Quick update from the Chairman of the Australian Advice Network Investment Committee (Troy Theobald) on the recent market volatility.
As with any time of uncertainty in markets we have had a few calls from clients with concerns on the fluctuations we are seeing in markets.
- While this is the news of the day, our own analysts have been looking at these risks since June. Chinese debt issues have been a concern for a number of years and the Chinese Communist Parties increasingly authoritarian approach to the management of both its citizens and its listed companies have had most professional investors decreasing their exposure to these companies and China generally. China makes up part of the emerging market sector and any exposure we have to them is very limited and has steadily been decreasing.
- We also have a tapering of bond purchases by central banks and rather than get too complicated, what it basically means is that the huge financial stimulus we have seen almost continually since 2010 is being eased.
This is actually a good thing as it means growth is strong enough without government intervention but there will be companies that have survived only because of this stimulus, which will come under pressure and won’t survive. Once again, nothing new here and something professional teams have been monitoring for most of 2020 and 2021.
- Lastly, we have uncertainty of interest rates and underlying inflation. Interest rates are no longer decreasing but they also aren’t dramatically increasing. There certainly can be a case for movement up from here but how much is the question and central banks will definitely try and keep it restrained.
It is about this time that well intentioned friends with little to no information but a strong ‘gut feel’ decide to offer unsolicited advice. This news is hitting the dailies and it is the first they have heard of it.
Historically, the evidence is you should be most afraid when everyone around you is telling you to jump into the market and ‘fear of missing out’ (FOMO) is rife.
When everyone around you is concerned, that information is all in the market and you have already seen any market impacts before you even think about making a decision.
We are not trying to sound dismissive here, and these are conversations we have had over many years. Investment decisions driven by fear and greed are alive and well and cycles are often impacted by psychology rather than fundamentals.
To manage this we have built disciplines into our portfolio management to remove ‘gut feel’ or unconscious biases from our decision making:
- We recognise that we can all be overconfident of our abilities and overestimate our capacity to outthink the market;
- We recognise that markets will have cycles and we need to have a structured approach to managing our way through these periods. By disciplined reweighting to set benchmarks based on your risk appetite each quarter we:
- take profits without trying to guess future market direction;
- buy into declining markets even in periods of high volatility; and
- actually add performance using that volatility rather than being negatively impacted by it.
We would argue it is our restraint and discipline in strong markets that allow us to take advantage of negative quarters. The link below provides a paper on our aversion to risk and the self-talk that we need to learn:
- We have a structured approach to investing to ensure risk is taken into account;
- We have a well-diversified unrelated group of investment managers in each asset sector that dilutes that risk further;
- We look for best of breed managers who have a strong track record of capturing market upside but also have smaller drawdowns in market downturns; and
- We avoid illiquid assets that can be hard to redeem quickly in a rapidly changing investment environment.
Yes, we do have a very strong grasp on market fundamentals and regularly source information from the managers we work with as well as the broader market. This gives us confidence in the calls we are making but also means that when the ‘news’ gets a hold of it we have already considered it and also deliberated any necessary adjustments.
Importantly, we would always argue, keep your eye on your medium and longer terms objectives rather than getting confused and reacting to market noise.
History has proven time and again, the folly of making ‘guru’ calls and we can talk to any number of examples where a 100% move to cash then became the anchor that missed the outperformance in rising markets.
As always, if you have any concerns at all, please do not hesitate to talk to us or come in. There are always opportunities to reduce risk and primarily we want our clients not having sleepless nights worried about their investments. We have our beliefs on how money should be managed but it is your money and we want you to be comfortable with the process we use.
Director Financial Services RFS
Chairman, Australian Advice Network Investment Committee