March 2019 – Smart Money Asia

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If you are a consumer of financial news, you will be used to seeing headlines like this: “The Dow added 141 points because recession fears are fading”. Well that sounds like great news doesn’t it? Onward and upward! Yet only two days ago it was “Dow plunges on recession fears”. So are we afraid of a recession or not? Is the market going up or down?

Of course, the market is going up and down. That’s what markets do. Most of what passes for financial news is just commentary on that particular day. It’s like listening to a report on how the weather was at the end of the day – not much use if you’re trying to figure out if it will be sunny for golf at the weekend…

But surely some of this stuff must be important? What should we be paying attention to and what is just noise? Well firstly, if you are a long term investor with a diversified portfolio that you rebalance at least annually, then almost all of this stuff is noise. It may be helpful if you are making tactical trades with a small portion of your assets, but talk of an inverted yield curve* should not be keeping you awake at night.

Of course I am not trying to discourage you from keeping an eye on what’s going on and trying to become a better investor. But if you want to keep your time spent on this stuff to a minimum, here are some simple tips:

Understand the correlated assets and how they behave over time – here’s a basic guide to cash, bonds and equities.
Understand what stage of the stock market cycle we are in. Most people buy and sell at exactly the wrong time. If you don’t know where we are on the graph below, then how do you know when to be more aggressive or defensive?

Psychology-of-Market-Cycles

3. Know your benchmarks. In particular, know the rate of inflation in your base currency. This is your key benchmark to compare investment performance to.

For most (non-finance) people, I think this is enough. If you understand how the main asset classes behave over time, what stage of the market cycle we are in, and how your investments are performing relative to the main indices, you probably have more valuable knowledge than you would gain from watching an hour of Bloomberg news a day.

This isn’t to say you shouldn’t read or listen to investment podcasts to broaden your knowledge. Just don’t let yourself be swayed from your long term goals by sensational headlines. I know people who have been following doom and gloom commentators far too closely since the 2008 crisis, and have completely missed the 10 year bull run in equities. Keep in mind what the stock market looks like over the long term:

Stock Market Since 1900

Much like other types of news, focus on a few key things and shut off the rest of the noise for a less stressful life.

If you are looking to go a little deeper, this article provides a simple guide to 16 major leading and lagging economic indicators which are worth keeping tabs on.

*If you really want to know what an inverted yield curve is, there’s an explanation here.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

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I came across an interesting article this week – see here. JP Morgan are launching a US Equity ETF with a fee of just 0.02%. That makes it the lowest fee ETF available at the moment, beating Vanguard, Schwab, and iShares on cost.

This is great news for long term investors, as long as they make money. Now why wouldn’t they make money with a fee of only 0.02% you ask? With the rise of ETFs, there’s a lot of talk these days about how much investors are paying. Fund managers and financial advisers are frequently criticised for charging too much.

But here’s the thing: it doesn’t matter how cheap your investment is if you buy it when the market is doing well and then sell it during a downturn. You are going to lose money!

Here are a couple of excerpts from Tony Robbins’ “Money Master the Game” book:

For the 20 year period from December 31,1993, to December 31 2013, the S&P returned 9.2% annually. However the average mutual fund investor averaged just over 2.5%, barely beating inflation. They would have been better off in US Treasuries.

Another fascinating example is that of the Fidelity Magellan mutual fund. The fund was managed by Peter Lynch, who delivered an astonishing 29% average annual return between 1977 and 1990. However Fidelity found that the average Magellan investor actually lost money over the same time period. How can that be? Well, quite simply, they bought and sold the fund at the wrong time!

So what can we learn from this? Simply that if you focus too hard on fees, be careful not to lose sight of the big picture. If you are prone to making emotional investment decisions when markets are swaying, maybe it’s worth paying for a good adviser who can help you make sound decisions?

If you are able to buy that JP Morgan ETF, hold it forever, and add to it when markets are bleeding, then good for you! You are going to be very happy with the result over the long run.

If watching your investment value go up and down makes you nervous, maybe you are better off paying for a diversified managed fund with a blend of asset classes that is adjusted tactically by the manager. Then you don’t have to worry about buying and selling at the wrong time.

I guess what I am saying is; if you are a disciplined investor you should absolutely be conscious of fees, and minimise them where possible for best results. If discipline is an issue for you, or you simply don’t have the time, it may be worth paying for some help.