Money predictions: what are they costing you?

Written by multiforte on . Posted in News

Low returns are shaping as the new normal“. That was a headline in The Australian Financial Review in July 2012 – just over a year ago – in anticipation of another grim year on global equity markets for Australian investors.

How did that forecast turn out? And what did it cost you?

Certainly, the case for investor caution looked solid a year ago. Listing a gloomy roll-call of negatives, the AFR said Australians were starting to realise the days of double-digit annual returns from shares were long gone.

There was the jobless recovery in the US, the ongoing stagnation in Japan, the many failed attempts to address the European debt crisis and, at home, a stubbornly strong Australian dollar that was defying falling commodity prices.

If you acted on that ersatz advice and sold out of equities a year ago, you may be kicking yourself right now. That’s because global developed equity markets have had a stellar financial year, on an unhedged basis rising more than 33%.

And which countries were the stars in 2012/13? According to press pundits, it is all about China and the new emerging economy powerhouses. Well maybe on an economic basis. But as an investment, it is a different story.

The best performing developed economy equity market in the past year was in fact Ireland, one of the countries hardest hit by the global financial crisis. The Irish stock market gained nearly 50% in 2012/13, admittedly from a low base.

Other unlikely stars included troubled Euro Zone members Portugal and Greece. Even the US market, where the economy was reported to be at risk of going over the so-called ‘fiscal cliff’, managed an annual gain of more than 35% in $A terms.

And did you know that Australia, for so long dubbed ‘the miracle economy’, was the worst performing developed market in the past financial year?

What is the individual investor to make of all this?

First, it seems clear that while newspapers may give you an accurate account of what happened yesterday, they are not a great barometer of what will happen from this point on. We have seen over the years how the myth of journalists having a reliable crystal ball has undone investors. And think about this: If reporters really could forecast markets correctly, why would they be slaving away in the media?

Second, markets (unlike the media) look forward, not backward. What’s in the news is already in the price. What’s not in the price is not news yet. And if you know what tomorrow’s news is going to be, you really don’t need to be reading this.

Third, if the news around a particular market or sector or company is all bad, prices will fall. Low prices mean the return that investors demand for taking a risk on that market or sector or security is higher. Risk and return are related, remember?

Fourth, diversification is your friend. It’s only a couple of years ago that every second newspaper columnist was telling us to reweight towards China and that Australia was assured of strong returns as the boom went on and on.

There certainly weren’t many journalists out there singing the benefits of investing in Japan or the US. And if someone said a year ago that Ireland would lead the world in 2012/13, they would have been suspected of hitting the Guinness.

Finally, making big bets on individual sectors is rarely a good thing. It could turn out right, but it’s rather like putting all your money on one horse in the third at Randwick. That’s called speculation, not investing.

Smart investment is about spreading your risk. It’s about diversifying across companies, sectors and markets. It’s about taking different sorts of risk in small companies, large companies and value companies and then balancing those equity risks with other risks in fixed interest and cash.

Most of all smart investing is about separating the noise of news from the subtle underlying signal of returns. The media love to make a splash with speculation on markets. But that doesn’t make their predictions valuable and certainly doesn’t mean you should dive in after them.

Worried about your money?

If you’re worried about your money and investments, why not seek a second opinion? We can share insights from many years of research and managing investment portfolios that can help you gain peace of mind. Just call on 02 9262 6045 or email to have an initial chat.

With thanks to Dimensional Fund Advisors for source material for this article.