My Future Strategy
The following comments are written by Aaron Drew, Principal, MyFiduciary
For an investor with long-term horizons staying the course with your present investment strategy is usually the best option, subject to your goals, objectives and cash needs remaining broadly the same as when your strategy was established. Numerous studies show that being out of the market can be very corrosive to long-term wealth accumulation. To provide an illustration, the chart below shows that investors in the Australian market who missed the best 10 days over the past two decades reduced returns by 2.5% per annum, whilst investors who missed the best 50 failed to earn a return at all. In addition, studies also suggest that these outsized returns often occur around market sell-offs. Investors who try and time markets by getting out after a sell-off hence may miss the best returns markets offer.
Source: FactSet, MSCI, Standard and Poor’s, JP Morgan Asset Management
For investors with short-term cash needs, or who have taken more risk than they are normally comfortable with, the run up in markets over recent years presents an opportune time to increase cash holdings (the correction in 2018 is still quite modest in this respect).
For investors who have concern with performance over a medium-term horizon (next three to five years or so) there may be an opportunity to enhance returns by tweaking your longer-term allocation to cash, bonds, equities and property stocks as follows:
- Holding less in bonds, and therefore more cash and shares. This reflects the view that interest rates may still increase more quickly than is currently factored into bond prices given the strength of global growth and employment conditions, and the potential for this to increase inflation faster than expected.
- Favouring non-government (corporate) bonds over government bonds, given the risk of faster interest rate increases is more material for government bonds.
- Favouring value, emerging market, Australian and European stocks compared to US stocks. These markets are broadly assessed to offer more value than US stocks
- Maintaining holdings of property stocks and New Zealand stocks at around your long-term allocation
- Reducing the currency hedge on overseas shares to below your long-term allocation given the large run up in the NZD over the previous six months or so
The above strategy does not take account of an individual’s personal situation. As with all investment decisions, what might be the right strategy over the medium term, may not be right over the very short term. We really don’t know what will happen over the short term.
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