How to cope with treacherous investment markets

Steve Thaxter- Sovereign Wealth Partners

Senior Partner and Principal Adviser

 

Since its peak at the end of August, the Australian share market has fallen around 12%, a similar number to many global share markets, including the US.  Around the world almost all “risk” assets have got cheaper as investors ponder a multitude of negative news flow around slowing economic growth, withdrawal of central bank support, political uncertainties and trade wars.

 

It’s the nature of investing that there are times when markets fall.  Nevertheless, when the falls are large one often feels like a goose and decision making becomes harder. For most of us, the pain of going backwards is bigger than the pleasure from positive returns.

 

Investing is an emotional game in the best of times.  In the worst of times it’s all too easy to succumb to behavioural traps, lose sleep or make poor decisions.  The answer is to have a clear wealth management process.  This article summarises the 5 step process we follow with clients to reach asset allocation and investment decisions.  This process is enduring, we seek to follow it in both good and bad markets.

 

1   Orientate thyself

Ultimately it’s all about cashflow and timeframes.  Prices don’t matter unless you’re transacting.  You need to know when you need cashflow and capital back from your investments. Think of your investment wealth as stored in a chest of drawers.  Some part of your wealth needs to last for your lifetime.  That’s a bottom drawer item and should be invested for the best long term return.  Today’s market conditions are of little consequence for bottom drawer investments.  Any part of the portfolio you need to “cash in” during the next year or two is a top draw item.  Ideally top draw items are already in cash or are easily turned into cash without much downside.  So understanding the timeframes of your investments is a big help.  An even bigger help is to have a long term plan that you know is feasible and fully costed.  Then you know the timeframes and you have a clear expectation of what your investment assets need to earn to support your lifestyle.

 

Tip – feel free to use our on-line Sovereignty modelling tool to orientate yourself before making significant investment decisions.  We’re happy to help you navigate it.

 

 

2   Understand thy tolerance for risk

Risk is what you sign up for whenever you invest.   Different investment mixes carry different risks and many risks are not apparent.  The most important risks to avoid are entering bad individual investments and having to sell a large part of your portfolio in a downturn.  Even good investments carry risk and in general the higher the return expectation, the higher the risk.  Everyone has a different tolerance and needs to be able to sleep soundly at night even in severe market downturns.  We use the Finametrica on-line risk assessment tool as a starting point with clients and are always happy to review previous results with clients and retest from time to time.

 

Tip – understand your risk tolerance and know how that translates back into an appropriate mix of long term investment assets that matches your tolerance.  If you’re a Sovereign client, feel free to contact us to revisit previous work together.  If you’re not, don’t hesitate to contact us for more information.

 

 

3   Follow a sound investment process. 

Every successful investor follows a disciplined process that’s appropriate for both up and down markets.  Private investors are often burnt through inexperience, lack of quality research and the psychological traps of poor investment decision making.  Sadly we’re unlikely to find a winning process anywhere in the frenzied 24 hour media cycle.  That’s because successful long term investment is mostly about slowly unfolding success stories.  They are not controversial and far too boring for the headlines.  In fact one big advantage most private investors have over professional investors is a long term timeframe, one that can look beyond present uncertainties and consider how the prices of enduring businesses have suddenly got cheaper.  The mainstay of Sovereign’s approach is to tap into a multitude of investment experts who manage risk well and have beaten market averages over the long term.  We carefully consider their preferred positioning from both a short term and long term perspective.

 

Tip – ask us at any time for our estimates of the long term return potential of each asset class, also our short term momentum readings which can help with timing decisions.

 

 

4   Keep thy portfolio score and take soundings of expected risk and return

Our view is that each of our clients’ investments need to be benchmarked for performance, each should be pulling their weight over the long term and the overall investment blend should be consistent with our client’s risk tolerance.  Most importantly, through our research and work with clients we need to be comfortable that each of them can survive a serious bear market scenario (financially and emotionally) and still be around for the inevitable good times to come.

 

 

5   Take action as necessary

A large part of our role as wealth partners is to show rational leadership when changes need to be made.  Investing is a psychological minefield and a game of uncertain outcomes. But there are sound processes for us to draw on that tip the balance towards long term investors.  Irrespective of market conditions, our clients should be feeling that their investments are set up to deliver a realistic and satisfying future lifestyle.

 

Tip – If you are uncomfortable with your positioning, have unresolved questions or need support with your wealth decisions, don’t hesitate to contact us. 

 

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