Has the next bull market already started?
Our Investment Committee recently published the minutes of their latest meeting held on 23rd June, 2023. Reading the contents made me ponder on whether the next significant uplift in share and asset prices has already begun?
I have to admit that it wasn't just the very comprehensive information contained in the minutes that fuelled this question, but some reports that I've been getting back from our Financial Planning team. They have recently been fielding questions from a small number of clients who are pushing them to change strategy, to sell 'poorly-performing' investments, and to move assets into cash by selling and putting the money on deposit 'until things settle down'.
Now it would be foolish to take these instances of concern as authentic evidence of a strong upward turn in markets. It's true that investment markets have struggled to provide decent returns when measured over the last couple of years, and its not unreasonable for some clients - especially those who are newer to our processes and philosophy - to get edgy about the future. But it's also true that every time these calls have started to happen in previous downturns (and I've been around long enough to experience a few of them) it's invariably the harbinger of better times just around the corner.
That's because the biggest single factor in achieving satisfactory investment returns is the behaviour of the investor, and selling out just as markets begin to turn is a common trait of undisciplined investors. However it's not a behaviour that generates good returns. Quite the opposite.
Here's an extract from the Investment Committee minutes:
The returns achieved by our portfolios.... over the last 5 years were in fact significantly higher than the average performance of our peers. Our rebalancing process means assets holding their value better are being trimmed or sold and assets trading below their intrinsic value are being bought with the proceeds. We have seen time and time again that this process adds a significant amount to longer term returns when asset prices inevitably revert to mean/fair value.
This process requires a high degree of objective thinking, mental fortitude and patience, as it is
counter-intuitive to human nature. This helps explain why advised clients tend to outperform do-it-yourself investors, as the value of staying the course with a well thought out investment strategy is often worth more than the strategy itself, in terms of the returns achieved over the longer term.
When investors act on feelings rather than logic, value is destroyed. For example, we recently had discussions with a client who wanted to sell the 'worst performers' (I use italics because there is more than one way to measure performance) in his portfolio and put the proceeds on cash deposit. The share price of one of the assets in question had fallen a long way from its previous high point. However we could see that the net asset value (the true measure of worth) had remained high, and it was clear to us that this was a buying opportunity, not a selling signal. At its then price, the shares were generating annual income of over 9% p.a., with lots of potential for growth. Shortly afterwards an offer was made for the company that generated a 50% gain in the share price, vindicating our advice.
The seeds of the next bull market are already starting to flourish. Inflation is coming under control, energy prices have fallen dramatically and food prices will also fall over the next few months, and fund managers are starting to raise their expectations for the returns on investments, especially in the UK, as they rebound from today's bargain basement levels.
The reality is that no-one knows what will happen tomorrow, next week or next year in economics, politics, the weather or share prices. What we can say is that most of the dire predictions made about all of these things turn out to be unfounded, and much of the fear is deliberately created in order to feed the voracious news media with compelling content. Acting on this torrent of opinion and misinformation is what accounts for the 'behaviour gap'. Read more about how investors destroy their own wealth here.
It is still our fervent belief, borne out by strong evidence as well as our own decades of experience, that putting together a diverse portfolio of good quality investment assets based on a carefully thought-through method and rebalanced periodically, remains the best solution to the challenge of achieving solid long-term returns with minimum risk to your capital.
Don't be seduced into thinking otherwise.
Andy Jervis, Chartered FCSI (Financial Planning), Certified Financial Planner
If you would like to read a copy of the minutes of our latest Investment Committee meeting held on 23rd June 2023 you can download one here.
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