A tough year for most but not all: Firstlinks Newsletter
How to enjoy retirement; Survey results; Padley on fear; Demasi on short-termism; Recession looms; Volt Bank demise; Online ad threats; Newbie risk.
First up for a new financial year, many thanks to over 700 retirees who completed our survey on their retirement experiences, including thousands of comments. We have split the results into two articles: the first gives tips on how to make the most of a retirement, and the second shows the full results of the survey including charts. With so many comments across nine questions, highly informative but too numerous to put in one article, Leisa Bell has summarised the results into a downloadable document. It's worth taking the time to scroll through them, I found them fascinating.
Behind the markets for last financial year delivering a fall in the S&P/ASX200 of 10% and a drop in the US S&P500 of nearly 20% lies every individual's personal experience. The US Treasury bond index lost 11%, offering none of the traditional bond protection. Even those who default into a balanced super fund will suffer their first negative returns since the GFC. Each investor must now decide whether to sit on their portfolio, sell to avoid further falls or invest more in bargain opportunities.
Howard Marks recently spoke about current market conditions on a Goldman Sachs podcast, saying:
“First of all, what is risk? It's the probability of a negative event in the future. What do we know about that? What does the past tell us about that? The past has relevance, but it's not absolute. I don't think risk can be measured. I don't think the past is absolutely applicable. In fact, the big money is lost at the juncture when the past stops being applicable, which happens eventually."
The last six months feels like one of those junctures. We learn from the past but we are guessing about the future. Mark Delaney, CIO at Australia's biggest super fund, AustralianSuper, released a statement explaining a loss of 2.7% in its main balanced fund for last financial year. The same option was up 20.4% the previous year and 9.3% per annum in the last decade, a period of excellent returns for default super fund investors. It will be a long time before another decade is as good.
Delaney said of the results:
"After more than 10 years of economic growth our outlook suggests a possible shift from economic expansion to slowdown in the coming years. In response, we have started to readjust to a more defensive strategy, as conditions become less supportive of growth asset classes such as shares."
He's a bit late to the game if he has just "started to readjust" as the signs were there in late 2021, as described in our editorials.
We all have different risk appetites and ways to think about investing. I have a friend who I've known for 40 years and he's been consistent in his strategy. He cares only about the income from his portfolio, and this is far less volatile than share prices. When CIMIC (formerly Leighton) was recently fully acquired by its German owner, he received a large cash payment which he wants to reinvest. What's his reaction to the recent sell off? "Shares are for sale at a discount. It's fantastic," he told me last week.
Most investors nursing losses are not so happy, and this neat graphic from CommSec shows how the year unfolded to deliver the 10% loss in the ASX200. It highlights how poorly the year ended.
Hugh Dive of Atlas records the Dogs of the ASX each year, and here are the major losers. Wasn't everyone wearing gloves (Ansell), buying respiratory aids (Fisher & Paykel Healthcare) and buying pizza (Domino's) in the pandemic? AfterPay and BNPL rivals were replacing credit cards, Xero was driving business efficiency, job search was moving to Seek, Reece was riding the property boom. Hard to imagine anyone picked these 10 dogs during 2021.
The first-time, often younger, investors who jumped into the market in 2021 without the gains from prior years have found investing is difficult. It seemed like easy pickings when everything was up, from tech, Bitcoin, BNPL, online retail, NFTs, property. Interest rates lower than we'll ever see again pushed up the price of everything, and newbies bought on every tip in town. Now, late entrants to the greatest companies in the world are watching the red numbers with Amazon off 35% and Alphabet 22% in the June quarter.
For example, some tech-themed ETFs launched in Australia during the hype were ETFS Semiconductor (SEMI), down 33% last FY, BetaShares Crypto Innovators (CRYP) down 71% and Cosmos Global Digital Miners (DIGA), down 76%.
The debate is whether the losses suffered by younger people with a few thousand invested matters to them over the long term, as it is part of an investing journey and they have not lost much in dollar terms. Rob Arnott and Research Affiliates hold a view that is counter to traditional advice about risk appetite by age.
" ... we are told that the young are tolerant of risk and that, as retirement approaches, the average investor becomes intolerant of downside risk, fleeing after a serious drawdown ... Conventional wisdom suggests a percentage allocation to equities which is '100 minus your age' and the notion that the young can bear more risk than those of us who are middle aged (or older!). True, the young have more time to recover losses, but what losses are more insidious for retirees than inflation sapping the real income of a bond centric portfolio?
If young workers have to deal with their volatile young human capital over a long horizon - with a heightened need to cash out when the portfolio values are depressed - then it makes even more sense for younger workers to begin with a less risky portfolio. This also helps shape their risk tolerance so that their attitudes about investing and riskbearing are not poisoned by a bad early experience."
It's not a conventional view and bonds have not performed the protective role Arnott is writing about, but it's a legitimate challenge to the argument that equity exposure should reduce with age. Certainly, my mate, now in his 70s and fully exposed to equities, does not follow convention.
Our articles take the discussion further.
In this week's interview, Chris Demasi presents the case for ignoring short-term market falls when great long-term compounders are available at fair prices. This is not an argument to invest in just anything but the Amazons, Microsofts and Alphabets of the world that have strong future earnings. And he includes an Australian company in his portfolio.
Marcus Padley says investors should embrace the opportunities that come with fear in the market, and he describes five steps he has gone through in the recent selloff to decide the best way to respond.
Then Ian Rogers chronicles the end of Volt Bank, which was one of the challenger banks that seemed more likely to survive. Volt did not fail due bad loans, but the current predicament facing many startups as capital becomes harder to access. It shows the benefits of scale of the majors and the difficult regulatory environment for new players.
Campbell Harvey and Rob Arnott paint a concerning picture of the US economy. They write that the Fed was late to the game, inflation is likely to keep rising and the result of the Fed’s belated actions may push the economy into a recession.
Michael Collins explores how privacy-focused regulatory scrutiny is challenging the online-ad business that is built on the collection and dissemination of consumer data.
The Reserve Bank decision this week to increase the cash rate by 0.5% to 1.35% comes with the expectation of another increase next month. The decision was justified by high global inflation - boosted by supply chain restrictions and the war in Ukraine - strong demand for goods, a tight labour market and capacity constraints. But Philip Lowe expects inflation to peak late in 2022 and decline back to the 2–3% range in 2023. His comments sounded slightly more relaxed about the need for future rate rises.
Where do we stand now? We have featured this ASX chart several times over recent months, and close watchers will see a significant fall in cash rate expectations. The implied rate for early 2023 is 3.4% but it was over 4% in mid-June, a level we said was highly improbable. It still looks too high, requiring a hefty 1.55% of further increases for the rest of 2022. Lowe does not want to see what that would do to property prices.