From where we are sitting if you are convinced that now is the right time to get back into the stock market then mixing it up with growth and income makes a lot of sense.
That’s why taking an active approach to your investments in 2009 is the key. Unfortunately, most financial advisers and most asset allocation models will probably insist you stick to the same old formula that ‘helped’ investors lose 50% of their share portfolios during the last twelve months.
They will insist that anyone below the age of 35 should be invested in growth assets. Why? Because apparently it is more tax effective and afterall, you’re young you don’t need the extra income.
After 35, then supposedly you are better off switching away from purely growth into more conservative assets, such as fixed interest or anything that pays a steady income.
As time passes the idea is to gradually shift further and further away from growth into more stable assets, so that by the time you are into retirement your entire portfolio will be most cash.
The alternative to that view is to say “rubbish.”
With any message you have to remember who is benefiting from it. Who, for example, benefits from investors taking a passive approach to investing?
Why have stockbroking firms encouraged their brokers to move away from transactional based broking towards “asset management”?
Simple, the reason is because there is more money in it for them. And it makes the client more ’sticky’ to the firm if the adviser is ‘managing’ all of their wealth.
But once you think about passive asset management in depth the arguments for it start to lose their appeal. The biggest argument that managed funds put forward for a passive approach is that it is “time in the market, not timing the market.”
Frankly, it’s a hackneyed expression and doesn’t hold water.
The other argument they put forward is that over time an actively managed fund’s returns will be lower than a passive fund. Again, they are being selective.
What facts are we going on?
Well, let’s take an example – and we’ll use round numbers to keep in simple. Supposing you have a superannuation fund of $100,000 in November 2007. Supposing your annual income is also $100,000 and your employer contributes $9,000 per annum to your super.
If you had remained fully invested in shares – which most ‘growth’ options would have been in a retail fund – then your $100,000 would now only be worth $61,560.
Your $9,000 worth of contributions would have also been invested into the same ‘growth’ option. And of course those contributions would have been made during a time when the market was falling. Which means your $9,000 of contributions would now be worth less than $7,000.
So after one year of market turmoil your fund manager has taken your investment down to about $68,000. And that isn’t even taking into account his/her management fees.
Yet imagine you had started to pull your money out of the market in late 2007 and early 2008, so that by the middle of 2008 you were virtually free of shares? Your returns would have been much better.
On top of that, your monthly contributions would have been going straight into cash rather than into a falling stock market.
So even assuming that you didn’t pick the top of the market, you would still be better off now, buying in at these levels compared to those investors who have remained passively in the stockmarket.
If you’re still not convinced then think about it this way. In order for an investor who has seen their portfolio fall by 32%, to get their money back, they need the stock market to rise by nearly 48% from today’s level. And that is just to be at breakeven point.
For an investor who has actively managed their portfolio over the last twelve months, chances are they will need a much smaller advance to get back into the black.