markets 1Q 2018.