- if we wait till things look better, we will pay 10% or 20% more for the same investment
- bank deposits are not investments
- banks are good for short term money that will be needed within 3 months to 3 years
- medium to long term investors cannot afford such low returns
- the herd invests in good times*
- the countercyclical investor makes a lot more money
- if everyone is investing, don’t
- if no one seems to be investing, get started
- only buy quality & diversify – essential
- *Property investors beware.
Invest in gloom, profit in boom
To be fair, it does take some courage to buy when things are gloomy, but is the current gloom justified? Recent research indicates that the USA, still the biggest economy by far, is going along well, and has less than a 4% chance of recession in 2016.
The simplest picture
If you are investing, where in the market cycle do you want to buy in
If you feel quite strongly that you should be buying when things are gloomy, but are fearful, you could do half. If you do and markets rise, then 50% of your money has shown a nice gain, and that is 50% better than nothing.
If markets fall, you can invest the other 50% or 25% and buy the same market more cheaply. Given time this will usually work quite well.
Next step – patience
A balanced portfolio averaged + 9.2% pa. from 1990 to 2014.
- 19 positive years - best year +26%
- 5 negative years - worst year – 14%
Once you are invested, rebalance
No one can pick the top or bottom of a cycle, so use rebalancing instead. It’s the next best thing since it will increase profit, and also reduce risk. Right now, February 2016, markets are down so many balanced investors will be slightly underweight in shares by about 2% - by rebalancing, they are buying a few more shares more cheaply (2% of a portfolio).
“In the short run, the market is a voting machine, where voters only require money, but not intelligence or emotional stability. In the long run the market is a weighing machine.” - Ben Graham, lecturer, researcher, author, and widely regarded as the father of value investing,
“Investors demand a reward for taking risk.” – Eugene Fama, Nobel Prize Winner
The “weighing machine” is one reason why investors need to be patient and give shares time to work.
The Fama “demand a reward for taking risk” has a lot to do with market pricing, and is a reason why bonds outperform cash, and shares outperform bonds (because investors demand it, and markets adjust accordingly).
Graham and Fama have made huge contributions to the understanding of markets and how they work.
Over the past 80 years global bonds have averaged about 1% more than short term bank rates.
NZ bonds have averaged about 2% more than short term bank rates.
Rationale - no investor is going to buy a bond if it does not pay more than the bank.
Global shares have averaged about 4% more than bonds (large, value and small company shares).
Rationale - no investor is going to buy shares if they don’t pay more than bonds.
Certainty not available
Death and taxes are the only certainty in this world. However, those who succeed do the following:
- diversify widely over bonds, property, and shares
- buy only quality
- use cost efficient investments
- recognise there will be ups and downs
- use rebalancing instead of fear
- be patient – 5 years or more for best results
- avoid forecasting
- use averaging in
- or only invest 50% now
Supplied by Alan Clarke, financial & retirement adviser, & author.
His 2nd book “The Great NZ Work, Money & Retirement Puzzle” is available on line.
Alan is an independent authorised financial adviser (AFA) FSP26532.
His disclosure statement is available on request and free of charge.