Experienced investors preparing for a wild 2022
January was a tough month for financial markets, with concerns that rising inflation would lead to rising interest rates (and potentially lower equity prices). In January, equity markets started to take notice of this risk. The ASX 200 Index fell 6.4%, the ASX Small Ords fell 9%, and the tech-heavy NASDAQ fell 9% in the USA.
Economic data is increasingly pointing to higher inflation in many parts of the world. The prolonged inflationary pressure from COVID disruption, a strong consumer, and tightening labour markets have convinced the US Federal Reserve to begin raising interest rates (likely next month). The principal debate is whether the first hike is 25 or 50 basis points. Some central banks, such as the Reserve Bank of Australia (RBA), are holding onto the belief that inflation will moderate, even as the cost of food, travel, petrol and construction continues to rise. If the RBA is wrong, it risks having to raise the cash rate more aggressively later this year, potentially hurting the economy and the housing market. Many of these cyclical risks have been reflected in the sell-off in equities in January, with investors selling shares of cash burning companies (growth stocks) and replacing these with earners (value stocks).If you listen to the renowned value investor and GMO co-founder, Jeremy Grantham. In that case, his position is that the US market is now in the fourth superbubble of the last hundred years.
In his recent article, Grantham states, "Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle. The checklist for a superbubble running through its phases is now complete, and the wild rumpus can begin any time". Grantham predicts a drop of almost 50% in US equity markets.
The point of this article is to ensure, firstly, you know the risk you are taking within your personal or superannuation portfolio. Secondly, it is crucial to be invested in portfolios that are actively managed to target risk/returns relative to the current market conditions, risks and opportunities.
What was discovered during the Global Financial Crisis more than a decade ago was that the traditional superannuation portfolio (default option) may have exposed investors to more risk than was necessary.
The vast majority of retail super and investment portfolios are made up of a relatively narrow range of asset classes that are expected to adhere to the performance of historical norms rather than what is likely to occur in the foreseeable future. Furthermore, they are constructed according to the investor's risk appetite rather than their financial goals.
Specific actively managed portfolios are made up of assets that target risk and return outcomes using a forward view and a more comprehensive range of assets. The approach seeks to balance opportunities that exist even within declining markets, along with assets that mitigate risk.
Now is a very prudent time to talk to WLM about your financial goals.
WLM can help
Don’t have a plan? WLM is here to help you to secure your financial future. If you’d like help with setting your financial goals or any further information, 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.
