In­vestors not to see the worst of the cri­sis

The Pak Banker - - Front Page -

BER­LIN

Ac­cord­ing to Ger­man Fi­nance Min­is­ter, Wolf­gang Schauble, as at last week, in­vestors may not have seen “the worst of the cri­sis”. Note to self: hold back that bull within you.

Schauble’s com­men­tary places the prover­bial “damp squid” on our last ar­ti­cles which leaned to­wards the bulls rather than the bears, in the light of “good look­ing” rather than ugly as­set prices to endSeptem­ber. (Global eq­ui­ties up over 18 per cent, emerg­ing eq­ui­ties up over 15 per cent, con­vert­ible bonds up over 10% and com­modi­ties around 10 per cent).

“How­ever, a lump sum in­vested in 1987 will have en­dured some se­ri­ous trauma and an av­er­agely com­pe­tent port­fo­lio man­ager should have di­ver­si­fied the over­all as­set al­lo­ca­tion into a num­ber of smaller in­vest­ments, with­out tak­ing a risk on spe­cific mar­kets or spe­cific as­set classes. ”

And so to my real point: some in­vestors might be wan­der­ing why their port­fo­lio did not go up with these indices? A tricky ques- tion for in­ex­pe­ri­enced and many ex­pe­ri­enced in­vestors alike.

There are three pos­si­ble ex­pla­na­tions: Firstly: rarely (I mean one in five) do fund man­agers out-per­form mar­ket indices. They fre­quently miss the best trad­ing days.

Se­condly: whilst in­vestors have the op­por­tu­nity to buy their own track­ers at a cheaper rate than a fund man­ager fee, they need to know which track­ers (mar­kets) to buy, and when. As the No­bel Prize win­ner, Harry Markowitz noted: the most ef­fi­cient way to in­vest money is to in­vest 100% of your money in the as­set that goes up the most. When the No­bel guys tell us how to get the tim­ing right, I will pass it on to you (af­ter I have re­tired).

Thirdly: there is an in­formed school of thought, that sup­ports Schauble, which be­lieves the debt which took twenty years to buildup is un­likely to be un­wound in com­par­a­tive mo­ments. Put an­other way: be­cause a mar­ket is driven up­ward by short term buy­ers be­ing more nu­mer­ous than short term sell­ers, it doesn’t mean that they can’t fall down to­mor­row. This fear cur­rently sep­a­rates mar­ket indices per­for­mance from many port­fo­lio re­sults.

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