Sensationalism vs reality - don’t let it blind you to opportunities

Today’s media is becoming more digitised and individual commentators are struggling to have their articles and views recognised by time poor and information overloaded readers.

The solution many writers have adopted is to offer an increasingly more extreme view - with a hyperbolic headline, i.e. making as big a splash as possible by exploiting society’s increasingly insatiable demand for byte sized information. As a result, balanced, centrist views are rarely offered as they are drowned out by the shrillest voices. Even mainstream media headlines have become more extreme and no longer provide moderate, balanced investment advice. More likely, one will find extreme headlines designed to capture maximum attention. We now see headings like ‘Stocks are dead’, ‘Bonds are dead’, ‘Gold is dead’, ‘Buy and hold is dead’ and ‘Oil is dead’. We just now await the granddaddy of them all – “We are all dead.”

As professional financial advisers, we are concerned that New Zealanders are not getting the real message and instead are more willing to rely upon repeated bombardment of negative financial news. There is no denying that the investment markets have been poor over recent years. There are still many uncertainties in our world but the fundamentals are starting to slowly improve and this creates opportunities. Our concern is that New Zealanders may miss out on the inevitable recovery in equity markets as they are only receiving sensationalist views from media sources.

Pimco, the world’s largest bond manager, holds the consensus view that investment returns will be lower going forward. However, equities (the share market) are likely to outperform bonds in coming years and Pimco offers the following balanced view point:

1. Selecting stocks that can outperform the market as a whole is essential to meeting overall return expectations. This means that high quality active fund managers are potentially the way to go.
2. Look to buy companies that can grow faster than the market as a whole. Where a company is headquartered is not nearly as important as where it does business. Use fund managers who are less constrained and instead can purchase the best companies with the best growth prospects wherever they may be domiciled.
3. Don’t overpay for the companies. It pays to buy quality but sometimes the highest quality companies have become overvalued as investors increasingly seek them out. Any purchase needs to be based on a rigorous valuation framework and sometimes, it may pay to buy a somewhat lower quality company at a steep discount than overpaying for the highest quality company.
4. All investing has risk but it is important in a still volatile world to actively manage the downside risk. This may entail hedging which is costly but it is better to get a lower return than no return if something went wrong.

Holders of large portfolios can potentially buy individual stocks and create a diversified portfolio. However, for the average investor, a portfolio that incorporates high quality active fund managers is most likely to be the solution for obtaining the most appropriate risk adjusted return. Milestone works with Morningstar (one of the leading investment research companies in the world) to identify low cost, well run investment funds for clients.