|
|
|
|
|
 INVESTING |
|
Smart Investing
Experience tunes in to the market blues
 August 25, 2007
Robin Bowerman
Bob Dylan is the voice of experience.
And a healthy section of the baby boomer generation can relate when he sings:
I was so much older then
I’m younger than that now
Dylan, touring Australia on a concert tour this month, has never been one to conform to stereotypes and his (largely) baby boomer audience in Melbourne certainly had an empathetic chuckle as the 66-year-old belted out the chorus of his Back Pages song.
Imagine if you could rewind the past 30 years and could reverse one investment decision made with the full flush of youthful confidence - what would it be?
Overconfidence is one of the human behaviour traits that can cost us dearly as investors. Overconfidence is certainly not the exclusive preserve of the young but our experiences as investors do tend to make us less certain of our ground – when today’s certain bet turns into tomorrow’s dog the scars take some time to heal.
This is what makes the market volatility of the past month an interesting time. Older heads have been through it before but there is a cohort of investors who have probably not experienced this type of volatility because they have only been actively involved in investing for the past five to seven years – and since 2002 it has pretty much been a one-way street heading north.
Now no-one enjoys markets shedding value but context rather than short-term movements is what is important so in Bob Dylan’s terms it may be a good time to have a younger perspective.
Growth assets are volatile – prices can fluctuate wildly in the short-term – but that is the nature of the investment. There is risk involved and investors should expect to be paid a premium for the amount of risk they are taking. But the risks are sizeable. In any one year the difference between the best performing asset class and the worst can be up to 50%.
A simple look at the range of movement on the Australian sharemarket since 1950 provides one valuable reference point.
In any one year from 1950 to 2007 the Australian share market could have been up 80% or lost 40%. That is a very wide range of possible outcomes over a 12 month period. But look over a five year period and the volatility range narrows to a possible 40% increase or 10% fall. Look over a longer time frame like 20 years and the difference narrows again – the volatility range is between a rise of 10% to 20%.
This of course is measuring the broad market return – the risk factors rise to another level when you take into account specific stock risk that is always present when a portfolio is not well diversified.
So the recent volatility on fixed interest and share markets is a long way from extraordinary. It is a healthy reminder that overconfidence can trap you into ignoring some of the basic – albeit at times unfashionable – rules of investing.
It is a time for a back to basics approach: diversifying your risk across a range of asset classes, keeping costs low and staying invested for the long-term.
Experienced investors also have reasonable expectations – it’s what keeps them young at heart.
More articles from this week's CompareShares newsletter:
Markets: Trouble in China has investors guessing
Self-managed super: Old strategies are now even better
Sustainable investing: Climate change and consumers: hot air or real deal?
Fundamental analysis: Chief ratios for stock hunters - part 2
Resident Trader: Trading CFDs in a gapping market
Smart Investing: Experience tunes in to the market blues
Analyst report: Retail in a tailspin?
US markets: Long valuation waves and market fear
Sub-prime: Sub-prime what?
Ask the expert: Uncovering the average forex trader
Stock of the week: Mincor shares suffer from nickel freefall
CFDs: Pyramiding provides windfall to CFD traders
CompareShares Reader: Cloud gazing or tea leaves?
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
 Email to a friend
 Print this article
|
|
