Many asset markets experienced losses over the course of January. However painful this start to 2016 might have been, it does potentially offer investors (at least) two positives.
The first positive depends on whether the market falls reflect a deterioration in the asset’s underlying economic fundamentals. If these fundamentals are (broadly) unchanged then the market fall presents an opportunity to purchase the same asset at a lower price. Boxing Day sales have extended into February in these markets. However, if the underlying fundamentals have worsened then the fall in the asset price might not represent a more attractive entry point than was available in 2015. Many oil-related stocks come to mind in this latter case.
The second positive is relevant to investors who have allocated capital to ‘risk managed’ products. Have these products proved to be as robust as claimed through the real life stress test that was January? As uncomfortable as recent conditions might have been, these falls are still relatively small when compared with more painful downturns such as 2001-3 and 2007-9. This real life stress test represents (at least) a second bite at this particular cherry, following on from events related to Greece in mid-2015. If the product has not held up to the extent claimed during the sales process, perhaps it’s time to make a change before the risk management shortcomings have material consequences?
Benjamin Graham held that “in the short run, the market is a voting machine but in the long run, it is a weighing machine”. Sentiments can swing wildly in these short-term popularity contests but attractive openings might also emerge. The polls currently do not make pretty reading but why not peer through the gloom to identify if opportunities are being created?
Ralph’s observations don’t take us very far, do they?
Yes, there may be buying opportunities to add future income at lower prices, but only if you have appointed investment managers who share that kind of thinking. Many seem to me to be index followers for the most part.
To see buying opportunities you need to have access to capital – if it’s new capital from
savers (or employers) that still to be allocated to what Ralph refers to as “risk managed” products (I hesitate to use the word “investments” about such products).
If it’s existing capital to be reallocated, where does that come from? By selling longer dated gilts? By selling income generating assets (BP may be an example of Ralph’s oil-related stocks, but it’s now lost 25% over the past year, which is not good in any portfolio) to buy future income at lower prices?
The disciplines to buy/avoid, hold/sell, sell/reinvest are seldom demonstrated in a good way by those afore-mentioned index followers.
Does Ralph have any further suggestions for us all?
My personal view is the indices should be binned and the fund managers held to account instead on their income generated and their allocations of capital, but few of the so-called investment consultants out there seem to think that way. As for more traditional stockbrokers? Yes, some of them do, if you can still find them.
…. still tend to be allocated …. to “risk managed” products.
Some of these “products” are sold on their “low volatility” (eg half of equity market volatility) with “equity-like” returns. In practice, many of these (eg “diversified growth funds”) have delivered low volatility with low returns.
Someone once said you can’t pay pensions with relative returns, and I’d suggest the same may be true in most cases with “low volatility” returns, unless you have unlimited capital to waste.