The Great Fall of China
Wednesday, August 26, 2015
By Angus Dockrill, IMFG Director and Wealth Specialist. After nearly 7 years of higher than normal investment returns, investment markets have fallen over recent months with significant falls in recent days.
In this IMFG Investment Alert, we cover:
1. Lessons from the 2008 Global Financial Crisis (GFC).
2. What is happening across investment markets: are we on the cusp of a Chinese Financial Crisis?
3. How should the long-term investor respond?
LESSONS FROM 2008
In late 2008, the world was in the middle of the GFC. You may remember it as a time of stress and concern during which you may have questioned your investment portfolio, financial plan and future security. Markets fell considerably. Information of the day was generally negative. There were two types of investors to emerge during this: 'Winners' and 'Losers'.
The 'Winners' were long-term investors that were net buyers of a diversified basket of investment assets. The 'Losers' were those that sold their investment assets in order to wait for 'certainty'. For every seller there was a buyer. Had you invested $1 million dollars* into the US Stock Market on 1 July 2008 and simply retained your exposure, the investment would have grown to $2.35 million by 30 June 2015. That is, investing and holding your nerve through the worst of the most significant financial crisis in what was the epicentre of that particular crisis has generated a positive investment experience. In contrast, those who invested the same amount into cash would now have a portfolio worth $1.31 million, barely keeping up with the increased cost of living.
We are not suggesting that a long term investor should speculate by attempting to pick which asset, which industry, which asset class, which economy, and which market to invest on any given day - quite the opposite. An appropriately diversified portfolio across asset classes was and remains the most likely portfolio to allow you to capture the returns offered by capital markets and achieve your long term goals.
WHAT IS HAPPENING NOW?
As we write it is clear that investment markets are concerned about how the next stage of China's transition will play out, with share markets falling considerably in recent days. There is broad agreement of slower growth in China which is causing a ripple effect across the globe, notably in the resource rich Australian investment market. Are we on the cusp of a 'Chinese Financial Crisis'?
Since April, we have seen the value of investment markets fall. This is, in itself, not unusual; we have enjoyed more than 6 and a half years of higher than normal investment returns across share, property and bond markets. One can expect that markets will have periods of lower returns after periods of high returns, periods of high volatility after periods of low volatility. It is what markets do. We are now entering a new phase where there is expected to be a gravitational pull of lower-returns in most major asset classes.
HOW SHOULD THE LONG-TERM INVESTOR RESPOND?
In reaffirming your commitment to remaining a long term investor focused on the achievement of your goals, and not a short term speculator, even the hardiest of investors may be a little troubled about the investment news you read at the moment. We, respectfully, suggest taking a deep breath. We want you to make decisions that support your long term security with confidence and are available to you for precisely that.
With history as a guide, those who own and maintain a diversified portfolio of assets (including shares and property) during a period of ‘crisis’ achieve a higher return on their money than those that invest in cash or more conservative investments (like cash or fixed interest). This is particularly so when it comes to continuing to meet your income needs in the years and decades to come, taking into account the increasing cost of living and impact of inflation.
Once you have paid for the price of risk in a falling market, you need to stay in the game for the return. Investors must stay disciplined through all market environments to pursue their long-term goals.
· Do you still believe that risk and expected return are related?
· Do you still believe it is more prudent to diversify your financial assets?
· Do you still believe that stocks and property provide higher expected returns than bonds and cash?
Often investors feel the need to move to conservative investment strategies as markets fall and fail to move back into growth strategies before the markets fully recover. The evidence of every single financial crisis that we have seen suggests that reacting in this way is not in the interest of the long term investor. Over time, the action of selling assets when values are low and buying back in when values are high can have a significant impact on a final investment balance. Rebalancing and maintaining a diversified portfolio is a more reliable and enduring strategy. Amongst all of this 'bad news' the long term investor may, in fact, see opportunity.
By Angus Dockrill, IMFG Director and Wealth Specialist.
* This article is written for an Australian audience. All figures are in Australian dollars - Source Vanguard Australia
General Advice Disclaimer
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. Past performance is not a reliable guide to future returns. Opinions constitute our judgement at the time of issue and are subject to change. Neither IMFG, its Licensee, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.