We’ve divided the results into two articles: The first offers suggestions on how to maximize a retirement, while the second displays the complete survey results in charts. Leisa Bell has summarised her results into a downloadable document as there were a lot of comments across nine questions which was incredibly informative but too much to include in one article. They are fascinating, and worth taking a moment to scroll through.
Beneath all the markets for the last financial year showing a decline of 10% in the S&P/ASX200 and almost 20% in the US S&P 500 is each and every individual's lived experience. The US Treasury bond index dropped 11%, giving none of the usual bond diversification protection. Even those taking the default option into a balanced super fund will post their first negative returns since the GFC. Now each investor must decide to stay put with their portfolio, sell some to avoid more drops or be opportunistic and buy the dips.
“First of all, what is the risk? It’s the likelihood of something bad happening down the line. What do we know about that? What does the past have to say about that? What happened eons ago matters, but not deterministically. I don’t think that risk is measurable. I don’t think the past is entirely relevant. The real big bucks are lost at the point at which the future ceases to apply, and that point inevitably comes.”
The past six months only feels like one of those junctions. We know about the past but we are having to infer about the future. Australia’s largest super fund, AustralianSuper, chief investment officer Mark Delaney issued a statement explaining a 2.7% loss in its core balanced fund for the last financial year. That option was up 20.4 per cent the year before and up 9.3 per cent per annum over the last decade, a period of superb returns for default super fund investors. It will take at least 10 years for another one to be as good.
“With more than a decade of economic expansion our outlook points to potential transition from economic growth to economic slowdown in the years to come. As a result, we have begun to switch back to a more defensive approach as conditions will be less supportive of growth asset classes such as shares."
If he has only “begun to readjust,” he’s a little late to the game; the signs were already there in late 2021, as described in our editorials.
Everyone has a different risk appetite, and thinks differently about investing. I have a friend that I’ve known for 40 years and he’s been steady with his approach. His only concern is income from his portfolio and this is far less volatile than stock prices. Immediately after CIMIC (formerly Leighton) was fully acquired by its German owner on good money a few months ago, he plans to reinvest the big cash payment. How does he react to the recent sell off? “Shares are trading at a discount. It’s wonderful,” he told me last week.
Most investors sitting on losses are not so happy, and this neat graphic from CommSec shows just how the year played out to achieve that 10% loss in the ASX200. It underscores how badly the year finished.
Atlas' Hugh Dive tracks the Dogs of the ASX
Hugh Dive tracks the Dogs of the ASX each year, and shares the big losers here. Weren’t all those people buying gloves (Ansell), respiratory aids (Fisher & Paykel Healthcare) and pizza (Domino’s) during the pandemic? AfterPay and the BNPL rivals were replacing credit cards, Xero was making businesses more efficient, SEEK was eating business out of the job board; Reece was riding through the property boom. Hard to picture anyone taking these 10 dogs in 2021.
The first-time, often younger, investors who flooded the market in 2021, when returns from earlier years had already been pocketed, are learning that investing is hard. It looked like easy pickings when everything was up, tech, Bitcoin, BNPL, online retail, NFTs, property. Rates that will never be this low again bid prices for everything higher, and newcomers bought every piece of gossip on the street. Now companies late to the game are looking at the red numbers with Amazon down 35% and Alphabet down 22% for the June quarter.
Take for instance the tech-themed ETFs that have launched in the Australian market during the hype, two of these were ETFS Semiconductor (SEMI) down 30% last FY, BetaShares Crypto Innovators (CRYP) down 71% and Cosmos Global Digital Miners (DIGA), down 76%.
The question is whether the losses of younger people with a few thousand invested has felt this loss over the long term, as this is just part of an investing journey and they have not lost much in dollar terms. Rob Arnott and Research Affiliates take a view in deep contrast to traditional guidance about your risk appetite based upon your age.
“As we hear, the young are risk tolerant and as we approach retirement age the ‘average investor [becomes] intolerant of downside risk, fleeing after a serious drawdown’ … Conventional wisdom prescribes a percentage allocation to equities of ‘100 minus your age’ and the idea that the young can withstand more risk than we middle aged (or older!) folks. It’s true enough the young have more time to make up for losses, but what losses are more pernicious for retirees than inflation chewing up the real income of a bond centric portfolio?
If young workers have to bear the emergence of their volatile young human capital over a long horizon which has an even more acute financial pressure to cash out the portfolios when the portfolio values are low then it becomes even more reasonable for younger workers to start with a more conservative portfolio. It also will help shape their risk tolerance so their attitudes about investing and risk bearing are not poisoned by a bad early experience.”
It’s not an orthodox outlook and bonds haven’t played the defensive role that Arnott is discussing, but it’s a valid counter to the case that equity exposure ought to be diminished as one ages. No doubt, my pal, now in his 70s and completely committed to stocks, is going against the grain.
Our articles go deeper into the discussion.
Market Voices and Outlooks
This week Chris Demasi makes the case for not paying attention to short-term falls in markets when great long-term compounders may be had at fair prices. This is not a case for investing in anything other than the Amazons, Microsofts and Alphabets of the world, which likely have strong earnings for years to come. And he does have an Australian company in his portfolio.
Marcus Padley says investors should welcome with open arms the opportunities that accompany fear in the market, and he shares five stages he has recently worked through on his way to deciding how best to respond.
Then Ian Rogers records the demise of Volt Bank, one of the challenger banks assumed to have a better chance of surviving. Volt did not go wrong by bad loans, rather the situation being faced by many startups by virtue of bad loans. It highlights the scale benefits of the majors, and the challenging regulatory environment for new entrants.
Campbell Harvey and Rob Arnott are giving a gloomy view of the US economy. The Fed was “behind the curve” while inflation was likely on the rise, and the result of the Fed’s tardy actions “is very likely to cause an economic recession.”
Michael Collins writes about how privacy-minded regulatory scrutiny is upending the online-ad business, which rests on the collection and distribution of consumer data.
This week the Reserve Bank lifted the cash rate by 0.5% to 1.35%, with the prospect of another rise next month. The decision was backed by high global inflation lifted by supply chain restraints and the war in Ukraine, strong demand for goods, and a tight labour market. But Philip Lowe says he expects inflation to peak late in 2022 and return to the 2–3% range in 2023. His comments seemed a little less stringent on the necessity of future rate increases.
Where Do We Stand Now?
We have shown this ASX chart several times over the last few months and sharp eyed watchers will note a massive drop in cash rate expectations. The market consensus for H2 2023 is 3.4% as of now but sat above 4% in mid June, which we declared as highly improbable. It continues to look too high, needing a chunky 1.55% more hikes for the rest of 2022. Lowe does not care to discover what that would do to property prices.
