Markets have been showing plenty of signs of pressure and pessimism thrives, and that’s usually a good start for hunting value….
The future is unknown, and that’s ok. An uncertain future is a fair price of admission to invest in markets, and access the magic of compound earnings.
Rather than think about markets as providing information, i.e., the markets are going down therefore I need to get out, think about markets as offering a price. The ASX 200 is approximately [ ] % undervalued on average as of [day] close. Only twice in the last 15 years has the discount been greater; once in the GFC and more recently in the brief COVID crash.
In times of volatility—no matter the kind—knowledge and fundamentals are comforting. Now is a good time to take stock of the market, and here’s what iInvest came up with to help make sense of it. We hope this provides a useful anchor for emotions and actions should markets get better (or worse).
1. Revisit investment goals
- What’s really important?
- What are the constraints?
- What is non-negotiable?
- What is the appropriate risk tolerance?
2. Revisit savings
- For those still in the asset accumulation phase, does it make sense to increase the level of investment given the reduction in portfolio values, and likely better future returns given markets have fallen?
- Saving and investing more when portfolio values are down can provide a valuable counter-cyclical bias to wealth accumulation.
- Is it possible to weather any volatility and uncertainty knowing you can work longer if needed?
3. Asset allocation
- What is appropriate given your personal goals and risk budget? It is worthwhile thinking about the appropriate asset allocation settings through the cycle as well. Here, our overall Price/Fair Value can be a useful tool to prompt countercyclical behaviour. If our price/fair value metric is anything to go by, now is likely a good time to be maintaining or raising exposure to equities, which is a risker asset class, rather than cutting.
- Increasing exposure to riskier asset classes when times are good, and optimism abounds—such as 6–12 months ago—is also likely to detract from longer-term returns.
4. Stay invested
- Markets are cyclical and will have ups and downs. Invest accordingly (it’s never too late to find solid foundations).
- Going to cash when sentiment is depressed is likely to drag on longer-term returns.
5. Behave countercyclically
- Plan to do this where possible. It may feel like the horse has bolted now, however, markets will continue to have ups and downs. Prepare accordingly.
- Even if it feels like you could’ve done better in hindsight—hindsight’s always 20/20—think about how you might play the next cycle. One need not have all the answers first go around but taking those learnings and experiences and incorporating them into your philosophy is key to future success.
- Predicting specific future cycles is hard but it’s possible to spot market optimism and pessimism and act accordingly. The Buffett quote—”be fearful when others are greedy and greedy when others are fearful applies here”.
6. The selloff may provide opportunities
- Did irrational optimism creep into your portfolio? Did the rising price of the securities hold more appeal than the fundamentals of the underlying assets itself?
- Is there a window for selling some holdings to reinvest in better value/higher quality opportunities? Not to sell because a certain security is down but it’s now clear the fundamentals were not what you hoped.
7. Invest in you!
- This one we can all control. Human capital is the value of our future work, the product of time and labour rate. Education, training and experience are all ways to improve it.
- Whatever we can do to further our human capital value has the potential to compound and enhance our financial wealth longer-term.
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