Dear Friends
Remember to remain in your seats
As one of the world’s most successful investors, the American billionaire Warren Buffett is regularly referred to as the “Oracle of Omaha” because he often sees things that other investors don’t.
Many people hang on his every word (and action), which is why some investors are concerned by Buffett’s recent comments that he believes stock markets are way overvalued.
Yes, stock markets are overvalued
Buffett is not alone in his views. Many experts believe that stock markets are now overvalued, including me. This sentiment, as regular readers of eGrow will know, has been somewhat of a mantra of mine for the last two years!
Buffett’s company Berkshire Hathaway has been selling out of some stock positions over the last year and now has over $500 billion sitting on the sidelines in cash.
But don’t worry. Buffett is still very much in the stock market, to the tune of hundreds of billions of dollars. He has simply been repositioning his investment portfolio so he can reinvest his accumulated cash back in the stock market when cheaper opportunities arise. That's how he and the other shareholders of Berkshire Hathaway have made substantial profits over the long term.
Stick to your (diversified) strategy
Investing is not gambling. It requires a disciplined, well-considered approach and involves sticking to a long-term strategy.
Those of you who were clients prior to the GFC understand this. At that time, even though global markets fell by approximately 55%, we stuck to our investing strategy and did not panic. We ‘remained in our seats’ back then, and did not miss a beat!
Why? Because appropriately diversified portfolios, combined with the ‘Marinis Cash Buffer’ meant not having to sell assets in depressed markets. Our clients stuck to their strategy and markets recovered over time, as they always do.
Having exposure to both Australian and overseas shares diversifies your shareholding in this broad asset class. At the same time, an overseas exposure is designed to function as a shock absorber when we have a major economic downturn here.
For example, during the GFC, clients with share portfolios diversified across Australian and international shares were able to benefit from large falls in the Australian dollar. As expected, this resulted in international shares staying in positive return territory – despite the broad fall in stock values on overseas markets.
Stock picking versus holding the index
Now, we all know that we should sell high and buy low (if only I had a crystal ball). That is what active investment managers promise. But it doesn’t always work when you go all in, as the Standard & Poor’s Index vs Active (SPIVA) report consistently proves. Click here.
In January this year, our clients, a couple with funds invested in a ‘Moderate’ index portfolio (asset allocation to 50% Growth investments and 50% Defensive investments) came into the office for their review. They were delighted to learn that their (moderate risk) portfolio had returned 11.36% for the previous 12 months.
One of these clients is also a member of an industry super fund, into which his employer and maximum salary sacrifice contributions are currently directed. In the knowledge that this particular fund had previously underperformed relative to other (balanced) portfolios by deciding not to have an exposure to overseas technology stocks, I advised him to check his returns for the same period.
He confirmed that his industry fund had returned 8.46% in its balanced portfolio (asset allocation 73.8% Growth and 26.2 % Defensive investments) despite taking a much greater risk by not being diversified within all asset classes and having a higher exposure to Growth Assets!
This result demonstrates the difficulty of picking which market sectors will outperform others, versus having an exposure to all sectors – simply by investing via the relevant index for each asset class.
When to take profits
Like Warren Buffett, we also believe in selling high and buying low. But we also only do so at the margins when we rebalance your portfolios.
Like Buffett, we don’t switch you to 100% cash. We take profits from those assets that have done well in the previous period and use the proceeds to buy more of those that have underperformed.
In doing so, we bring your asset allocation back to your target asset allocation in line with your risk profile.
And we do this, regardless of the general noise. It’s simply about sticking to a long-term strategy – even when it means rebalancing your investments when returns from one asset sector are high.
There may be more stock market volatility this year. That’s an unknown.
But I am reminded by the quote from one of my all-time favourite economists, John Maynard Keynes, who is alleged to have said: “Markets can remain irrational, longer than I can remain solvent!”
And one more thing
If you wake up to the news the American stock market has crashed overnight by 40% or so, don’t panic. Your strategy will see you right. As has been said “The stock market is the greatest device yet invented to transfer wealth from the impatient to the patient.”
And one more FINAL thing
Over the last 12 months or so I have been reminding everyone to be on guard against scammers and to follow the Federal Government’s scam watch: http://www.cyber.gov.au/protect-yourself
One of the layers of security our clients have is the personal relationship with their adviser and our team. We recognise voices, we know the individuals, we are business ‘friends.’
As always, if I or any of the team can be of assistance, please don’t hesitate to reach out on (08) 8130 5130 or via email to admin@marinisgroup.com.au.
Yours sincerely
Theo Marinis CFP®, B.A., B.Ec., CPA., MCIFAA
Financial Strategist
Authorised Representative
