The holiday season is here and we’re starting to see the usual round of articles making bold predictions about what’s in store for investors in 2016.
We’ll focus on something that’s more useful for long-term investing results: three key investing lessons from 2015.
Lesson one: The importance of international
Many Australian investors have portfolios consisting largely of ASX listed shares. However, around 98 per cent of the world’s share investment opportunities lie offshore. If everything in your portfolio has an Australian focus, you’re missing out on a huge number of interesting companies, industries and locations.
Equally noteworthy, Australia’s share market is concentrated in a few sectors – especially financials, resources and property – and they’re all heavily exposed to the Australian economy. As a result, a portfolio of large cap ASX stocks, or an exchange traded fund (ETF) based on the broad share market indices, tends to lack diversification.
Going international means you can invest in a much larger opportunity set – increasing your potential returns – plus it means your portfolio gets the added diversification of:
- owning shares in companies that aren’t heavily exposed to the Australian economy; and
- benefitting from falls in the Australian dollar (which tends to happen when the Australian economy weakens).
In the past year (to 30 November) the Vanguard MSCI Index International Shares ETF (ASX Code: VGS) provided a return to investors of almost 18 per cent, outperforming the Vanguard Australian Shares Index ETF (ASX Code: VAS) by 16 per cent. In the last six months, while VAS has lost 8 per cent, VGS has managed to produce positive performance (around 2 per cent).
An investor with a 50/50 mix of both ETFs would have generated a return for the year of around 10 per cent, and their portfolio wouldn’t have nosedived as sharply in the last six months (compared to someone investing in VAS or the broad Australian share market).
Better returns and sleeping easier at night. That’s the benefit of investing part of your portfolio internationally and it was proven again in 2015.
Lesson: Investing internationally can provide greater opportunities, returns and diversification.
Lesson 2: The banks aren’t that safe
A contributor to the lacklustre Australian share market performance over the past year has been the big four banks, which make up about a quarter of the ASX 200. While the CBA and WBC share prices have ended the year (to 30 November) close to where they started, NAB and ANZ have fallen substantially (see Chart 1).
What’s more concerning though – especially to those who’ve invested in the banks for yield and safety – are the intra-year moves. Back in March, CBA traded at over $96. In October, the CBA share price was barely over $70 – a 27 per cent loss of value in a little over six months (ignoring dividends). While the banks had to do fresh share issues that weighed on their share prices, the fact is that nothing particularly bad happened during this period.
If you’ve invested in banks for the dividend yield, the last year has provided a taste of how much capital can be wiped out if their balance sheets take a hit due to a recession or a downturn in the property market. Don’t forget also that the broad Australian share market ETFs, and many managed funds, have about a quarter of their portfolio invested in the big four banks and around half invested in financials (including real estate). If things get tough for the banks, they’ll get tough many ETFs and managed funds.
Lesson: Bank shares aren’t necessarily a safe investment.
Lesson 3: Cash isn’t king for the conservative investor
Cash is good when you have a short investment horizon and for grabbing a bargain when shopping. But it’s no good as a long-term investment strategy, no matter how conservative you are.
In recent years we’ve seen falling bank deposit and term deposit rates and we saw that again in 2015. Back in 2009 your author was able to open up a five year term deposit with Westpac that paid 8 per cent per annum. Right now, the best available is 3.5 per cent. On online savings accounts, base rates are barely more than 2 per cent – hardly enough to keep up with inflation.
It’s why it’s so important for all investors (including the most conservative) to have a diversified portfolio, including allocations to assets such as shares (both domestic and international), property and infrastructure. While cash and term deposit rates have plummeted since 2009, each of these asset classes have provided substantial real returns to investors.
By way of example, the Perpetual Wholesale Diversified Growth Fund – a managed fund that invests across all these asset classes (plus fixed interest and cash) – has returned 8 per cent a year to investors over the last seven years and 8.7 per cent a year over the last five. Lower returns on its cash holdings have been compensated for by stronger returns in other asset classes (especially international shares).
Cash isn’t conservative since it puts all your eggs in one basket that’s heavily exposed to central bank policy and inflation. The lesson that continued to be emphasised in 2015 is that a diversified portfolio is a much better option for conservative investors.
Lesson: Conservative means investing in a diversified portfolio of assets, not investing largely in one asset class, even cash. The purchasing power of cash tends to be eroded in the long-term by inflation.
It’s never different
You’ve probably heard the expression ‘this time it’s different’ but in the world of investing it rarely is. The year 2015 reminded us of a number of lessons crucial for long-term investing success.
Richard Livingston and Annika Bradley represent the online financial advice service Eviser (www.eviser.com.au). This article contains general investment advice only (under AFSL 469838). This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.