WA Super News
Keep Calm and Stay Boring
It is normal to feel anxious about the drama and turmoil that happens during uncertain market conditions which we are currently experiencing. Although super is generally seen as boring, it certainly isn’t feeling very boring right now. At the moment, you might want to be a little boring and stick to a long-term mixed strategy.
For quite some time, our outlook at WA Super has been one of expecting lower returns on average and higher likelihoods of significant falls in markets in coming years (refer to the article in the West Australian “Variety spice of life for cautious investor”, 15 January 2018). This has been driven by:
Low, but potentially rising interest rates
There are very low and even negative interest rates in some parts of the world and the easy money that has been injected into markets through quantitative easing is coming to an end. If quantitative easing and low interest rates helped boost markets on the way up, it has been difficult to form a view that the reversal will be supportive of strong market returns going forward.
High and arguably stretched starting valuations
The bull market in equities since early 2009 is one of the longest in history. While bull markets don’t have a fixed expiry date, equity valuations by many measures are higher than any time in the past 15 years and valuations in private and unlisted markets are higher than prior to the 2008 Global Financial Crisis or tech wreck. The higher the starting valuation of an investment, the lower the future expected return on that investment.
Uncertainty and unpredictability of geopolitics
We didn’t predict Brexit or Trump in 2016 and we didn’t anticipate the market’s response. Whether it’s current trade tensions or the actions of political leaders, it is difficult to determine what political leaders will do going forward and how markets will respond.
This recent bout of volatility has not altered our view. We retain the perspective that expected returns going forward are lower than historical averages, and risks to the downside are higher. No one can know when or how markets will rise or fall but we believe it is important to always be realistic about expectations for markets.
A reminder of risk
There will always be good news and there will always be bad news and there will always be attempts at explaining what is going on. Whatever the underlying reasons, this October is a stark reminder that investing has two sides. On one side, positive returns are your reward and on the other side, negative returns are your risk. Rewards generally come over long periods of time, whereas risks can be short, sharp and even scary. Financial markets are incredibly complex, interconnected and unpredictable. There has been a great run up in markets in the past 10 years; however the past few weeks are a reminder that markets also fall. It’s inevitable, they will go up and they will go down. On average though, share markets deliver negative annual returns around 30% of the time.
Here are two points to consider in times of market turmoil:
1. Set and stick to a strategy
In times like these, the temptation is often to do something. That is rarely going to be the best course of action. Investors who focus on ‘market noise’, who try and time the market, are unlikely to succeed in the long run. You only lock-in a loss when you sell and similarly you don’t benefit from chasing a gain after it has happened.
The truth is that most of the time, no one can know when or how markets will rise or fall. Nobody has a crystal ball, no matter how ‘expert’ somebody is, I certainly don’t and I won’t pretend to.
The most important thing an investor can do is determine an appropriate risk budget and build a strategy with a diverse range of investments that can stay the course through good times and bad. That means your weekend can actually be spent doing exciting things like going to the beach, heading out to a winery in the Swan Valley or taking the kids (or grandkids) to the park. You don’t want to live your life continually worrying about how your super or investment portfolio is performing. That’s our job!
2. Diversification is the boring defence
Most investment experts haven’t found that reliable crystal ball and won’t know what investments will be the best (or worst) in the future. That’s why, at WA Super, we keep a long-term view and focus on building well-diversified portfolios that deliver a smoother path through volatile markets that are robust in a range of economic and market scenarios. We deliberately build portfolios that are less reliant on shares to generate returns. This means that when the good times are rolling we won’t be shooting the lights out, but our focus on diversification means we’re a safe pair of hands when volatility does strike. Taking pride in being stable, consistent and reliable may not be the most exciting thing, but times like these show why it pays to be boring.