At large: Ross Greenwood
It takes great discipline to keep calm when the sharemarket is struggling
Here’s the truth about investment. You don’t get everything right. Far from it. You don’t control the process. The fact is, most of the time you feel as if there’s little control at all. You will lose money. Simple as that.
If you want guarantees, keep your money in the bank. At least the government will guarantee you $250,000 per deposit. But in the long term, after tax, your money is probably losing value to inflation anyway.
Now money in the bank is not always such a bad thing. Especially if you’ve taken the attitude that there’s nothing to buy. No value. The real answer is to look harder or to look longer term. It is only a genuine pessimist, or panic merchant, who cashes in everything and claims the sky is falling.
But even a move to cash comes with risk. Timing is the key and here we go back to that sense of a lack of control that most investors feel. Those who do try to control the timing of investments, if discovered by authorities, generally end up behind bars.
Experience when investing provides a greater sense of calm when there are fewer opportunities or when asset prices are falling. But this takes great discipline.
Most recognise that falling prices equal buying opportunities and rapidly rising prices generally equal selling signals. But what happens when low inflation and low wages growth cause nothing much to happen for a very long time?
That is something most Australian investors have never experienced. Normally, something is happening to move the stockmarket: high inflation equals buying growth stocks and holding on; low inflation equals falling interest rates equals defensive stocks including banks and property companies.
But nothing? Well, that’s a different story. There is one recent example of a fund manager bailing out altogether, though reports of the individual circumstances behind that story suggested it was more than a big market call.
The fund manager is supposed to be the person who finds the opportunities. They are paid to deliver growth though, truth known, many of them struggle to even match the basic indices that track the markets. So over 10 years – which takes in the GFC – according to Morningstar only seven of 42 diversified equity fund managers did better than 5% a year. Seven!
You might argue that your money was better off in the bank. But it should also be noted that most of those same fund managers have produced returns of 10%-plus a year over the past five years. As they say, you must take the rough with the smooth. For most people, the obvious point is that they do not have the time of professionals to scour the market for timing and opportunity.
But as with every investor, professionals get things wrong. Wrong in strategy; wrong in timing. The issue is that their job is to keep searching for things to buy. Some might have the right to go to more cash, but are you paying them to protect your money or to invest in the stockmarket?
A good example of this is in the stockmarket itself: one of our biggest companies, Wesfarmers. It owns Coles, Bunnings Warehouse, Target, Kmart and Officeworks – all big retailers – along with coal mines, fertiliser companies, chemicals, ammonia, gas and even tools and safety equipment.
The management of Wesfarmers has long said it prefers to run a portfolio of assets to even out the dips and troughs in the economy. But there are many investors and fund managers who would prefer to make their own choice about whether they invest in retailers or coal mines.
Even the current fight over the strategy of BHP is about who should control the value locked inside the business: the management or the shareholders who own a decent chunk of the shares.
But this same debate even comes down to your own portfolio. In other words, if you invest via fund managers, ask yourself not only who is making the decision about what to invest in but who is making the bigger call about whether to invest at all.