19/11/2013
One of the great challenges of investing is being able to lean against the prevailing winds of the day. Sailors will tell you that it takes effort, discipline and patience when battling into strong headwinds.
Five years on from the global financial crisis share investors probably feel like they are entitled to enjoy having the wind at their back with the Australian sharemarket delivering 24 per cent growth so far this year as at the end of October.
That is good news for super fund portfolios as well with the average growth super portfolio delivering 15.6 per cent for the last financial year. – See Chant West returns.
But if there is one thing we can all learn from – and try not to forget – is how past performance influences our levels of confidence with investing.
This week in the Wall Street Journal was an illuminating article that highlighted how US investors are diving back into the sharemarket as market indexes set new highs.
According to fund research tracking group Lipper US investors have placed $US76 billion into share funds this year – the strongest year since 2004.
Between 2007 through 2012 investors withdrew $US451 billion from share funds.
There is no doubt that a more positive outlook for the US economy is fueling the rise in optimism among US investors.
However, it is perhaps time to sound a note of caution. If you look at fund flow data into US global share funds between 1993 and 2008 one strong message emerges – people invest more money into the sharemarket when it is high and sell out when it falls into negative territory.
The data may be for US investors but there is no reason to believe similar behaviour is not happening in other parts of the world.
Buying anything when prices are high and selling when they are low is never going to be a wealth creation strategy but what the fund cashflow data points to is how hard it is to time markets successfully and how much past performance influences our confidence levels.
Rising markets raises confidence levels which raises our propensity to take more risk.
But clearly the memory – and some of the lessons – of the global financial crisis seem to be fading. Investment markets – be it shares, property, fixed income – all move in cycles.
For investors the most important decision is to get their asset allocation mix attuned to their age and risk tolerance.
In that way you will hopefully be able to profit from the times when market winds are favourable and be able to weather the storms which will inevitably appear from time to time.
Importantly with a diversified portfolio you should never have the worry that drove one investor quoted in the WSJ article who is investing now because “I don’t want to miss out”.