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It's time to question investment truisms

For almost all of my working life, we've been able to hold onto a handful of truisms about investment. Expressions like ‘time in the market not timing the market’ become investment adages because their truth endures through the ups and downs of the cycle.

But sometimes, as Jim Callaghan noted about politics in the 1970s, there is a sea change about which we can do nothing, and which is only clear in hindsight. In investment, the most famous of these may have been the start of the so-called ‘cult of the equity’ in 1956 when George Ross Goobey, the manager of the Imperial Tobacco pension fund, made the then radical claim that shares offered better inflation- and risk-adjusted returns than bonds.

He was right and the rest is market history.

Looking for the equivalent sacred cows today, I was unsettled to discover just how many things I could list about investing that I used to believe unreservedly and about which I’m now not quite so sure.

1. Balanced fund durability

First on my list is the foundational belief that dividing your portfolio between shares and bonds will always smooth your investment journey, ironing out the peaks and troughs and helping you sleep better at night. This year has been a shocking reminder that in certain circumstances (think high inflation and central banks prepared to risk recession to get it under control) both bonds and shares can perform extremely badly at the same time. The last ten months or so have tested the reassuring idea that when one of these two asset classes falls the other tends to rise. Risk averse investors who have sought the shelter of a traditional balanced fund are quite reasonably asking their advisers what has just hit them.

2. Gold as an inflation hedge

The next myth recent events have skewered is that gold is a hedge against inflation. This illusion gained traction in the 1970s when the precious metal performed well alongside sharply rising prices but there is more correlation than causality at work here. The truth is that gold performs well when inflation is higher than interest rates and bond yields. Then, the metal is forgiven its most glaring disadvantage, the fact that it does not pay an income.

Negative inflation-adjusted or real yields are the key to a rising gold price. These are often associated with periods of high inflation but not always. Today’s rapid swing from negative to positive real yields and the associated underperformance of gold this year make the point.

3. Growth investing

The third truism is a more recent arrival in the conventional wisdom and this year’s reversal of it might be seen as a return to a more durable fact of investment. The cult of growth, most obviously the outperformance of technology shares in recent years, has run into the sand as rising interest rates have changed the arithmetic of discounted cash flow models that put a high value on future earnings. Investors are once again looking for the bird in the hand that less exciting but steady cash generators and dividend payers can offer. Twenty years ago, we were reminded by the dot.com crash that shares on low multiples of earnings or assets, or which paid a high and sustainable income, were worth more than the market often acknowledges. I suspect we are relearning that today.

4. China to rule the world

A final investment truth that has dominated market thinking for years but has been undermined by recent events is that China will in due course be just like America but bigger. Beijing’s recent prioritisation of ‘common prosperity’ over economic growth confirms that China has long since given up slavishly following the western development model. Ten years ago, the relentless growth of the Chinese middle class and their journey through the acquisition of household goods and towards the consumption of leisure and financial services still looked like a one-way bet for investors. A property bubble, regulatory squeeze and Zero-Covid policy later, things look harder to navigate.

What does all this add up to? In some ways a more difficult backdrop than was in place during what we will come to see as a golden age for investors. But also, I hope, a period ahead in which there will be opportunities that have been lying dormant for many years. There won’t be a shortage of ways to make money in the markets in future or to protect its value; we will just have to look for them in different places.

 

Tom Stevenson is an Investment Director at Fidelity International, a sponsor of Firstlinks. The views are his own. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL 409340 (‘Fidelity Australia’), a member of the FIL Limited group of companies commonly known as Fidelity International. This document is intended as general information only. You should consider the relevant Product Disclosure Statement available on our website www.fidelity.com.au.

For more articles and papers from Fidelity, please click here.

© 2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

 

8 Comments
Trent
November 11, 2022

The perception that one needs a financial advisor and that a bespoke retail fund outperforms an industry fund is deeply entrenched. Is there any truth to this perception or have we all been trained to believe it?

Glen
November 11, 2022

Agree. My wife and I have done very well from our investments in Australian Super over the past 10 to 15 years. When we did rely on financial advisers, we inevitably lost money.

Trent
November 14, 2022

Thanks. I am in a quandary over this. My new advisor is facilitating my personal control over SMSF funds and I’m asking what evidence they have of investment returns but they are evasive. I can see all the industry returns so why aren’t private advisory funds required to do so?

SMSF Trustee
November 14, 2022

Trent , you're just talking to the wrong adviser. All the ones that I know include returns data in their statements of advice. Glen, please give more evidence to explain what you've experienced. What you've said slanders an entire profession based upon what? How many advisers have you dealt with? What do you mean by "lost money"? What do you mean by "every time"? Did you see the recommended strategy through over the time horizon agreed or did you just happen so start at the beginning of a bad year in the markets, bail out early, take a loss and blame the adviser? You might have been poorly advised but that is not the typical experience of clients with advisers so I'm curious why it happened to you.

John
November 10, 2022

Expressions like ‘time in the market not timing the market’

what about the expression "Past performance is not a predictor of future performance"

Well that seems to be applied only to financial performance.

Why do they select Steve Smith for the Australian cricket team and not me (if "Past performance is not a predictor of future performance")?

Why is it when we are interviewing for an employee we ask "what have you done in the past?"

Graham W
November 10, 2022

Tom says that gold is not a hedge against inflation and I cannot agree at all. A dollar in 1970 has lost 92% of its purchasing power. An ounce of gold in the seventies was worth $35 and now is worth around forty times more in today's money. Definitely this is not a myth Tom, but a big miss by Fund Managers. The cynic in me makes me think that Fund Managers have always avoided putting gold bullion in a balanced portfolio as they would be hard pressed taking a management fee on this part of their funds under management.

Kevin
November 11, 2022

I think you've compounded one side of the equation and deflated the other Graham.
Average wages in 1970 were A$50 a week.I don't know what exchange rates were but if we say that 1 ounce of gold was A$50 then you worked a week for 1 ounce of gold. Today average wages are around A$ 1830.An ounce of gold is A$ 2400?.You work just over a week for 1 ounce of gold Could this be weakness in the A$ v US$ at the moment.
An easier way gold hit US$ 850 in 1980.So gold has roughly doubled in 42 years,and no income.Or AXJOA was A$ 1000 in 1980,roughly the price of ounce of gold?Today AXJOA at around $84000,gold @$2400?
On Monday would you spend $84K on gold,or $84K to buy the index.

Graham W
November 12, 2022

Definitely the gold as I expect it will outperform the share market by a minimum of twice as much.

 

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