‘7-point plan’ for staying patient: Get real … you MUST make the mental adjustment’

Last month, still in the throes of Brexit, we discussed separating noise from substance where it comes to financial news headlines. News of late - be it in the political or economic arena - has been rather downbeat. Politics aside, economic growth outlook in both developed and emerging economies is uninspiring. Private sector revenues are shrinking. Government bond yields are at record lows (for example, the US 10-year bond yield dipped below 1.4% earlier in July). Central Banks continue to pump liquidity into the financial system trying to jump start economic activity, but to no avail. There is no inflation to show for it, other than in stretched share and bond valuations. As an investor, it is easy to feel worried, and unsure of the next steps.

Our Step 2 of the 7-point plan for staying patient calls on investors to recognise returns in the near future are very likely to be lower than in the recent past. ‘Get real…you MUST make the mental adjustment’ means we need to lower our expectations and be ready for a bumpy ride. Behavioural economists would say our brains are wired to preference the most recent experiences in forming expectations of the future. With the equity ‘bull run’ of 2012-2014, and returns for diversified portfolios reaching into high teens (for example, median 61-80% growth asset fund performance was 14% in 2012 and 18% in 2013), it is easy to forget markets don’t always go up, and even a well-constructed portfolio can struggle to achieve its objectives.

We are not saying it is all doom and gloom, but in an environment where equity valuations are stretched, and therefore have little upside, bond yields are very low, and term deposits deliver on average only 2.5%, every basis point of performance counts. The long-term nature of the challenges confronting investors in their pursuit of reliable sources of return means this is not just a rough patch. The low return high volatility environment can linger for some time, and inaction is not a very good strategy for navigating through it.

So what should be done? Initially, lots of proactive client discussions to recognise they are likely to be more worried than seasoned investment professionals. Stay focused on their strategic investment plans and recognise a mental adjustment to a lower return outlook should be made, at least for a period of time. Then, access the breadth of resources available to your larger investment partners. They should be well placed to help you seek out pockets of value in the financial markets that would give your portfolios the best chance of success. For Russell Investments, it is all about a fresher, more intelligent approach to diversification. This will be the subject of the next article. So stay tuned.

This article forms part of the 7-point plan for staying patient series.

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