06 Jul Sticking to principals
I hope everyone is well and coping during this improving, yet still very difficult time in our history. It seems that risks surrounding a ‘second wave’ are very real if the Victorian situation is anything to go by. Locking back down could be a possibility, not only in Melbourne’s outer suburbs but nationwide if authorities don’t continue to manage risks well and Aussies stick to the rules.
Our view is that the Federal and State government has done an excellent job in acting quickly to give security and confidence to businesses. This has given the majority of the public a real safety net in terms of employment and protection of their livelihoods.
Work is slowly resuming across many sectors however there are some sectors that have been extremely hard hit, most notably those surrounding the international tourism industry. We have clients who are reeling from the fallout yet are showing incredible resilience, doing work they aren’t trained for to keep their family safe from fiscal ruin. Their humility is incredible to see.
When looking at investment markets during the depths of COVID, in the face of extreme uncertainty and panic, we know that growth markets fell hard. The international and Australian share markets fell over 35% in four weeks. The media was reporting that economies are on the brink of collapse and the world as we know is to end. So where did that leave us in terms of what action to take? Sean, what do we do – right now? Our view is that being reactive and scrambling to take action at that point is simply too late.
Taking a reactive approach to investing is about jumping on the bandwagon while investment markets are going up (often buying once most of the gains are had), and trying to jump out of markets when times are bad (often after they have already fallen significantly). Worrying constantly about where markets sit and what the media is predicting today about what will happen tomorrow. We think this investment approach is difficult and we haven’t seen anyone do this repeatedly with any success.
Instead, taking a principled approach to investing, no matter what the surrounding market or economic environment is doing, is a different course of action. Action that needed to be taken not after COVID begun but well before. It must start from day one.
A principled approach to investing is one where we acknowledge that growth markets inherently carry volatility. Always have and always will.
Therefore, any capital we need in the short term – we simply don’t play in that space. Even while ‘times are good’ and the media is buzzing about share market bull runs and property booms. We let the hope of short-term gains go and instead invest any money we need in the short term into what I call the ‘dull and boring’ stuff. Like watching reruns of MasterChef. You know who’s won. Predictable and reliable T.V. This dull and boring stuff is made up of income and fixed interest type investments which give us a low return, but importantly, very low volatility. In short – we know exactly where they will be and what they will be worth tomorrow, next month, and even next year.
However, for our long-term wealth, we do invest in growth investments. Despite whether we are in what feels like a boom or a bust. No matter where in an ‘economic cycle’ we enter, these investments will reliably provide us, decade in and decade out, powerful real returns over and above inflation. Of course, the catch is that they don’t provide us with this great return in a straight line. In the short term they are very volatile and can go up and down day to day, month to month – even year to year. They are anything but ‘dull and boring’. Instead they’re like an action movie unpredictable in the short term. However, they aren’t doing anything they didn’t promise from the start. We still know who’s going to win in the end, right? We use growth investments in our clients’ portfolios to grow their wealth over the long term and provide them with a strong income along the way. We just have to stay strong and remain in love with them when they are playing up – like my 3-year-old son! We have to stay the course with these growth investments during one of their tantrums. Patience pays off.
When we combine these two investment pools together in a methodical, principled and clam manner – the result is a diversified portfolio that gives you long term growth and income, and short-term certainty.
Our principled approach was really put to the test during the depths of COVID. We had many clients check in to see if we had changed our stripes and whether we should take action and run for the hills. And I fully appreciate that is a normal and sane reaction! But we stuck to our beliefs. We stood firm that no matter how bad this got – it would only last a year, maybe two, even three. But not five or six or seven. Nothing in history (including the great depression, two world wars and anything Donald trump has thrown at us) has caused worldwide growth investment markets to remain in a rut for more than two to three years. The hard part is staying the course when tough times come because growth investments will put your nerve to the test.
But the result has been capital preservation. The All Ordinaries index fell 36% from over 7,200 points to below 4,600 points. The news at that point was dire. People were taking their money out during this time thinking they were being safe and saving their wealth. Then 10 weeks later, the All Ordinaries index closed at over 6,100 points. A rise from the bottom of over 32%. If you had taken your money out at the bottom you would have lost 36% and not recovered. You might have jumped back in, but most people we spoke to were “waiting till it all blew over to get back in”. Perhaps waiting for the market to peak again?
We are not out of the woods yet, as I predict the next 12 -24 months will be volatile. But we have to stick to our principals. Our firm belief that in five to six years’ time this will have ended, and markets pressed onwards and upwards. They always have and we believe they always will.
We appreciate everyone staying the course with us. We had many clients reach out and express their concern and I’m very thankful that they did and trusted us to check in. The best thing is that not one concerned client, after talking it through, disregarded our advice and sold out of growth investments. Therefore, not one of our clients ended up losing any money. Their accounts may have fell but have come back up a significant way – with more to go before we are back to where we were in February. It will be a slow burn, but better that than getting out and losing real wealth.