The start to the new financial year has seen the market record new highs, reaching 8000 for the ASX200 for the first time before finishing relatively flat.
We regularly comment in this newsletter on the performance of the market and individual companies, there are, however, several other factors impacting portfolio performance. Asset allocation is very important, as different asset classes have different risk/return characteristics. Some of the most successful investors managing diversified portfolios (across asset classes) have a talent for setting portfolio parameters and sticking to them. This sounds logical although far from easy to implement and investors often change their asset mix during times of euphoria and/or duress. For example, from when the pandemic hit in February to March 2020, the drop in the market confirmed aggressive panic selling and a rotation to cash. Those selling shares were indeed changing their risk profile from growth (equities) to capital preservation (cash).
During this time, we stated in our March 2020 newsletter:
“We have been through many troubling times in the past, including the great depression, world wars, recessions, oil panics, crashes, and other major events. Every time, the market has eventually recovered and those that held through have done very well. Whilst it may seem like there is no light at the end of the tunnel, I can assure you, things will eventually improve. In fact, the cyclically adjusted price-to-earnings ratio (defined as price divided by the average of ten years of earnings, adjusted for inflation) – is at 20-year lows.”
The point to be made is the best advice we can give readers is to keep things simple. Whilst stock selection is critical, so is surrounding yourself with people who have experienced numerous cycles and remain circumspect.
Several asset classes have grown in popularity, particularly since 2020, including unlisted private credit, private equity, venture capital and other uncorrelated assets. These all have their own risk profiles, pros and cons, and key considerations. However, over the long term the key drivers of performance remain the same, being a combination of profit and/or dividends which is generally reflected in asset-price performance.
Alex Leyland