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2024 - Portfolio diversification is key

The ‘Santa Claus Rally’ arrived for global share markets as the long-awaited pivot in monetary policy from the US Federal Reserve arrived at its December meeting. Although the Fed kept the federal funds rate target on hold, it flagged the current rate hike cycle was as good as over, with three rate cuts forecast in 2024. Triggered initially by a positive US inflation data print and extended in December by a surprisingly dovish statement by Fed Chair Jerome Powell, bond yields reverted to levels aligned with a ‘soft landing’ scenario.

Growing optimism central banks will cut interest rates sooner and harder in 2024 than previously predicted delivered impressive returns for international shares in the final quarter of 2023. US shares got to within touching distance of their all-time high late in December. The S&P 500 Index ended the month up +4.5% and was the best-performing major share market over the quarter, delivering +11.7%. This late rally helped push the world’s largest market up +26.3% over the year.

In Australia, the S&P/ASX 200 Index enjoyed a very strong rally to end the year, jumping 7.3% in December and +8.4% over the quarter.

Current yield levels and share market multiples imply we are back in the goldilocks zone of a ‘soft landing’. We see that market volatility will continue in 2024 therefore clients need to implement some long-term investing fundamentals:

1) No one can time the market

For most investors, equities should be included as part of their overall portfolio. However, ‘timing the market’ – that is, consistently selling high and buying low, is almost impossible. For that reason, we believe in the old mantra ‘time in the market, not timing the market’. Active fund managers remove the emotion and view volatility as an investment opportunity.

2) Avoid emotion-driven selling

If the market has been performing well for a period of time, a pullback can often trigger an investor to take profits, while a more prolonged correction can lead to emotion-driven selling (or jumping between investments).

However, emotion-driven selling commonly will result in a lower long-term return on your portfolio, because you are then faced with trying to re-enter a rising market. Before making a decision to sell an investment three factors to consider are:

  • What is your investment time horizon? If you are more than a few years away from retirement, or generating a long-term income, a market correction will likely seem like a blip in your investment history in the coming years (remember the Covid crash?).
  • Are you remaining true to the long-term objectives when you established your investment?
  • Fund managers are more adept at counter-emotional investing, as well as understanding the market fundamentals (however, even the best fund managers have periods of short-term underperformance).

 3) Diversification

Trying to predict which asset class – be it shares, cash, fixed interest, or property, will outperform others in any one year can be as difficult as trying to time the market. In the last 15 years, each of these asset classes has had its periods of relative outperformance. If you are sufficiently diversified across the asset classes, your broader investment is hedged against periods of high volatility, and portfolio risk is smoothed out.

WLM can help

If you'd like help with understanding how to meet your financial goals and manage risks in the investment environment, please contact us today.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.

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