Investors not to see the worst of the crisis
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.