It is less than two years ago that we were used to seeing double digit returns from investment funds- including KiwiSaver Schemes. Today, we have much lower interest rates, rapidly fluctuating exchange rates and lower earnings from shares. This leads to overall portfolio returns being significantly less than in the immediate past. This is just a sign of the times in which we are currently living. Portfolios and investors need to adapt to changing times and increasing risk.
Two natural human reactions are to:
- Sell those investments underperforming and put the proceeds into those doing really well.
- Cash up your investments and wait until everything is doing well again
However, both academic research and practical experience shows neither of these to be smart investment strategies. The likely result could be underperforming a strategy of ‘hanging in there for the medium to long haul’.
Key dangers associated with investing into something that appears to be outperforming are:
- Taking on more risk within a portfolio. After all is said and done, higher returns normally come with higher risk;
- Concentrating the portfolio into fewer stocks or bonds and then concentrating on specific countries and industry sectors. We call this ‘concentration risk’. The undesired consequence of this is that if one of the investments under-performs then it can significantly impact upon the entire portfolio.
As we transition to less certain times and lower investment returns, Milestone takes the following approach with clients:
- We work to lower client expectations around investment returns. We do this through discussion and education;
- If necessary, we will update the client risk profile and financial goals to ensure the client can handle dips in portfolio performance and capital value. If the risk tolerance has changed, then we will rebalance the portfolio to reflect the new risk profile;
- We review our Investment Policy Statement (IPS) to ensure it is appropriate for the foreseeable future. Our IPS contains our philosophical view of investing and the methodology we use for selecting individual investments and building portfolios.
- We assess the quality of each investment within a client portfolio to ensure it has a good risk-adjusted return (this is the level of risk taken to get the desired long term investment return). We focus more on risk-adjusted return rather than getting the highest possible return. If we are using managed funds within a portfolio, then we obtain an updated research report on that fund to ensure the manager has the knowledge competency and skill to handle the current phase of the market cycle.
History shows that the markets rise and fall and those who do well tend to remain invested when markets fall and find additional cash to invest into undervalued assets when cheap.
Give us a call. We are happy to talk through any issues or concerns you may have.