Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 190

Preparing for the ups-and-downs of 2017

After the rollercoaster of investment emotions that was 2016, investors have been cautiously embracing a more upbeat feeling across markets so far this year.

Perhaps it is wishful thinking, but it seems many pundits and punters alike are growing comfortable with the fact that, although the world looks a lot different to what it did a year ago, it’s not all doom and gloom where investing is concerned.

Although a market rally can certainly buoy hopes for a more stable year, we should remember that last year was certainly no slouch for returns, despite medium-to-long-term forecasting pointing to market returns lower than historical averages, underpinned by slowing global economic growth.

In fact, the broad Australian sharemarket returned more than 11% last year, despite early concerns that China’s slowing economic growth and softer commodities prices would hurt the local economy.

Resilience is conditional

With that example in mind, it can be comforting to think that our investments might be more resilient than expected. Diversification and discipline are essential to 'future proofing' a portfolio, allowing it to weather oscillating markets by being more resilient in the face of volatility.

Diversification allows investors to spread risk and avoid a catastrophic hit to their portfolio if they are over-exposed to a single company, sector or market that tumbles. Having exposure to multiple countries, industry sectors, varying market caps and asset classes (e.g. equities and fixed income) gives portfolios a better chance at carrying on should only a portion of its holdings go through a cycle of underperformance, or loss.

While diversification acts as a shock absorber for a portfolio, discipline is the key to letting diversification do its job of managing risk. By avoiding the temptation to follow market trends, either by selling an asset when its value falls, or buying an asset that’s on an upward march, investors can remove perhaps the riskiest factor that can hammer potential returns: human behaviour.

Human behaviour, particularly fear and temptation, are what can drive investors to make ill-considered decisions in times of market fluctuation. We saw this last year when many investors sought to flee UK equities ahead of the Brexit vote, only to miss out on a fairly quick recovery in that market. An investor with a broad exposure to the British sharemarket would have likely been better off gritting their teeth through the tumult and seeing it through to the other side.

Vanguard’s global CEO, Bill McNabb, discussed this recently with The Evidence-Based Investor, outlining how Vanguard approaches market flashpoints like Brexit in terms of understanding risk, rather than trying to work out trading strategies to minimise damage or maximise opportunity.

In a recent letter to investors, the full version of which is featured below, McNabb also outlined the need for investors to be prepared for future volatility, saying that surprises should be expected in 2017. Although Vanguard isn’t in the habit of offering ‘hot tips’ for investors, McNabb outlined in his letter these four pieces of advice to help investors navigate uncertainty and set themselves up for investment success.

Valley Forge, Pennsylvania

9 January 2017

As we begin 2017, I'm struck by the questions we've been receiving from our investors. Never before — not even during the Global Financial Crisis — have investors come to us with such specific concerns about the movements of the markets and governments around the world.

We're living in unprecedented times, so we certainly can't predict what this year will bring. And if you know Vanguard, you should know not to expect ‘hot tips’ or ‘sure bets’ from us either. But I do have four suggestions that I believe can help investors reach their goals.

1. Prepare for uncertainty. Several political and economic events caught observers by surprise in 2016, including the results of the Brexit vote in the United Kingdom, the presidential election in the United States and the federal election in Australia. Markets respond to surprises with volatility, and we expect more surprises in 2017. With a new US administration comes the potential for changes to policies that affect investors. Some may be beneficial; some may trigger market volatility. The best approach in any environment is to maintain a long-term perspective and a balanced and diversified portfolio.

2. Save more. In addition to potential near-term volatility, we expect the equity and bond markets to produce lower returns in the next ten years than they have over the past several decades. This will place the burden on investors to save more. Saving more is an asymmetrical proposition: If you don't save enough and the markets don't assist you, there's nothing you can do. If you over-save and do well, great – you can retire a few years earlier.

3. Safeguard your assets. As the threat of cybercrime continues to grow, we work hard to protect our clients' assets and data. But investors must be aware of the risks and take precautions too.

4. Stay well-informed. Great investors understand how all the pieces fit together. Become familiar with all the components of your portfolio and know the role that each one plays in your investment plan. Stay abreast of the markets and economy but don't be driven by their movements. I realise it sounds paradoxical to say, "Stay current but resist the urge to act." But that's exactly what you should do.

Here's to a prosperous 2017.

William McNabb III, Chairman and Chief Executive Officer, The Vanguard Group, Inc.

 

Robin Bowerman is Head of Market Strategy and Communications at Vanguard Australia. This article is general information and does not consider the circumstances of any individual. Vanguard is a sponsor of Cuffelinks.

RELATED ARTICLES

Five factors driving the great Australian recovery

Four themes to set your portfolio for economic recovery

Why not use options to protect your share portfolio?

banner

Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Latest Updates

Retirement

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Interviews

Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?

Compliance

D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.

Shares

Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.

Retirement

Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.