2009 - Gone but not forgotten
17 December 2009
By Tim Hewson
My mother taught me that what we survive makes us stronger.
So whilst 2009 might conjure up some bitter memories for some, there are also some very important lessons in sound portfolio management that can be learned by us all when looking forward into 2010.
A year in review
There was certainly no shortage of excitement this year and the Australian managed funds industry was truly tested for the first time in over 50 years. Despite this, recent findings of the 2009 World Economic Forum Financial Development Report stated that Australia has demonstrated extraordinary resilience and is ranked the number two financial centre in the world.
In the words of Alan Kay, "the only way you can predict the future is to build it". So in the aftermath of the GFC came a flurry of regulatory and fiduciary reviews designed to reform and future-proof the Australian financial services industry from another global meltdown.
These include Australia's Future Taxation System Review (Henry Review), the Super System Review (Cooper Review), the Parliamentary Joint Committee Inquiry into Corporate Collapses and Financial Services and Products (Ripoll Inquiry), the Federal Budget changes to Super, the release of IFSA Super Member Charter on the remuneration of financial planners as well as the release of various industry discussion papers such as APRA's review of APS 210 and their prudential approach to ADI liquidity risk management.
So greater control, consistency, transparency and choice for the consumer is the name of the game, and if the industry doesn't bring about reform themselves, the Government will legislate it.
So at the very least, the most positive outcome from the GFC has been its role as a catalyst for initiating a review of industry regulation and its role in safeguarding us as financial consumers and our position amongst the world's leading developed economies.
A fresh approach to 2010
With the end of the GFC now barely nine months behind us, many are gearing up for the challenges of 2010 with a sense of cautious optimism and the prospect of a fresh start.
Signs of recovery and a light at the end of a very long tunnel continue to feed through Australia's economic data.
But it's just as important that we remember that it was just over 12 months ago in October 2008 that the GFC became official. Then, Lehmann Brothers collapsed, along with house prices, retail sales, business and consumer confidence and employment. Now, just fourteen months on, it would appear that much of the economic misery has gone and been forgotten. Or has it?
Recent events in Dubai serve as a vicious reminder of how long-term credit binges can and will cause the significant hang-over effects within the global economy. But, whilst many economists self-servingly focus on green shoots, many still remember the effects of the economic and social disruption caused by the GFC - recent market volatility continues to serve as a nasty reminder.
So what have we learned? Well the key themes for 2010 are education, regulation, diversification and trust.
A slow recovery for Europe and US with interest rates tipped to remain low for a prolonged period of time should serves as a suitable reminder of where we have come from. More importantly, the very real risk of a 'w-shaped recovery' is still on the radar of many economists as they firmly believe we are not out of the woods yet.
Despite this, the IFSA CoreData Investor Confidence Sentiment Index for September 2009 recently released its third consecutive quarter of increasing investor confidence results. And with the majority of households being optimistic about the recovery and the opportunity to make money over the coming quarter, it begs the question... have we forgotten the lessons of the recent past?
What goes up, must come down
A review of the index performance of the major asset classes provides us with a reminder of just how quickly things can change. For example, it was only last year that Australian Fixed Interest was the best performing asset class for the first time since 1992. By contrast, there is also a notable recovery in the performance of Australian Equity in the twelve months to 31 October 2009 compared to the -38.30% of 2008.
Source: Colonial First State Investments Limited effective 31 October 2009.Investment Tips for 2010
So what have we learned from our experience of the past year that can help us to better manage our portfolios in 2010?
- An appropriate and well defined long-term investment strategy is the key to surviving periods of interim market tolerance. Invest through investment cycles. Know your tolerance for risk, keep your eyes on your longer-term objective and avoid succumbing to short-termism.
- Do your research! Make sure you understand the risks of what you are investing in. If you can't explain it to someone else, then you shouldn't be investing in it.
- Diversification will protect your portfolio from downside volatility.
- Dollar cost averaging works. It's a basic investment strategy, but has proved useful for anyone who implemented it over the past two years.
- Timing your entry and exit to and from the market is a fool's game. For an investor moving in and out of the S&P/ASX All Ordinaries Accumulation Index over the past 10 years to 31 October 2009, if you missed out on the best 30 days performance (just 3 days each year), you would have reduced your annualised return by 11.49%pa from 9.4%pa to -2.09%pa.
- Past performance is not a guide for future performance, but it will give you an accurate basis for comparison of fund managers and to establish whether they have achieved their investment objective.
Malcolm X once said
"the future belongs to those who prepare for it today". So get cracking on setting your 2010 financial resolutions now. Why put off until tomorrow what can be done today?
Happier investing in 2010!
Important note: Before making any financial or strategic decision you should obtain professional advice which takes into account your personal circumstances and objectives. This article is not professional advice and does not take into account your personal circumstances or objectives.
The views and opinions expressed in this article do not necessarily represent the views and opinions of Rabobank Australia Limited. The persons involved in its preparation and distribution and their related persons disclaim all liability for any loss or damage suffered due to the use or otherwise of the information.
