It’s now less than a month until I reach 50 not out, but the title doesn’t relate to this impending milestone.
Rather it refers to the portfolios which have (since the week after the BREXIT vote) gone on an upward journey, producing many many happy returns.
Up to 23 August the portfolios have grown for the year:
|Portfolio||Return 1 January – 23 August 2016|
|Cautious Income Portfolio||9.48%|
|Cautious Growth Portfolio||9.40%|
|Moderately Adventurous Portfolio||12.91%|
You should note that past performance is not a reliable indicator of future returns and the value of your investments can fall as well as rise. The total return reflects performance without sales charges or the effects of taxation, but is adjusted to reflect all on-going fund expenses and assumes reinvestment of dividends and capital gains. If adjusted for sales charges and the effects of taxation, the performance quoted would be reduced.
Why has this happened?
This is the question; why, after a tumultuous twelve months and 3 separate market meltdowns
(August 2015, January and June 2016), have investors decided that all is well and that it’s time to buy?
Under noted are some of the reasons we think are influencing markets and some thoughts on each:
Sell the fear, buy the fact
It’s a strange reality that individual shares will often increase on the rumour of a positive event such as an earnings increase, and then sell off when this is confirmed (known as buying the rumour and selling the fact).
Equally markets can sell off rapidly on the fear of an event, and then after a pause for consideration often rebound sharply once it has occurred. This is investor psychology at work and the collective paralysis induced by uncertainty; a negative actual being easier for markets to deal with than a potentially negative possible.
So looking back now:
August 2015 was about China and its devaluation; it happened, markets panicked, they reassessed and all was well again until…
January 2016; oil prices plummeted, markets panicked, then reassessed, prices rebounded and all was well until…
BREXIT happened, markets panicked… rinse and repeat.
Lower for much longer
The cumulative effect of the different issues faced over the last few years around the world, is that the vast majority of central banks are still engaged in easing monetary policy.
Japan, ECB, Bank of England, and Bank of China are all pumping money into their economies in slightly different ways and lowering interest rates.
The US is the odd one out; it wanted to start raising rates so it said, but has found that by simply not easing, this is de facto tightening compared to the rest of the world. Doing nothing for the Fed is therefore doing something.
Low returns and the hunt for yield
The knock on effect for markets is that the uncertainty of the last year post the US halting QE and signalling its intention to raise interest rates is now in their minds over.
As we’ve written many times the prices for high-grade bonds and higher dividend paying equities with strong balance sheets were above average.
Markets were starting to rotate away from these and into more cyclical areas with lower yields, (but much lower price to earnings multiples) on the assumption rates were going up.
That’s now reversed; markets don’t think rates will go up for some time, so higher yield investments are in favour again.
Lower for longer 2
One of our longer term views has been that economic growth going forward would be lower than historically normal, but would last without a recession for far longer as a consequence.
We think of it as similar to the housing market; property prices can only go up so much in a cycle if property is to remain affordable. This has tended in the past to play out by being up a lot in some years, and down quite a lot in a few years then averaging out around the rate of inflation plus 3/5% over the cycle.
We think that possibly the world’s major economies which had similar historical cycles of booming and retracting are now in a longer term trend of milder growth, but without the overheating which caused the downturns.
We therefore suspect that cyclical growth will average out around the same number, it will just be far less up and down annually. If in fact this is how it is, then markets will take time to get comfortable with a new normal.
Putting money to work
The final factor is a simple but powerful one, it doesn’t pay to hold cash.
Negative real interest rates now more than ever prevent investors from taking the view that they lose nothing by holding cash, they do lose by doing so and they naturally don’t like it.
There is still a massive amount of cash undeployed because of recent volatility, but this will act to push up markets as it comes back into assets.
As prices rise it always creates a positive feedback loop luring in more investment so prices keep rising over time. The longer it lasts the higher they go (it’s how bubbles end up forming when pushed to the extreme).
A fair question to ask is surely this therefore makes markets less attractive? As they ascend on a tide of new money and the answer is historically yes, very much so.
The safe money is made early by those who buy cheap; it’s the late comers (usually retail funds from individuals who suffer from the confirmation bias of wanting to see something consistently happening before they act) that get disappointed and suffer loss.
We tend to write much more in stressful or difficult times to try to explain why something is happening and attempt to give a longer term perspective to a shorter term issue.
We certainly don’t write to ‘big up’ performance.
So that’s certainly not what we’re doing here.
Rather it’s to say that portfolios have indeed risen strongly which is great, but it serves to highlight our constant messages about not trying to time markets and not becoming despondent when they are falling.
It’s a central truth that believing the reason returns will probably be higher over the long term, comes at the cost that investors must pay an emotional price of suffering periods of volatility.
So as of now, and who knows what tomorrow will bring, it’s nice to be able to say it’s both decently up and well worth staying the course.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.