The life of an investor inevitably involves periods of frustration and can prove to be an emotional experience for many – whether it involves shares, property or bonds – as we navigate the ups and downs of the economic cycle and the impact this has on our portfolio value. For this reason, some broad perspective can help appease these concerns and focus on the underlying objective of investing.
Are you an active investor? Are you a buy-and-hold investor? Or a reasonably balanced individual that wants to participate in the upside but avoid the major setbacks that occur from time to time?
Austin Donnelly was a great advocate of these perspective pieces, as they should instil a longer-term mindset. In the past 100+ years, we have faced two world wars, a great depression and multiple recessions. Yet, despite all of this, the market continued on a reasonably stable trajectory.
In fact, the market went up 63,338% excluding dividends in the past 116 years (equal to approximately 71% every 10 years). This is despite the fact it experienced 10 “crashes”, defined as falls of over 20%, meaning approximately once every decade anyone that was fully invested had to stomach up to a 20% loss to their life savings. Of course, there are techniques available to reduce the drawdown risk (such as diversification to negatively correlated assets) or one can attempt to identify the risks in advance and avoid the losses altogether.
Today’s concerns are arguably similar, as we face the short-term issues of a US election, US debt ceiling negotiation, an Italian vote, the Brexit process and Chinese debt concerns. We also face the long-term issues of an ageing population, high household debt levels, a seemingly elevated property market and technological change that can have a material impact on investment values.
The truth is that there are no guarantees in financial markets. The best we can do is make reasonable assumptions on the best path forward and retain conviction throughout the noise and inevitable periods of market panic.
Therefore, as an investor, it helps to consider in advance whether you have the knowledge and temperament to identify these risks in advance (plus a willingness to act on your conviction when most people remain optimistic) or whether a buy-and-hold strategy is more akin to your style.
Knowing that most people wish to avoid crashes, we provide a framework that hopefully helps you to identify the key risks and position accordingly. However, just like the 1987 crash or the 2008 financial crisis; the timing and depth of a crisis is often a great unknown. In the end, intelligent investing requires temperament and deep analysis – in that order.
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