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.