Markets move in cycles and while there are increasing discussions around when the next market crash will occur, there is no need to panic; a correction is a normal and expected part of investing. Measures we take to manage the impact to your portfolio are already on our radar.
While I hesitate to use the word ‘crash’, it is the term used by most (overused by the media) to describe a ‘drop’ in share market values. It is part of a normal market cycle that has repeated for decades. As companies grow their earnings, their value increases; the Rally. The market factors in ‘expected’ future earnings and depending on its level of optimism, the market price overshoots fair value. If, or when, earnings disappoint relative to expectations, or an event or new information triggers a lower assessment of value, prices go down; the Crash. The drop is generally an overreaction and in due course prices return to their previous levels; the Recovery.
What is different this time is the length of the current rally. Historically market cycles have generally ranged from 4 to 7 years between peaks. It has now been 10 years since the last meaningful drop in market prices. So, does this mean a correction is imminent? In a word – no. There is certainly an increased risk of a correction as time passes, but it doesn’t mean it will be next week, next quarter or even next year. The doomsayers have been warning of a crash for years. This headline from the NZ Herald warning of a crash was from October 2016; almost 2 years ago. Since then the Dow Jones Industrial Average Index has gone from 16,000 to 28,000, this is a 75% gain over two years.
What will we do when markets ‘crash’? We will not pre-empt the drop and sell out of shares before they drop (research shows that attempting to time the market is futile), and we will certainly not recommend selling after the drop. That is not to say we are not prepared for a drop. In fact, we have been preparing for the next drop since the last one. We manage your portfolio knowing that the rally-crash-recovery cycle will always repeat.
These are four of the steps we have already taken to ensure your portfolio is well positioned to survive the next correction, whenever it may be, and benefit from the subsequent recovery and rally.
We limit exposure to riskier, share market investments to appropriate levels:
We periodically measure your risk profile, including your risk tolerance and risk capacity. This is often done using a formal tool such as the FinaMetrica or Morningstar test, or a conversation during initial or annual meetings. By setting a benchmark asset allocation, and during a bull market periodically rebalancing the portfolio back to those weightings, we are in effect selling high and buying low all the time. We are reducing the exposure to assets that have increased the most, and buying more of the safer, less exciting assets. Conversely, when shares go down, we will take advantage of lower prices and increase holding in those cheaper assets.
Diversification across and within sectors:
We spread portfolios across shares (equities), infrastructure, property, fixed interest and cash. Even within sectors, such as shares, we invest in different geographical areas, business sectors and company styles. Fund managers may hold 50 to 100 stocks within their fund, and we may hold 3 to 5 funds in a sector (or more). We tend to limit the exposure to any one fund to around 5% or 10% of a total portfolio. (You can see the exposure to each asset, and asset class, in the far-right column of a valuation report.)
Active funds management:
We outsource the day to day analysis, buys and sells of individual stocks to fund managers with a depth of resources to be able to do this far more efficiently than we could. We use a range of managers with different styles to actively buy and sell assets at their discretion. We regularly meet with them and buy research on all NZ and Australian based managers. If a manager feels that the markets are overly expensive, they may choose to take an active position away from the market – i.e. holding more cash and less shares.
Maintaining sufficient cash and short-term fixed interest to rebalance and fund withdrawals:
For clients that take regular, or even ad-hoc withdrawals, we try to maintain several months’ worth of expected drawings on call, and enough funds in short term fixed interest to cover several years of withdrawals. This way the access to cash is not impacted by share market movements, and we are able to buy more shares when they have ‘crashed’ to lower values.
If you are concerned about the next stage in the market cycle, or would like to discuss your portfolio, please call. We are only a phone call away.
As many of you are aware, the UK leaving the EU has brought out much uncertainty about the financial and economic future of the UK.
Below is an opportunity to watch what AMP Capital have to say, the first part is about equities and the second part from about 3 min is about fixed interest.
If you would like more information please contact us.
Our clients will get a special report early next month with a summary of the best information we can find.
By Colin Austin
Living most of my life in Auckland, I am very familiar with the variability of the Auckland motorway system. Generally speaking, if you’ve got a long distance to cover the motorway is the best bet. Occasionally you will spot the flicker of brake lights ahead and you know that things might slow down for a while, but once you get passed that slow spot, you’ll be back on track.
In very heavy traffic, we can be tempted to take the off-ramp, use the slower suburban roads for a while, and re-join the motorway when we think things might have improved. Occasionally this strategy might work, but if we were to hit the off-ramp every time we saw the flicker of brake lights ahead, or got the slightest inkling that there might be delays, we would be on and off the motorway every other exit. Most of the time, staying on the motorway is the best strategy, even with heavy traffic.
