Welcome to the third edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitor the investment markets and aim to keep our valued clients regularly informed and updated.
Despite wild fluctuations in investment markets, almost all asset classes ended the March quarter in positive territory. The year started with a strong rally in shares and fixed interest (bonds) markets in January, encouraged by signs of inflation easing and the prospect of a pause or end to central bank interest rate hikes. The narrative shifted negatively in February, as shares and bonds were weighed down by robust economic data and forced investors to reassess interest rate expectations.
In March, volatility flared again with the collapse of several United States (US) regional banks and the forced sale of Credit Suisse to its Swiss rival, UBS, which elicited rapid support measures and a fall in bond yields. This fall in bond yields led to a rally in interest rate sensitive growth shares, at the expense of value shares which were also weighed down by the banking sector and ended the quarter only marginally up. Longer-dated government bonds rallied, benefitting from flight-to-safety flows. All market sectors then regained composure and rallied into the end of the month following coordinated support from central banks and regulators.
Market Volatility – A Normal Part Of Long-Term Investing
Market volatility is used to describe when a market experiences a period of unpredictable and sometimes sharp price fluctuations (both falling and rising). Although it is unsettling to see the value of investments fall, it is essential to know that market volatility is normal in investing. Eliminating market volatility is not possible without removing risk, and risk is the price investors pay for higher returns over the long term.
The Upside – Markets Can Recover Quickly
Market volatility can sometimes be considered a good thing. Historically, significant market downturns have presented an excellent opportunity to invest in shares at discounted valuations and generate higher returns in subsequent years. Shares consistently bottom and recover quickly when markets are most negative because investors often overreact and push prices to levels well below what their fundamentals would suggest. Those who sell during a market downturn effectively transfer wealth to those who buy and stay the course.
The chart below shows every significant fall in the US share market (S&P 500 Index) of more than -25% over the past 70 years and how quickly returns can rebound and move higher. One year after a 25% decline in the market, investors experienced an average gain of 17%. Three years later, the market was, on average 37% higher, and ten years later, the market was a massive 214% higher on average.
Markets go up over the long term, but never in a straight line. Short-term market volatility can cause markets to fall regularly and often faster than they rise. One of the benefits of taking a long-term approach to investing is that time is on an investor’s side. Disciplined long-term investors can ride out short-term market volatility knowing that the market has always pushed higher over the long term. Sticking to a long-term investment plan through market events and cycles and remaining invested in growth assets like shares gives investors the best chance of achieving their goals and objectives.
AW Investment Philosophy
An investment philosophy is a set of beliefs and principles that guide an investor’s decision-making process. It is not a narrow set of rules or laws, but more a set of guidelines and strategies. The AW investment philosophy is as follows:
- Higher Returns requires acceptance of higher risk – AW believes that over time investors receive a higher return for bearing risk – the higher the allocation to growth assets such as equities and property, the higher the expected return over the long-run.
- Diversification – Diversification increases the predictability of the portfolios and provides increased probability of reaching the investment objectives. AW believes that diversification is the most important risk management tool.
- Valuation is important – Markets can experience inefficiency and mis-pricing. AW adopts a dynamic asset allocation approach that considers the starting valuation of asset classes and sub-asset classes and believes that valuation is an essential element to capital preservation over reasonable timeframes.
- Take an evidence based approach – AW is an investor rather than a speculator and believes that making investment decisions based on fundamental analysis and empirical evidence rather than short term noise delivers better long term investment outcomes.
Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.