Financial Topic Demystified
What Should Investors Do Now?
This is the age old question asked by everyone, especially those inspired to take an active approach to investing. We do indeed live in interesting times. Share markets had fallen by more than 50% from their peaks in late 2007. Since early March we have experienced significant rebounds in prices. A range of questions are now being asked - have we passed the bottom of markets?, have I missed the best of the upturn?, will there be another major downturn in prices?, are prices going to stagnate for many years to come?, would I be better selling out and investing in bonds, cash or even gold? and the list goes on.
Rather than provide my own answers, which frankly would be "I don't know for certain", I think it is much better hearing the perspective from a group that we think has a good perspective on the issues - Dimensional Fund Advisors. The following is the transcript from the latest podcast on our website which provides a link to a really usefual series of presentation put together by Dimensional on the topic of What Should Investors Do Now?
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In this edition of our podcasts I wanted to provide a simple update on the movement of markets so far in 2009 and then turn listeners attention to considering what their response should be to the current climate.
To the end of last week - 22nd May - we have seen the following performance in share asset classes:
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Australian shares are now up 1% for the year, up 20% since the bottom reached in early March.
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Australian listed property still down 26% for the year but up 17% since the bottom.
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International listed property is also still down 19% for the year but up 16% since the bottom.
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International shares up 2.5% for the year and up over 30% since the bottom.
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Emerging Markets are now up 27% for the year so far, up 38% since early March.
As I always profess. as my family and closest friends can confirm, I have no idea whether markets will continue this projection in the short term. There is still potential for "icebergs" to create more havoc such as the downgrading of the UK's or even the US credit rating. Let's hope the global economy can avoid these icebergs but we should be prepared for this.
So What Should Investors Do Now?
For clients and regular visitors to A Clear Direction's website you will be well aware that I currently favour the use of Dimensional Fund Advisor investments within portfolios.
Last Friday, Dimensional have uploaded to their public website a really useful series of online presentations done by Weston Wellington, Vice President of Dimensional in the United States. The series is titled -
What Should Investors Do Now? The presentations are 68 minutes in total length but well worth sitting through. Weston covers Dimensional's approach to managing money under adverse business conditions, looks at how recessions affect share prices, explains why many did not see the problems in share markets coming, compares the recent downturn with previous downturns, considers whether government intervention is a threat to capitalism and concludes by suggesting what investors should do now.
Summarising the concluding comments:
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Diversification remains important.
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If you have less borrowed money, are less affected by the recession, and have a longer time horizon than the average it makes sense to buy.
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If you have more borrowed money, are more affected by the recession or have a shorter time horizon, it might be the time to sell.
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If you are about the same as everyone else, do nothing and relax
These are very general rules of thumb that hold some merit. However each individual's approach will be more complex given individual circumstances, risk tolerance and goals. If you wanted to spend time discussing your individual response to the current economic and investment climate please do not hesitate to be in contact.
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So what is "A Clear Direction's" approach?
Of course, it should be stated up front that Dimensional run a business with the objective of encouraging investors to invest money with them for the long term. We should not blindly follow everything they suggest as truth. Our firm does not, and we are constantly looking for better alternatives. However, at present I have not found a better approach and therefore continue to recommend Dimensional investments and their approach to investing as the core of what we suggest for clients.
We have some clients who have stopped regular investing into the market, some have increased their regular investments, none yet have sold any of their growth asset exposures but this has been put as an option for some clients depending on their individual situation. As always, the decisions to be made should be done so according to your own individual circumstances.
To take a look at this approach and some of the research that sits behind our firm's core investment philosophy in more detail please take a look at our
Building Portfolios page on our website.