It’s the same with investing. Research and history shows us that the fastest and best way to reach our financial goals is to include an investment in shares. While there can be volatility, or short periods of time when other asset classes (e.g. fixed interest) can outperform shares, over the long term, shares outperform all other major asset classes. Staying invested in the market and accepting that sometimes we might feel we would be better off taking a different route is better than trying to time our entries and exits from the market. If we tried to time the market and got out or in every time we saw the flicker of brake lights ahead, we would risk exiting when prices are slightly down, and then buying back into the market after prices have recovered. We would lose ground every time.
Continuing the analogy, we reduce risk by diversifying our clients’ portfolios, ensuring we are not putting all our eggs in one basket, or in one vehicle on the motorway. We are investing in many different styles of funds and in a wide range of companies across several industries, markets and countries. Furthermore, depending on each client’s risk profile, we only have a portion of any portfolio invested in shares. The balance of the portfolio is already invested in slower moving, fixed interest investments.
We have started to see the flicker of brake lights ahead in international share markets. There are concerns over the potential exit of Britain from the Euro (which are subsiding) and uncertainty over the US elections. This is likely to mean that we will enter a period of falling share market prices. While we could lurch to the left and take the next exit, we believe that this would be a potentially costly mistake. Our advice is to expect that there will be some delays ahead, but stick to the strategy that will provide the best long term outcome.
As always, if you have any questions, please give your adviser a call.
This amazing event was held in Wellington this weekend. Over 1200 people entertained thousands over four nights. I went on Friday night, not expecting much, as I had no idea what it was or why it was special. I was so proud to be a kiwi, the rendition of Pokarekare Ana was spectacular, and here is a link to video to prove it (although it was much more powerful to be there with the audience humming the tune).
Well done New Zealand, if you are back again in 10 years I will be getting tickets and bringing the family.
I have added a couple of photos, neither of which explain the shear volume of people at the “cake tin” or the amount performing, but you get the idea.
Well done and congratulations to Harbour Asset Management!
New Zealand Fund Manager of the Year 2016 – Harbour Asset Management
Harbour is an outstanding steward of its investors’ capital and the well-deserved winner of Morningstar’s overall award for New Zealand funds management excellence. Originally established as a domestic equities house, the firm has expanded its offering, which now encompasses fixed interest and global capabilities, in
a sensible and well-structured manner. Performance across all asset classes was top-notch in 2015, with investors benefitting from shrewd security selection and well-judged portfolio positioning in difficult market conditions.
Fund Manager of the Year: Fixed Interest Category, New Zealand 2016 – Harbour Asset Management
Harbour’s Christian Hawkesby and Mark Brown have done an exceptional job at developing the firm’s fixed interest capability since joining forces in 2011. Their sound investment process, backed by detailed economic research and modelling, has resulted in a noteworthy track record to date. Investors looking to diversify their portfolio by including fixed interest exposure need look no further than Harbour.
THIS IS NOT INVESTMENT ADVICE.
PLEASE CONSULT WITH YOUR FINANCIAL ADVISER FOR PERSONALIZED ADVICE THAT IS APPROPRIATE FOR YOU.
ANZ Investments was last night named International Equities Manager of the year in the 2016 Morningstar Awards.
This is great recognition for their investment team, who were also finalists for Morningstar Fund Manager of the Year and Morningstar KiwiSaver Manager of the Year.
ANZ Investments is the largest fund management company in New Zealand with over $24 billion in Funds Under Management.
Beyond the annual awards, their investment funds are consistently receiving top ratings for investment performance in Morningstar’s quarterly reports.
*Morningstar award winners are selected based on sound methodologies that emphasise outperformance over one, three, and five-year periods. The analyst-driven Fund Manager of the Year awards recognise managers who have not only achieved impressive returns, but also been strong stewards of investors’ money.
THIS IS NOT INVESTMENT ADVICE.
TO RECEIVE PERSONALIZED ADVICE PLEASE CONSULT YOUR FINANCIAL ADVISER.
Mint Wins Morningstar Fund Manager of the Year Award
for Domestic Equities
Mint Asset Management has taken out the Fund Manager of the Year award for Domestic Equities at the 2016 Morningstar Fund Manager of the Year awards.
Rebecca Thomas, CEO of Mint Asset Management, said “There are nine years of collective toil behind this win. We are delighted with the award, which is a testament to the rigorous investment process and highly experienced team we have at Mint.”
Tim Murphy, Morningstar Australasia’s director of manager research, said: “The winners of the New Zealand Morningstar Awards have all shown themselves to be first-class stewards of investor capital. The quality of their people, process, parent, price and performance demonstrates their commitment to investors.”
THIS IS NOT ADVICE TO INVEST.
