Investment Insights: October 2017

In this edition we take a look at the age old problem of waiting for just the right time to invest which is front of mind for many at the moment with the increasingly inconsistent, incoherent and sometimes inconceivable (did he really challenge his Secretary of State to an IQ test in the same week that he said he met with the President of the Virgin Islands which is actually himself) rhetoric coming from the United States.

2017-10-30

Hello and welcome to another edition of Investment Insights.

In this edition we take a look at the age old problem of waiting for just the right time to invest which is front of mind for many at the moment with the increasingly inconsistent, incoherent and sometimes inconceivable (did he really challenge his Secretary of State to an IQ test in the same week that he said he met with the President of the Virgin Islands which is actually himself) rhetoric coming from the United States. Of late we have talked with many investors who are waiting until this “North Korea” things blows over, however history tells us that as soon as one so called crisis is over another one will take its place. Take 2016 for example based on the following headlines:

August 2015 - One of the World’s Most Respected Investors Predicts 2016 Stock Crash, Grantham just made another bold call. He thinks the US market is “ripe for a major decline” in 2016. He says it could spark the worst crisis since the Great Depression.

January 2016 - Beware the great 2016 financial crisis, warns leading City pessimist, Albert Edwards joins RBS in warning of a new crash, saying oil price plunge and deflation from emerging markets will overwhelm central banks, tip the markets and collapse the Eurozone

June 2016 - These three investing legends are warning of another market crash, Some of the world’s most successful fund managers are warning of red flags for the world economy. Here’s what they’re buying now

This is just a sample and we have ignored “Brexit” and the election of Donald Trump, both of which were set to send markets reeling but in the end 2016 produced returns of just under 12% in Australia and 9% globally. These articles go on and on with the only change being that sometime between June and about this time of the year they replace the current year with the next year! Please don’t misunderstand us, the markets will at some stage fall (as they have done recently) however as we have previously and regularly discussed they will always recover. However the subject of today is not their rise and fall, but rather the problem of waiting for just the right time to invest.

In a piece published in May this year Samuel Lee of SVRN Asset Management looked at a variety of strategies focused on “buying the dip” in order to generate outperformance. The results were less than spectacular with a buy and hold strategy returning 6.3% compared to a buy the dip (a dip being defined as a 10% drop from peak to trough and held for 12 months) 2.2% p.a. Further tests were conducted with larger dips and longer holding periods but none of the variations tested produced higher absolute or risk-adjusted returns than buy and hold. The key reason why waiting for the crash strategy did not outperform buy and hold was that because the equity risk premium was high and decades could pass before a big-enough crash, making it very costly to sit in cash.

So while waiting for the crash is clearly not a great strategy, nor is rushing in just before the market does take a downturn. For this we have a very simple and elegant strategy called Dollar Cost Averaging, but more on that next time.

If you would like to discuss any aspect of your strategy and investments, or you would like help putting one together, please contact one of our advisors today.

Daniel Minihan
Partner, Private Clients and Wealth

Matthew Oakey
Partner, Private Clients

David Foord
Senior Manager, Wealth Management

Matthew Baum
Private Client Advisor, Wealth Management

Keegan O'Rourke
Private Client Advisor, Wealth Management

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