Christmas was especially challenging with markets around the world experiencing significant falls in the final quarter of 2018.

On October 1^st, 2018 the Australian ASX 200 closed at 6,172.  It fell to 5,467 on December 21^st, a fall of 705 points or 11.4%.   Other major indices experienced similar falls or worse.  What precipitated such dramatic moves when seemingly corporate earnings, particularly in the US, were quite solid?

While issues such as the US/China trade tensions, Brexit, Italian debt discussions with the EU and finally global growth more generally were causing concern, the main culprit was Jerome Powell, the Federal Reserve Chairman who on October 3^rd 2018 said;

“The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore. They’re not appropriate anymore. Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral,” he added. “We may go past neutral, but we’re a long way from neutral at this point”

Market participants around the world were alarmed at this statement particularly when they had become accustomed to immediate past Federal Reserve Chairman Janet Yellen, delivering more measured commentary.  US President, Donald Trump berated Jerome Powell publicly and the Fed Chairman was under significant pressure from all sides to qualify exactly what the Fed’s position was given that inflation in the US was and remains quite benign.

On January 4^th 2019, Mr Powell did just that, saying the Federal Reserve would take a “patient approach to monetary policy tightening”. Markets interpreted this to mean that not only was an accelerated series of rate rises off the table, but the Federal Reserve may well not raise rates as much as it had stated.  In just 3 months its position had changed quite significantly.

In addition, there was a détente of sorts between the US and China on trade talks which helped ease market concerns. These talks are ongoing and remain positive, though time will tell.

Market movement since Christmas-eve

So what’s the lesson?  The future will incorporate a series of unforeseen events that are impossible to predict.  Thankfully, you don’t need to know the future – what you do need however is to stay disciplined and not allow emotion to replace rational decision making.

As clients of APC this message is re-enforced because it has been proven time and time again to be true.  As you can see from the chart below, there are always events that can cause investor concerns.  This is called by some commentators as the ‘Wall of Worry’.  However as you can see, taking a long term approach has rewarded the patient investor.

‘Staying The Course’ is easy to say but sometimes very hard to do as humans are not wired in this way. We naturally feel the need to do ‘something’. When markets are falling, we feel we must act…. sell, move to a more defensive portfolio. When markets are rallying, we feel that we don’t want to ‘miss out’ so we must buy.

If you think this through though, the behaviour of focusing on the short term movement of share markets leads to selling in a falling market whilst buying in a rising market – selling low and buying high – exactly what you shouldn’t do.

Since 2001, if you invested in the top 300 companies in Australia (ASX300 Index) and made no changes to your portfolio, you’d have generated an average return of 8.3% per annum but if you missed just the 15 best days during that whole period your return would have fallen to 4.2% per annum – nearly half!

Your strategy, developed with APC, is long term by design.  We review that strategy during your Regular Planning Meetings making amendments as required.

Australian Private Capital believes that markets work.  They are efficient at determining the price of a share based on available information about that company.  Markets will do what they do and there will be good times and bad, as the chart demonstrates.  But through them all, our primary focus should remain long term and we should not allow the short term ‘noise’ to cloud our judgement.

There can be no better example of this than the significant market fluctuations we have all  experienced in recent times.

As always, if there is anything you wish to discuss about your strategy or portfolio we encourage you to make contact with your APC Advice team.