PLEASE SEE YOU FINANCIAL ADVISER FOR PERSONAL RECOMMENDATIONS AS THIS MAY NOT BE APPROPRIATE FOR YOU AS AN INVESTOR.
I often feel that the opening line to most financial commentators should read like the opening line to a fairy tale, or a nightmare. They tell stories about a future that hasn’t happened and make up stories that sound like the markets (read share markets) are driven by computers and not humans.
For the person who is just trying to earn a living, save a bit for retirement and generally get along with others the whole idea that there is many options for their savings is usually overwhelming. This is where we come in, as advisers we understand the majority of options and choose the right one for you. It is not about product, it is about the best solution for you, which may be a product or a service, or nothing at all, you are sorted.
Right now there is a new product on the market, called Lifetime Retirement Income. You may remember annuities, they pay an income to you after you had saved for years to gain a lump sum for them to take the income from. I have seen the conditions of some of these policies, and they are scary. This is different.
Check out their website and see if this type of solution is right for you, then come and talk to us about it, as always there are risks, conditions and terms that must be understood. Come and see us and we will answer any more questions you have, explain the process and be able to guide you through.
This may not be the right solution for you, so come and see us to discuss your options.
DecisionMakers – and while you are there take the FREE risk tolerance test, find out what type of investor you are, or will be.
Is local government all about taxes, or is there something more?
When I think of local government I always think taxes and resource consent. But, if this all it is, why aren’t these functions managed our nation’s capital?
These questions and more are answered in the latest offering from the NZ Initiative,
“The Local Formula Myths, Facts & Legends”
Here is a short excerpt from the Foreward of the report by the head of the NZ Initiative, Dr Eric Crampton.
Krupp and Wilkinson began this work this year so we could start better to understand why local government pursues policies that, to an outside observer, seem utterly daft. Why set zoning rules that ruin housing affordability? Why run consenting processes that seem designed to give every objector the power to veto while putting little or no weight on the voices of those who could have lived in the new apartments or subdivisions? Even simple things, like consenting for a gravel pit, becomes tied down in difficult processes, as Krupp’s report last year on New Zealand’s mineral estate demonstrated.
In short, why does local government sometimes behave as though growth is something to be prevented or contained rather than something to be welcomed?
The Initiative’s new report canvasses some potential explanations but the fundamental problem seems to be political economy. When local government is potentially financially liable for any flaws in buildings that they consent, but sees little upside from faster consenting processes, we should not be surprised that things move slowly. Local political pressures mean councillors supporting new development risk being voted out of office before new residents can move in. Consenting processes empowering Not In My Back Yard objections entrench the status quo and prevent growth. As a bottom line, when local councils bear most of the costs of new development, but the benefits largely flow through to central government, we might reverse the usual conclusions about local government. If anything, it is perhaps surprising that local councils function as well as they do, given their constraints.
This report does not develop policy conclusions… But a report developed in parallel with this one pointed to a process for unblocking regional growth. As Krupp and Wilkinson became increasingly convinced that political economy rather than current financial constraints were the fundamental drivers of some councils’ reluctance to embrace growth, Khyaati Acharya and I proposed regionally based policy reform as potential solution.
Abstracting from the political constraint, restoring housing affordability is a solved problem: allow greater density within our cities’ centres; abolish rules like minimum apartment sizes and minimum parking requirements that push up housing costs;
and end the rules that stop cities from expanding at the fringes.
But abstracting from the political constraint is too much like the proverbial economist’s assuming the existence of the necessary can-opener. The more interesting remaining problem is how to change the underlying political economy so that both local and central government can embrace
growth and change.
This is a great conversation starter.
BUT, some issues we are currently facing (such as oil price drops and stock market drops) are not a surprise.
The oil price drop is no surprise to most analysts, or it’s impact on the global economy. The big picture is that it could be good for the masses. Reducing living costs, encouraging spending in other areas, boosting other parts of the economy.
When these times of uncertainty come (and there have been enough of them since 2008). What do you do? Who do you listen to?
That is where a good investment adviser comes in. We help you through the questions and media headlines to the heart of what is going on and what you can do about it.
There will always be uncertainty, that much is certain.
If you are having trouble sleeping due to fretting about your investments, you have a few choices:
- Do nothing
- Find a financial adviser you trust to talk it over with
- Talk to your friends who read the same news you do
- Talk to someone who looks at the big picture and has your best interests first and foremost in their mind. This should be the financial adviser you trust)
None of us can change the past, but we can change the present to have a positive impact on our future.
Don’t trust everything you read or hear in the media. Try to understand the angle and motivation of the person who wrote the article instead. As the saying goes, it’s not news unless it is bad news.