2018 is well upon us. It is time for reflection and thinking of the future regarding investing and retirement,
When we reflect on 2017 and look at our nest eggs we should have seen very good returns. We may have become overconfident and think that either “I am smarter than the rest” or “I made a killing in the markets,” or perhaps why did I listen to that advisor and have a multi asset strategy with lower returns when the stocks markets are where the action is.
Investors are often driven by performance and large returns. So why do an asset allocation model with 8 % when I can do 15% or more on the markets?
One should always crucially review the performance of the previous year. Fees and asset allocation do affect portfolios. However, we should also know that in Behavioural science people suffer from “recency bias” i.e. look at the past and extrapolate into the future.
The result is that many investors fall into complacency, looking back at the last several years many people will look at this historically lack of volatility and seen fantastic performance.
The S&P 500 is not cheap with an average PE ratio of 23, other markets are much cheaper. The UK is very cheap just now and we have a lot of potential in Europe and the Far East.
If the good new keeps coming, the markets can still go up substantially and for a long time.
However, every Bull Market is followed by a Bear Market just as every night is followed by day.
Hence, we should look at previous complacencies in the past.
I remember back in the late 90’s when internet stocks were flying high, stick a .com onto your name and your shares went flying (sounds similar to the companies changing to blockchain such as Kodakcoin, Long Island Iced Tea to Long Blockchain Corp, you can’t really make this sort of thing up). Many of these companies had low or zero earnings or even sales yet they went through the roof. From peak to trough the loss was about 96% over a 2 ½ year period.
Complacency raised its ugly head again after the financial crisis, the market collapsed, and we were all convinced that a weak economy and weak stock markets were the new normal. What happened was that we then went into one of the greatest bull markets in history, with a return of 268% (dividends reinvested).
Complacency once again, stocks have been the best performance asset class of the last 9 years, so why asset allocation models?
We have no idea when this complacency will be shattered, but at some stage it will.
Insurance companies, Sovereign Wealth Funds, Family Offices, Endowments etc, never do 100% stocks, they know about volatility and different returns for different asset classes. What do they know that we don’t?
When you listen to financial experts, they talk about cycles and show impressive charts that show the start and end of various asset class cycles. The problem with this approach is that it is all done with hindsight, look back at charts and find a random pattern. It is a bit like art connoisseurs looking at a picture and having different interpretations. Those experts then write articles (just like I am doing now 😊) like this one just to make an interesting story.
However, when living in the present it is extremely difficult to know when new cycles start and old one’s end. If we could, we would all be Billionaires. 2000 we hit the high on stocks, 2008 we hit the high in energy and base metals. Perhaps in December we hit the high on Cryptocurrencies, we will not know till later. For US stocks we are late in the cycle and interest rates appears to be the at the end of the current cycle. Gold may be in the start of a new cycle, especially if the Bitcoin bubble bursts.
What I am trying to say is that people have recency bias, cycles come, and cycles go, no one knows till after the fact. So be wary with the stock market and diversify into different asset classes because, as mentioned before, after every Bull market we get a Bear Market.
If you want to keep your money safe and still achieve great results, always remember these golden rules: –
- It is not possible to predict the economy, price of oil or the stock market. Check the past projections of economists and investment houses.
- It is a well-known fact that 90% of your long-term returns comes from asset allocation.
- All asset classes have periods of outperformance and underperformance, but all tend to revert to the mean.
- Todays 5-star funds will most likely be 3 stars within 5 years.
- 95% of all active fund managers underperform the benchmark over 10 years.
- Get those costs down, get the advisor to disclose all costs and look for better and cheaper alternatives, price is not everything but does play an important role.
- In asset allocation models you tend to sell the ones that have outperformed and top up on the ones that have underperformed.
- Invest in assets that pay passive income that cover your liabilities, i.e. rather than pay cash for a car, buy an asset with a revenue stream and lease your car. It is important to preserve capital at all costs if it is not a depreciating asset. If you have a chicken and an egg, eat the egg, the chicken will continue to lay.
- Build multiple income streams. If you are reliant on one stream such as a Pension, rental income, bonds or stocks then you are subject to outside forces and changes that you can’t control. The average millionaire has at least 3 income streams so save a part of your income into multiple avenues, build them over time and if one stream dries up, you still have two others. Some of those assets should be liquid, i.e. the ability to turn to cash over a short period of time.
- Last but not least. Learn about money and how it functions. We should all be caring about our health, we should all be voting, and we should all be seeking happiness. So why don’t we take the same care about money. Gain the knowledge, learn and become the person who can create more money and retain your wealth.
I wish you all a successful 2018.
Gordon Robertson MCSI