Investing requires optimism. Those who invest do so because they believe that the price of their assets will grow and be worth more in the future than they are now. In the fabric of this optimism is a belief in human enterprise and endeavour and the ability of people as individuals, and collectively as societies and markets, to work through problems and challenges and continue to grow and progress. Investing is also always about time horizons. It means accepting that growth can take time and that investment cycles will contain some years, sometimes multiple recurring years, where asset prices don’t move, or even decline in value, before a surge takes them upwards and onwards again.

The great challenge is not knowing what comes next. Periods of strong returns are often followed by periods of more subdued results. As an investment philosophy, WSC Group Private Wealth believe that making decisions about allocating your investments between asset classes should be made within a framework that is considered strategically. That is, it is not made based on what is the best performing asset class this year or last year, it is not driven by FOMO (fear of missing out on returns from surging markets). It results from an agreed “risk profile” that allocates funds been asset classes and then “rebalances” at an annual review.

With our share market hovering around all-time highs many people conclude that risks are low, and markets are strong. Fear of missing out on the 23.40% gain achieved in 2019 is driving more and more investors to enter share markets that appear to offer returns so much stronger than our meagre term deposit rates of 1.60% to 1.80% p.a. for a 6-month term.

It is important to remember a truth of investment returns that the higher the price you pay, the lower your future return will be. Consequently, as markets register new all-time highs, they become riskier, not safer. We therefore reduce our expectations and projections of forward-looking returns.

Heightened risk doesn’t mean we shouldn’t invest. People have invested for millennia. An ancient proverb from the book of Ecclesiastes (11:4) uses an agricultural metaphor to note “Whoever watches the wind will not plant; whoever looks at the clouds will not reap”. There is no perfect time to invest and taking no risk will result in no return.

However, assessing surging asset prices does mean we should rigorously consider our risk appetite, our time frame, and our ability to recover from market falls. We should invest with a sober assessment of risk rather than an innocent fixation on the returns from the recent past.

WSC Private Wealth don’t believe in the ability of most investors to consistently time the highs and lows of markets and speculate on trading in and out of markets. We do believe in increasing caution and patience as markets rise and increasing allocations to long-term investments as markets fall. It’s about boring money and exciting life. Not the other way around.

The great investment challenge of our time is the historically low interest rates that have been forced upon us by central banks, and our own Reserve Bank. The maths of asset valuation means that as the “discount rate” (interest rate) falls the implied value of the asset rises. This equation applies equally to shares and property.

Investors move away from lower yielding interest rate investments to higher yielding assets like shares that provide dividends, or properties that provide rent.

If low interest rates lead markets to higher valuations, then it is possible for consistently low rates to support these prices for an ongoing period. The opposite is also true. If future interest rates move higher, the valuation equation changes, and the theoretical value of assets is reduced. It is this possibility that suggests we should remain cautious and not over-allocate to shares just because markets are strong and interest rates are low.

The famous quote attributed to the great investor Warrant Buffet remains prudent. When it comes to investments, be fearful when others are greedy and greedy when others are fearful.

WSC Group - Private Wealth Pty Ltd ACN 632 928 691 is an authorised representative #1275915 of Merit Wealth Pty Ltd ABN 89 125 557 002. General Advice Warning: This advice may not be suitable to you because contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.