According to a 2017 report released by Russell Investments / ASX Long-Term Investing, “remember to check” is the new “set and forget”, with the reporting finding that the active investor will likely end up the fittest when it comes to finances.
There are a few hurdles for Mum and Dad investors trying to race to the top! No one has all the answers, but some are better equipped than others when it comes to identifying the hazards to a better financial future.
The report found a number of threats that effect long-term wealth creation for Australian retail investors.
One of the biggest threats was rear-view mirror investing, dangerous because “the strength of investment fundamentals has weakened and new norms are being creative.”
The study notes that your strategy from yesteryear can’t be relied upon, largely due to the changing and uncertain economic and political environment. Recent data demonstrates how the investment tides have changed.
“For example, chasing last year’s winning asset class as a strategy has underperformed a traditional balanced fund by 1.2 per cent per annum over 10 years (excluding costs),” said the report.
“This is because a strategy that buys and sells to follow last year’s winning asset class after it has outperformed assumes that past performance will continue year on year, which does not always eventuate.”
So what’s the solution? Finding investment opportunities that are dynamically managed and respond to real time market changes. This is where a managed fund and active investor can make all the difference.
The 10-year return rates for Australian managed funds are relatively comparable to global shares (5.5 per cent hedged versus 4.2 per cent unhedged) on a before tax basis, and while managed funds may not have been able to outperform everything, they did outstrip Australian shares (4.3 per cent) as an asset class. A balanced managed fund is regarded as having a ratio of 70/30 growth assets/defensive assets.
Residential investment property was among only three asset classes, along with global fixed income and Australian bonds, which exceeded a typical balanced fund target for the past 10 years – posting a before tax average return rate of 8.1 per cent. Meanwhile, Australian listed property, last year continued its flat run from 2015 and was the worst performer at 0 per cent per annum.
There’s no guarantee that these trends will continue into the next decade, so investors can’t trust any of these trends. The study cautions against relying on residential property for stable returns, a traditionally well-worn investment strategy by local investors.
“Following residential property’s star performance up to 2015, it again retained its place in 2016. However, we believe it carries significant stock-specific risk for people seeking stable, positive returns,” said the report.
While residential property overall has achieved strong positive returns over the last 10 and 20 years, it would be a mistake to blindly rely on the upward trend continuing across the board i.e. for the one or two properties an investor may have exposure to.”
It’s difficult to identify when something is overvalued, even when price-to-earnings ratios are high or assets appear in bubble territory, the ‘overstretched’ often proving to have more pull.
Everyone has a different bench mark, and as the study said “new norms” are always being created.
The 2017 Russell Investments/AST Long-Term Investing Report called on market forecaster Jeremy Grantham of GMO to explain the current investment landscape, which is believes is peppered with over-priced traditional assets. In February, GMO forecasted an average annual decline of 3.8 per cent for US large-cap equities and 0.8 per cent for US bonds over the next seven years.
Most strategists do agree that historically low yields are likely to remain for traditional asset classes, particularly bonds and shares. The study noted that higher volatility than before makes greater diversifications and active portfolio management all the more important.
“Instead of a ‘set and forget’ approach which relies on a steady-state, unchanging market environment, investors faced with volatile markets will require a nimble approach, shifting between asset classes and sub-asset classes in real time as market conditions change.”