From the CEO’s Desk is a monthly series written by Dominic Gamble, CEO, WEALTHINASIA.com, sharing with you his thoughts on relevant issues, challenges, events, questions, and experiences impacting investors today.
Ouch. Not even a day into the New Year and we were already getting pummelled.
In the first 13 days of the New Year, we saw major markets in the west lose -7-9% in value, the Shanghai Composite Index lose over -12% (and as of yesterday the pummelling continues at -20.5%), crude oil prices drop by -28%, and the commodities market continue to weaken across the board.
To most, this situation would look pretty bad. But investment performance can be a fickle thing. How do we make sense of all this madness?
Looking forward: What does 2016 hold?
In the US, the recovery will likely continue to experience a slowdown due to rising interest rates and a strengthening dollar. Establishing the US’s “new normal” for its fed funds rate is key as it will have wide implications for the emerging markets. However, in the overseas securities markets, Europe and Japan could be helped immensely at the same time because they are far less dependent on exporting commodities and US dollar-denominated funding, which makes both areas prime investment targets for this year. In addition, although crude oil prices have dropped 90% since its June high in 2015, lower oil prices should spur private consumption, particularly in Europe.
China’s weakening economy is a primary reason why the markets have been so volatile. We haven’t even seen the end of January yet, but China has already destroyed over $1.8 trillion in wealth since the start of the year and is growing at its slowest rate since 1990. However, at best it is a loosely justified overreaction, but at worst it’s an emotional reaction.
How are private investors performing?
Badly. We hear client horror stories on a daily basis where they have been managing money themselves and are suffering serious losses. The decision many investors face now is: do we cut our losses and get out now, or do we stay the course and ride this out?
Sadly there is no simple answer – if you get out, where do you go? Cash? Then you are trying to time the market which is one of the cardinal sins of investing. If you stay the course, which course? For example, the STI has lost nearly 11% since the start of the year, then a natural reaction would be to move away from Asian based securities.
However, Singaporean ETFs, such as the SPDR S&P Emerging Asia Pacific ETF, which are largely Asian based are great opportunities because they are diversified across multiple markets that are expected to grow. So actually now should be the time for adding, not reducing exposure to Asia.
How are wealth managers performing?
Wealth managers had a pretty good year.
Taking the most conservative performance indicators, such as the ARC Sterling Cautious Index and FE AFI Cautious Index, they registered returns of 1.8% and 3.8% respectively. Which doesn’t look impressive until you compare it with the FTSE, which lost -4.9% in 2015. That’s nearly a 7-9% gain and in the black!
Wealth managers often get criticised for slow performance, but down markets are often their best times. Why? Their investment process and risk discipline is typically far higher than a retail investor. Sadly retail investors have considerable duplicate exposure throughout their holdings and suffer from hyper correlation. That’s great when markets go up, but really bad when markets go down because everything moves in the same direction.
How to weather the storm?
Clearly what you don’t want to do so is succumb to a panic stage as if you were at a craps table thinking “it can’t get much worse than this so I’m going all in.” A long-term investment horizon; diversification; and identifying opportunities. They exist, but knowing where to look and timing is a different matter all together, which is why seeking objective advice can be refreshing from time to time.
At this point, you essentially have two options. There is the go-it-alone strategy of opting for a discretionary investment portfolio, or you choose an advisory portfolio, it all depends on how much control you want, how much time you have available to look after your investments, and your desired outcomes. But when it comes to gambling, there is no such thing as control, only the illusion of it.
However, if you do opt for a discretionary portfolio, then there are model portfolios or more bespoke portfolios. In general, a model portfolio is more favourable as they get more attention from investment professionals, have a more rigorous investment process and do not suffer from maverick investment manager decisions.
Albert Einstein called compound investing the ‘8th wonder of the world’ and is a practice heavily subscribed by the likes of Warren Buffet. 5% a year compounded for 20 years will make approximately 165% over the period, that’s an additional 65% from non-compounded.
So don’t panic. Don’t gamble your investments away. Investing is for the long term. Real money is made by steady long term investing, not by trying to time the market in short-term fluctuation cycles. If you need to, get advice, but make sure that professional understands your profile and works with other clients like you.
Happy investing in 2016!