The Investment Strategy That Wins Every Time

If my clients are thinking this, rest assured many other investors are having the same thoughts.

The difference is, my clients will be staying put while the rest of the market will likely take their money and race into the sharemarket, chasing growth and yield. This is partly why sharemarkets will eventually become more expensive, otherwise known as the ‘euphoric’ stage of the investment cycle.

We are reaching a point in the market cycle where a number of trends are apparent –

1. Interest rates remain low: While some investors have remained invested in fixed interest since the Global Financial Crisis (GFC) – too nervous to re-enter the sharemarket – sustained low returns are becoming unbearable.

2. Investors are now looking for alternatives: Listed companies such as Woodside Petroleum (9.7% gross yield), NAB (8.4% gross yield) and Telstra (7.7% gross yield) appear to be the answer.

3. Investor fear: After watching the sharemarket re-bound since it hit rock bottom in March 2009, nervous investors are afraid that share prices will take off and leave them behind. I would argue that happened long ago.

My answer to whether clients should be in fixed interest is simply, “yes.”

Regardless of interest rate cycles, fixed interest should remain a fundamental part of a long term investment strategy with an income objective, if appropriate to an individual client. In most cases, investors should have some exposure to the sharemarket in order to maintain a diversified, strategic asset allocation.

On the basis that my clients already have exposure to Australian shares, a general shift out of fixed interest and into shares will be beneficial regardless. This then offsets any reduction in their fixed income return due to lower interest rates. This has been the case over the last two years when interest rates have fallen, but shares have generally advanced.

If there happens to be a shortfall in investment earnings compared with the income needs of the individual, investors should not be afraid to supplement the shortfall by realising some share profits. This is classified as a re-balancing strategy, ensuring that the portfolio is re-structured back to the original asset allocation.

If this investment cycle runs like many others before it, eventually we will see interest rates increase and Australian shares plateau or decline from their high (which is perhaps not yet seen). The timing of this is not known, hence why shifting from one asset class, such as fixed interest, into another, such as Australian shares, is risky.

Deviating away from the asset allocation in order to chase better returns (income or growth) elsewhere is known as ‘timing the market.’ Typically this approach presents significant risk. If the market does not act in the way the investor hoped or expected, their returns will be diminished.

Investment strategies for clients of Hewison Private Wealth are a long term proposition and are designed to achieve a long term objective. An effective asset allocation combats short term issues, such as lower interest rates.

I would always advise investors to speak to a financial adviser before making changes to their investment strategy or portfolio. If you would like further information, please contact Hewison Private Wealth.