It may be time to buy and hope
PUBLISHED : | UPDATED:By now, investors should have realised that no investment theory or system works all the time; most experts’ forecasts are not much use; and it’s a waste of time trying to make your own economic forecasts, in the mistaken belief that this will help you predict the direction of the sharemarket.
This no doubt depresses all those who spend time poring over forecasts and theories.
Because, amid the large, real, macro-economic fears lurking worldwide, the major question for investors is whether the markets have overdone their discounting of share prices. Some optimists argue that share valuations are now historically low. Pessimists argue that, in a likely global recession, many earnings assumptions will prove too optimistic.
Morgan Stanley economist Gerard Minack thinks it will be a difficult year, with risks of volatility and bearish markets. But the contrarian (although minority) view suggests that, in the absence of any new, really bad news, there is a chance for markets to improve this year after two years of declines.
Of course, 2011 was not the time to be in sharemarkets; despite the accepted wisdom, even emerging markets disappointed. In fact, developed markets performed better. In superannuation, sharemarket-oriented growth funds have averaged returns of only 2.2 per cent in the past five years. Capital-stable options, with more invested in fixed interest, on average at least managed an above-inflation average return of 5.1 per cent.
But that is the past. Is it time to switch from safety first to more risk taking? Big picture investors may not think so. They think deleveraging around the world will continue, making it hard to revive both economic and investment activity. Still, while this may apply generally, in the more growth-prone Asian area (including Australia), there may be enough sparks to ignite the sharemarkets.
Despite the fears about Europe, the biggest factor for sharemarkets this year may well be whether the United States avoids a recession. The bulls in the US probably are counting on the presidential election in November to underwrite a muddle-through year.
Because many investors have settled into a risk-averse mood, they might fall into the trap of using the rear-view mirror to drive their investments. But those with a medium- to long-term investment horizon (say, five to 10 years) need to remember that moving from growth to defensive assets will inevitably affect their returns.
The very fears that have turned investors risk-averse may also contain the seeds of a market revival. The reason: any solution in Europe has to involve some monetary expansion – despite Germany’s reluctance – and the US Federal Reserve will also be standing by to print more money if needed. In short, some rise in inflation will be part of the policy response.
That means long-term investors need to maintain some sensible exposure to growth assets to participate in rising asset prices and provide a hedge against inflation.
For all but those investors who need to put capital security first, this will mean listening less to the doomsayers and remembering that asset allocation (rather than stock picking) matters most in achieving longer-term returns.
The wealthy investor Warren Buffett famously gave two rules for investment: his rule No. 1, don’t lose money; rule No. 2, don’t forget rule No 1. He takes a contrarian approach – be fearful when others are greedy and greedy when others are fearful.
While there is always room for sensibly avoiding risk, there rarely is a time when it pays to completely ignore exposure to income-yielding shares. It’s not necessarily a time to buy and hold – but may be time to buy and hope.
Barrie Dunstan Smart Investor
