State of the Market

There has been a lot of doom and gloom in the media lately about the recent fall in the sharemarket. Headlines such as “ASX loses $56 billion as investors join global stock rout” (The Age – 6 February) and “Aussie Sharemarket Bloodbath” (Herald Sun – 6 February) would have made any investor nervous. However, we should remember, headlines are designed to sell newspapers and rarely look at things in perspective. Using language such as “Bloodbath” and “Rout” certainly doesn’t help anyone make informed investment decisions and, instead, just causes panic.

So let’s look at the facts:

• The ASX200 index (an index of the top 200 shares on the Australian Sharemarket) hit a peak of 6,135 points on January 9^th and on February 2^nd was 6,121 points.
• On February 5^th and 6^th, following leads from Wall Street, at the close of business on February 6^th, the ASX200 dropped to 5,833.
• At the time of my writing this (February 20^th) the ASX200 is trading at 5,921.

Put into percentage terms, the drop from 6,135 to 5,921 is a fall of 3.49%. Obviously, a drop of any kind is not ideal. However, if we look back, we see that the ASX200 was actually trading below our current levels on October 31, 2017.

So, even after early February’s fall, the ASX200 is still at a higher point now than it was less than 4 months ago. Hardly the case for doom and gloom. And that’s just the short term. The 5-year return (to 31 January 2018) for the ASX200 shows growth of 9.1% per annum.

Back in September, Muirfield published an article that outlined our ‘Investment Beliefs’. Given the recent happenings in the market, we feel it is now a good time to revisit some of the beliefs Muirfield relies on when constructing client portfolios.

Muirfield Financial Services Investment Beliefs

The Muirfield Financial Services Investment Committee adheres to a number of ‘Investment beliefs’ to ensure our portfolios are robust. For this update, I believe point 6 is worth focusing on. To read the article in full list, please visit https://www.muirfieldfs.com.au/investment-update-sept-2017/

Muirfield Investment Belief – Point 6 – We do not try and time the market, nor do we overreact to short-term market fluctuations

Almost no one ever accurately picks the top of the market, nor do they predict the bottom.  Generally, people sell based on fear (when the market has already fallen) and buy based on greed (when the market is already growing).

Our philosophy not to time the market was well exemplified when we elected not to take action both after the Brexit vote and after Donald Trump was elected. Despite short-term corrections on both occasions, markets very quickly rebounded and reached new highs.

The chart below shows an example of what could happen by trying to time the market. The chart shows the annual portfolio returns from 1993 to 2017 for the ASX200 under 3 scenarios.

1. If you bought in 1993 and held the investment throughout
2. If you missed the 5 best trading days (by not being invested)
3. If you missed the 30 best trading days (by not being invested)

The total return in the above 3 scenarios is:

1. Holding throughout: 10.01% per annum
2. Missing the 5 best days: 8.83% per annum
3. Missing the 30 best days: 4.81% per annum

As you can see, by missing just the best 5 days of sharemarket performance your return is 1.18% below where it would be if you were fully invested and if you missed the best 30 days the figure is 5.2% lower per annum.

Given no one knows when the market is going to drop and/or when the market is going to rebound we believe the staying invested will leave clients in a far better position than trying to pick the right time to buy and sell.

As always, we will continue to monitor markets on your behalf and contact you if we believe any changes are warranted.