A big shout out to Joe N (husband of Fran as he puts it) – one of our long term clients – who I know will be glued to the Olympics and must be very happy with the 7+ app (https://7plus.com.au/olympics) that gives you every sport you can think of. Now retired, so lots more time on his hands, Joe is a bit of an Olympics addict and has been taking two weeks holidays every Olympic year since his twenties to watch whatever is available. The coverage has only got better, so no doubt he is in his element.
I am not a fan of reality shows (Legomasters aside, ah okay maybe Gogglebox) but sporting contests are the original reality shows and the drama, anguish and personal triumph still continues to draw us in. I know it isn’t for everyone but watching the Jessica Fox medal, Bronze in the K-1 Canoe Slalom (which was heartbreaking for her but still extraordinary for mere mortals) and then Gold in the C-1 Canoe Slalom is simply uplifting. We first saw her take silver in London in 2012 as an 18 year old and then Bronze at Rio. Now she has medalled twice more in Tokyo Jessica_Fox_ BIO (canoeist). You can see from her bio she has had enormous success in between but the Olympics is where we get to see her and other athletes in prime time.
More big news was Brisbane securing the Olympics for 2032 (first question is what age will you be in 2032). I know some people will immediately talk to the negatives, and there are lots, but it is the greatest sporting event on the planet and South East Queenslander’s will have a front row seat. Sydney was fantastic and I am sure Brisbane will do us proud. Our state and federal government will just put it all on the credit card!
I am not at the Joe level (my wife might argue that), but every Olympics’ or Commonwealth Games, I find I get heavily invested in sports I have never watched before and offer unsolicited advice to officials, that actually know the rules. (I still have no idea what constitutes a foul or exclusion in Water Polo but I don’t let that stop me feeling hard done by whenever a ruling goes against the Stingers or the Sharks).
And that is my segue into your financial world!
It is very hard to understand performances if you don’t know the rules.
There is a lot going on and as usual there are media darlings looking for sound bites and then there are the informed that offer analysis.
A scary headline that was meant to be positive was in the Financial Review on June 30, 2021. ‘Markets notch best year since the roaring 1980’s (AFR, ASX best year since 1987 ). Having been introduced to financial services through that period, that was not reassuring.
The ASX was up 24% in one year, which is its best year since the 1987 financial year, however that is not the full story.
In the calendar year 1985 and 1986, the market had gone up by 38.25% and 46.75% respectively after a negative in 1984 of -6.35%. Just so you know – that is not sustainable!
For the 9 ½ months to October 1987, the markets continued to rise and then we saw the Black Monday correction.
The current performance is after a substantial drop in the markets in February and March 2020 when we first met Covid-19. At 1 July 2020 the market was still down more than -15% from its 19th February high. Yes, 1 July 2020 to 30 June was a good performance but you need to look at the three to five year period to put it in perspective.
In Australia, the ‘ASX 200 Accumulation Index’ (which includes dividends) did a 9.59% compound return over the three years and 11.16% compound return over 5 years. Not quite as alarming as the headline.
The ‘MSCI Accumulation World index ex-Australia (unhedged)’ did 27.5% in the 20-21 financial year, 14.50% compound over three years and 14.73% over 5 years. Very strong numbers but earnings growth has supported this to some extent and if you take the ‘big 6’ (Facebook, Amazon, Netflix, Alphabet, Tesla and Apple) out of the equation, it is a much more reasonable return. Share prices should reflect the underlying earnings growth and that has been there, though the stocks above are arguably very stretched.
The other point to note is that maths exaggerates upside performance after a drop. If I have $100 and lose 20%, I have $80. $80/$100 – 1 = -20%. To get back to $100 you have to grow by $20 from an $80 start. In percentage terms $80 to $100 is a 25% growth. The math is $100/$80 -1 = 25%.
These are just the indexes and part of our role is to find managers who outperform passive indexes and also look to provide some downside protection. This does not mean we don’t see the same volatility as the market initially in a correction, but we should drop less and recover more quickly.
You can just look at the headline rate but that is not the full story. You should also look at the underlying risk that is in the portfolios. In diversified funds, risk is the amount of growth assets verses defensive assets. In the long term, growth assets should outperform though it can be a wild ride. The important thing is to understand the risk you are taking and the investment horizon you are looking at.
The below compares our AAN model portfolios to some well-known options that are advertised as ‘Balanced Funds’.
The table above breaks ‘balanced funds’ into the categories we believe they correspond to, based on their ratio of growth to defensive assets.
It then shows their one and three year compound returns and the difference this makes with an initial $100,000 investment.
The AAN Core actually outperformed the conservative and more aggressive options (other than the AAN Growth option).
This success is based on a combination of confluences. Our downside protection helped during the ‘pandemic crash’ and our active managers were holding good quality stocks that recovered more quickly.
In this case, we might have seen a gold medal but that is not our objective. We just want to make the final. Performance is something that can vary from month to month but our job is to help keep you on track and manage the risks wherever we can.
In the short term, downside protection can be a drag on performance but over the medium term it smooths volatility and can help medium to longer performance.
The real issue is, are you making progress to your plan?
For our accumulators and pre-retirees, it is knowing your medium and longer term objectives and working towards them. For our retirees it is about enjoying a sustainable quality of life while managing around its challenges.
For all of us, it is understanding the rules and playing within them.
Enjoy the rest of the Olympics and cheering on our Olympians, albeit through a really uncomfortable mask.