Investor short-sightedness to the detriment of returns

From

Julian Beaumont

The Australian sharemarket has doubled investors’ money since the bottom of the GFC – something that seemingly goes unnoticed by many commentators – and investors are risking potential returns by concerning themselves with future economic uncertainty, according to Bennelong Australian Equity Partners’ investment director, Julian Beaumont.

Studies into the psychology of loss aversion show investors feel losses twice as much as gains, and while speculation of a recession or equity market crash is rife, investors are doing themselves a disservice by focusing too much on the unknown, Mr Beaumont said.

“Being fixated on risk is resulting in investors missing out on market opportunities.

“The GFC has left investors with deep psychological scars that are yet to fully heal. In the decade since, investors have mostly targeted low-risk and low-volatility investments, with the obvious example of this being their preference for bonds and real estate.

“When it comes to equities, investors have sought out the safety of defensives, yield and the momentum of whatever has most recently been working, such as AREITs, gold stocks and ‘expensive defensives’, even though not necessarily justified by the fundamentals,” he said.

Mr Beaumont believes the Australian market is currently at its normal, orderly self, and with investors speculating about a potential recession and corrections, the sentiment is invariably making its way into share prices.

“Ironically, where there seems to be the most risk is where it is perceived to be the least. The rush into safety – bond proxies, for example – might prove to be not so defensive given their popularity and stretched valuations.

“At the very least, the current uncertainty in markets is good reason for investors to ensure they are genuinely diversified,” said Mr Beaumont.

Research shows there is little correlation between economic growth – specifically GDP – and equity market returns, and while volatility presents risk of loss in the short term, the risk reduces further out, becoming almost irrelevant over the long term.

In practical terms, this is evidenced by the fact that worrisome economic data post-GFC, which showed signs of a weakening economy, was actually beneficial for both bonds and equities.

“The bad news effectively delivered a greater probability that central banks would come to the rescue with further monetary stimulus, so why did we fear what didn’t bring us any harm?

“Does all the worrying and speculation make us better investors? No. Having some defensive strategies in place in case of a downturn is one thing; but continually anticipating the worst is another. Amid all the doom and gloom, we’ve actually had it pretty good,” he said.

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