Sift information and avoid the angst

In early February, we saw a pullback in sharemarkets around the world. The Australian market (ASX 200) had not long before jumped the 6000 mark. The US market was humming like a new Lamborghini.

Then, smack! The market fell and many were spooked.

On Monday, February 5, the US sharemarket as measured by the Dow Jones Index had its biggest-ever one day points fall.

Naturally the media had a field day doing their very best to cause heartache and pain to all Australian investors, which is the majority of our adult population. The thing is, the US sharemarket, is at an all-time high, so talking about a fall measured in points is grossly misleading, particularly when comparing to past falls.

To put it in perspective, the US market fell 4 per cent on that day in February and there have been 37 larger one day percentage falls since 1980.

Even more to the point, in 1987 the market fell 508 points which was a 22.6 per cent drop on one day. With the Dow Jones Index now around 25,000, a 1000 point fall as experienced last month is only 4 per cent of the market.

The chart shows the Dow Jones Index over the past 12 months. The falls in February basically took back all of the gains since December, and the Index still rose substantially over the 12 months taking the recent setback into account.

More broadly speaking, global shares rose 19 per cent in 2017, and while the recent volatility took some of that back, still substantially better returns than bank accounts or term deposits.

I was at a seminar recently (we financial planners have to spend a lot of time increasing our knowledge and keeping up to date with market and legislative changes), where one of the PIMCO executives was talking about interest rates and their view is that in Australia, our cash rate, which is currently 1.5 per cent, will probably only increase to 3 percent or slightly more in the medium term.

That means cash investments will continue to erode your capital because, for by far the majority of people, the interest income will be inadequate. By the way PIMCO is one of the largest and most successful Fixed Interest managers in the world.

I spend considerable time in the early meetings with new clients educating them about markets, volatility, income growth, tax, inflation, diversification and the list goes on. I explain to them that for most Australians their view of the sharemarket is akin to having a bet on the TAB, mostly now done on a smart phone.

So what is this filter that I mentioned?

The way I explain is like this: Today we have talked about the facts of investing, it is important to know that in our journey ahead, you will hear, watch and read many things that will possibly cause you angst.

Firstly, the media love to promote bad news because that gets people reading, listening and watching. Quite often the facts are not correct or there is an overlay of considerable emotion.

A case in point, in June 1998, the Financial Review (Australia’s most credible financial publication) had a front page headline that read, “The $52 billion stock market wipe out.”

The market had fallen 1.5 per cent the previous day, slightly significant, but certainly not catastrophic. Wipe out means total obliteration, gone, not here today.

The market continued to exist and has done comfortably well ever since. That headline, is misleading and, in fact, a lie. It is these uninformed or maybe intended headlines or media presentations that cause investors to stress unnecessarily.

Secondly, we all communicate with other people and quite often at the club, a friend’s house or a barbecue.

Someone we know and trust might tell us something that isn’t accurate. Maybe they heard it on the radio or someone else told them.

They have good intentions but it can influence your way of thinking which might not be logical.

As Warren Buffet says, “the most important quality for an investor is temperament, not intellect.”

Or put another way in one of his most famous quotes, “be fearful when others are greedy and be greedy when others are fearful.”

In other words, the successful investor does the opposite to what most people are doing.

This article was written on 14 February. At that time I had no idea where the market might move between then and when you read this.

 Brian Mooney is a Certified Financial Planner and Authorised Representative of Logiro. Email: brianm@logiro.com