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If I could give just one lesson about investing - Firstlinks newsletter

Graham Hand  |  19 Aug 2021Text size  Decrease  Increase  |  
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Using an estimate based on publishing 421 editions since 2012, there are over a million words in my articles in the Firstlinks archive, and few million more by other contributors. Investing comes with unlimited nuances and is as varied as the number of investors, but what if I were required to give one investment lesson in one sentence? How about:

"Allocate as much as possible in a diversified portfolio of growth assets, mainly shares, based on your risk tolerance and a long-term time horizon of at least 10 years and preferably up to 30 years."

Of course, this is deliberately open to personalisation. At some point in a 30-year period, the stockmarket will fall 40% to 50%. If an investor panics because they cannot tolerate losing half their portfolio, then they do not have the risk appetite for a large equity allocation, and they need to wind it back, to 80/20 or maybe 60/40. If capital preservation is paramount for a good night's sleep, then maybe 20% is all that can be tolerated.

There is also obvious merit in saving for and buying your own home, the most important step to financial security in retirement and the way most Australians have built their wealth. 

Why up to 30 years? It's longer than necessary for the market to recover from a major fall, based on historical precedents in Australia (although not in Japan). It's to encourage long-term thinking. The life expectancy of a 60-year-old Australian is currently about 26 years and many of today's 40-year-olds will work until they are 70. Investing should focus on strategies not speculation.

Why are shares the best for a long-term plan? Look at 120 years of data below. Long-term risk tolerance is required as this chart disguises the short-term pain, and that's the crucial question. Can you hang in for the long term? If not, then you don't have the required risk tolerance.

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What does 'diversified' mean? Avoid the idiosyncratic risk of large holdings of a few companies which could perform badly. The best long-term choice is a broadly-based index fund (global and domestic) to reduce costs plus some active management if a particular fund is considered worthy. Add some small and mid caps and include assets such as infrastructure and property to diversify further.

Most of the rest goes into a diversified bond fund with say 5% left over for some fun. Set up the portfolio and stop checking the market every day or week. Here's a trio of classic Buffetts:

  • “Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”
  • “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years."
  • "If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

What about the vexed subject of market timing? Investing is not as simple as one sentence. The current equity market looks expensive and returns for the next few years are likely to be lower than the past because the entry price is high. That's where patience comes in. This is a 30-year view. Build a growth portfolio over time by gradually putting money into the stockmarket and then hang in for the long haul. There are always good reasons why a crash is imminent but few people can pick market turns consistently.

It is tempting at the moment to see money being made on hot stocks and hot assets and jump in heavily. Look elsewhere. As William Green wrote in his book, 'Richer, Wiser, Happier':

“My costliest mistakes have come whenever I grew impatient or envious of other people’s returns and strayed off course by gambling on private companies or individual stocks that held the promise of a racier route to riches. The paradox here is that the slower road almost always proves to be faster in the end. The investors I admire most tend to be heroically inactive, not because they’re lazy but because they recognize the benefits of patience.”

Romano Sala Tenna supports this theme with three excellent charts for the patient investor. It is extraordinary how well the Australian market has performed for the investor who can accept that one year in five will be a loser.

This week's White Paper from Vanguard is further evidence, with its annual index chart in a paper called 'The Power of Perspective'. Quoting their founder, Jack Bogle:

“Stay the course. No matter what happens, stick to your program. I’ve said “stay the course” a thousand times, and meant it every time. It is the most important single piece of investment wisdom I can give to you.”

Many Australian investors have done well in equities in the last year, and the chart below from BetaShares shows how global equities have dominated ETF flows.

It's the same globally. The Goldman Sachs chart below shows more inflows in the last 41 week period (+US$852 billion) than for the previous 14 years combined. It can easily reverse without FOMO but it's supporting record highs at the moment.

Gemma Dale explains what is happening behind the numbers, with the welcome signs that new Australian investors are not speculating as much as the 'Robinhood and Reddits' in the US, but there has been a change in 2021 versus 2020.

Our interview with Emma Fisher of Airlie (part of the Magellan Group) is a lesson in sticking to what you are good at, which might not be long-term trend picking but finding good companies at attractive prices.

Phil Ruthven takes a broader look at long-term trends in growth, inflation, markets and sectors and implores policymakers to overcome their short-term focus. Stephen Miller looks ahead to when the US Federal Reserve may be forced to increase US interest rates and asks how the Reserve Bank may react. Global monetary policy will gradually move towards tightening by weighing up virus risks against rising inflation.

Worried that fund cannot sustain its stellar recent results? Andrew Mitchell provides his tips on how to separate skill from luck in the performance of a fund manager.

Then in a change of pace, two important articles on superannuation and SMSFs.

Noel Whittaker explains the choices that might face many of our readers, when one person in a couple dies and both have large super balances. What is the best way to manage the limits under the Transfer Balance Cap?

And Meg Heffron says we are already six weeks into a new financial year and there are important checks SMSF trustees must make around pensions and payments, as the ATO is increasingly clamping down on compliance.

Remember also that the ATO defines circumstances where the investment strategy of an SMSF should be reviewed, including a major market change, when fund membership changes or when a pension starts. The fund must have the cash flow to meet pension payments in each financial year.

Our new episode of the 'Wealth of Experience' podcast with Peter Warnes includes a look at buybacks, company profits, our survey results, 'no action' financial advice and we both have a grump. Plus the full unedited interview with Emma Fisher of Airlie.

The Comment of the Week comes from Ken who wants different words in the discussion about 'retirement income'. I agree.

"This one is a hot topic! I wonder if we should refer to this as cashflows or 'spendings', rather than income, which is often interchanged with 'earnings'. "Where does your retirement cashflow come from?" might be a better framing of the question."

is the editorial director of Morningstar Australia.

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