Goals Based Advice is just the first step in Goals Based Investing.
Equity markets have bounced well over 20% since the lows just over a month ago, so technically we are already in a new bull market.
With peak new cases now behind us, the economy agitating to reopen and governments starting to ease restrictions, is the massive fiscal and monetary stimulus in the pipes about to prove the bulls spectacularly right?
During market downturns, investors are commonly advised to stick with their strategic asset allocation rather than crystalise their losses in the hope that the downturn will be short lived and that returns will revert to historical norms.
Superannuation and pension accounts form a significant portion of most investor's investments. Yet many advisers and investors alike struggle to solve the strategic issues that affect this segment. Two specific challenges are sequencing risk and, as lifespans increase and people’s health improves, the conundrum of longevity risk.
Sequencing risk is one of the most important things to consider when constructing your investment portfolio.
The premise of Goals Based Investing is to focus each investment portfolio on specific individual personal and lifestyle goals. Those goals inform the right timeframe, risk and return parameters, which in turn determine the best asset allocation and investment mix. Goals can be short-term, such as taking a holiday, medium-term, such as renovating or paying school fees, and long-term, such as saving for retirement.
Let us examine what happens when the clear and present danger from the coronavirus meets the global asset bubble, your portfolio and the industry standard investment approach. This is no small issue because – contrary to a market consensus – the coronavirus (COVID-19) is actually a real threat to complacent equity markets and client portfolios. It is a global health pandemic which requires active management in the real world, and which should also be risk managed by your adviser or super fund. The coronavirus and its real-world management should not simply be dismissed as just another flu, and could even be the catalyst which bursts the global asset bubble.
Many portfolios traditionally use government bonds and cash to be defensive. With bond rates and cash rates now at historic lows, there is no longer much yield or return that one can expect from a long-term investment in these. Furthermore, the likelihood of losing money over time in real terms is now higher, given it now requires little inflation to overcome the mediocre expected return from historically low yields. Unfortunately, such a situation reflects lacklustre economies and is the end result of market returns being pulled forward by government intervention. Traditional defensive investments have simply become a tool of government policy as governments attempt to prolong an ‘artificial’ economic expansion.
The market environment has changed. Yet most advisers’ portfolios have not. They may want to adapt fast if they want their clients better suited to the new market environment - assuming they’re not going to unduly suffer more weak returns going forward as they did in 2018.
There is (arguably of course) a bubble in nearly every mainstream asset class. A bubble in debt markets, a bubble in property, a bubble in equity, a bubble in private assets, and a bubble in the way portfolios are managed. This is an artificially created result of easy monetary and fiscal policies that have been employed by global governments for many years now in an effort to boost asset prices (successfully). These policies appear unsustainable in the long term. If something can’t be sustained, then eventually it won’t be…