Calm.
There’s no other word to describe it.
Since the beginning of January the Australian stock market has gained about 5%. It has done so in a calm and unexciting way. (OK, there are two words to describe it.)
That doesn’t mean it has gone up in a straight line, because it hasn’t. But so far, the stock market has lacked the crazy market volatility we saw for most of last year.
If you’ve forgotten already, perhaps this chart will remind you:
So, does this mean it’s safe to pile back into the market?
After all, there are still a bunch of reasons why you wouldn’t buy into the Australian stock market: European debt problems, U.S. debt and economic growth worries, a slowdown in China, falling Aussie company profits.
But that doesn’t mean you should avoid it altogether…
And while we won’t say the Australian stock market is at its most risky today, it’s pretty darn close to it. What’s more, it seems even the pros are giving up. We’re starting to see more stories such as this in today’s Australian Financial Review:
“The majority of superannuation funds have failed to meet their return targets over the past five, seven and 10 years…
“Some experts argue that super funds, which typically expect to return between 3 per cent and 4 per cent above the rate of inflation annually over the long term, should be lowering their return objectives to reflect the dismal outlook for economic growth.”
And even the Future Fund is making a big deal of having low exposure to the stock market. According to its latest quarterly report, the Future Fund has 31.6% in stocks. The rest is in cash, bonds and other investments.
Future Fund chairman David Murray says, “Super funds are over-allocated to Australian equities. There is not a lot wrong with having extra cash.”
So while we agree that most investment managers have too much of their clients’ funds in shares, we don’t believe investors and investment managers should lower their return objectives.
To our mind it’s admitting defeat. It’s like a train operator changing the timetable to reflect the late running of trains rather than trying to improve the service so the trains run on time.
The biggest mistake an investor can make is to give up.
That means putting money into safe assets and protecting your capital. But it also means putting part of your money into unsafe assets… investments that can move wildly up and down.
The question is, how much to allocate to these assets?
Here’s what you need to know: the more time you can devote to actively managing your investments, the less you need to put into risky assets. That sounds counterintuitive we know.
It means if you’re an investor who can stay home all day trading the stock market, you may only need to risk 5% of your portfolio on risky trades. Simply because you can quickly cut losses or lock in gains.
If you can spend some time – but not all day – on your share portfolio, then small-cap stocks are a good option. You could invest 5-10% of your portfolio to get leverage to a rising market. But you limit your downside if the stock market falls… because you’ve only allocated a small amount of your cash to small-cap stocks.
Whereas if you can’t devote much time to your investments you need to risk more. So you can potentially benefit from longer-term investment cycles. But the trouble with that strategy – as you’ve seen since 2007 – is it can take a long time for the cycle to run its course.
It’s nearly five years since the stock market topped out in 2007 and the market is still down about 40% from the peak.
How much longer will you have to wait for the stock market to breakeven with 2007? And then how much longer before you can gain back the returns you’ve missed out on?
Our guess is it could take at least five years to get back to 2007 levels. And 10 years is a long time and a lot of effort to make a 0% annualised return.
But the longer you wait the harder it is to make up lost ground.
That said, asset allocation is only part of the story. It’s also important to understand the broader market and economy (no-one said investing was easy!). Because if you understand the big picture it will help with your asset allocation.
Getting this right is the basis for our presentation at the After America investment conference in Sydney next month.
During the presentation we’ll follow up on some of the general themes (including asset allocation and portfolio management) we’ve addressed in Money Morning, plus we’ll provide specific investment advice on where you should put your money.
As we say, it’s not too late to make changes to your investment strategy… but the clock sure is ticking.
Cheers.
Kris.
Publisher’s note: If you enjoy reading Kris’s essays in Money Morning, you’ll love hearing him talking about the challenges facing Aussie investors in person. This March, Kris will be speaking at the first ever Port Phillip Publishing investment symposium in Sydney. Come along. Meet Kris. Ask him tons of questions. Marvel at how tall he is. For more information on our not-to-be-missed March conference, go HERE
Related Articles
The Conference of the Year for Australian Investors
Are ASX Energy Index Stocks Worth The Risk?
Will These Commodities Help You Claim The Best Investment Gains Of 2012?
