Great uncertainty continues to surround the future direction of investment markets. “Expert” opinion seems to range from an expectation of “more of the same” over the next 1-3 years to one of high investment risk, leading to a severe global recession. What’s more, the opposing arguments are persuasive, which confirms the difficulty of assessing risks and forecasting returns. At the same time, some self managed super fund and personal investors are moving away from their normal comfort zone to “chase” more income yield or take up unusual alternatives. The exchange traded fund (ETF) sector has been frantically issuing new products which often have specific objectives (eg to profit from volatility, the surge in artificial intelligence etc) and whose role in a portfolio requires careful consideration.
However, Morningstar Investment Management, in their Global Insights August 2018 publication, drew some sensible conclusions with which we agree. These include:
(1)That many investment classes, from shares and property to fixed interest and cash are currently over-valued or expensive, including Australian and US shares.
(2)It is best to avoid investments that have a higher than normal potential for their price to decline.
(3)That while holding more money in cash is not a great long term strategy (its buying power will decline due to inflation effects), in the short term this may limit the chance of loosing capital if markets decline and keep some “powder dry” to take up investment opportunities when prices are lower.
In summary, great patience is required in these difficult times for investors. Holding a higher than usual allocation to cash and deposits while maintaining a well diversified portfolio that includes other investments (eg bonds, shares & property), may limit the impact of a downturn in investment markets when it happens and offer an opportunity to invest at more attractive prices.
Managing your risks has never been as critical, especially for people who intend to spend some capital in the medium term or those who are approaching or recently retired.