Taking an investment short cut will almost always end in tears: AUI

With the market and investor sentiment on the way up, one lesson investors should remember is that trying to take shortcuts to achieve out-performance is unlikely to be sustainable and will almost always end in tears, says Edward Smith, head of portfolio management at Australian Unity Investments (AUI).

Mr Smith said the current market situation is likely to encourage the introduction of new products and that the investment community is likely to see a rash of investment products promising out-performance at low risk over the next year or so.

“Some people may argue that now is a good time to look at leveraged products to take advantage of market growth. The challenge is that the risks associated with such strategies are not always obvious, and typically are revealed when it’s too late to reverse,” Mr Smith says.

“Good investment practice requires a clear set of objectives and strong governance. Investors should be wary of the promotion of new investment products that tend to follow rising markets and that claim to give over-the-odds returns.

“There is always danger in accessing volatile markets through complex structures. Wise investors are very circumspect about new products or structures that offer tax or other advantages to enhance returns, as they can be as dangerous to their financial health, especially if they are difficult to understand

“Tried-and-true strategies that involve setting objectives and ensuring a diverse portfolio might seem boring, but boring is good when it comes to managing the life savings of most people.

“Experienced advisers will be reflecting this in their client dealings and adopting an appropriate investment approach in their advice, to reflect their clients’ needs,” Mr Smith says.

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Increased noise makes investment decisions harder: Australian Unity

The amount of confusing ‘noise’ in the investment world is making it increasingly difficult for investors to focus on priorities and reach sensible investment decisions, says Edward Smith, head of portfolio management at Australian Unity Investments (AUI).

“The noise coming from commentators, market experts, fiduciary and monetary chiefs, and governments is incessant in today’s online, ‘always on’ world, and is continuing to increase as more and more political and economic interests insist their voices are heard.

“As a result, investors need to take care that investment logic doesn’t get overwhelmed in the din.

“For example, a lot of the political and policy background advice and commentary is about short-term issues and activities, such as the coming Federal election.

“Politicians tend to dominate the press in the lead-up to an election, and their comments can add to uncertainties reflected in the market.

“But it doesn’t pay to get too excited about election rhetoric and promises; they rank among the least reliable in terms of providing insights into the future,” Mr Smith said.

“Unfortunately, such commentary can get in the way of investors making sensible decisions about their long-term needs.

“When there’s a lot of clamour and distraction, it can be hard to maintain concentration and remain focused.

“Investors need to learn not to be distracted or influenced by the sort of short-term issues that politicians usually focus on, such as economic predictions for next year or the year after, or even short-term regional issues.

“What pundits believe could happen in the next few years is typically already priced in financial markets. The rule of thumb is that if a statement or policy seems certain, then it has already been taken into account in the price of an investment.”

Mr Smith said another problem with all the commentary at the moment is that the bones of every announcement made by people in influential positions are picked over in fine detail by commentators looking for hidden meanings and unintended indicators.

“Their comments are critically evaluated by markets, which assign a probability to each of a number of scenarios based on all public information.

“These are often then interpreted in ways that affect markets – usually for a short time before a sensible correction takes place.

“We have seen an example of this recently when more weight was given to a throw-away comment by the Governor of the Reserve Bank of Australia, on the setting of interest rates, than he intended.

“It should also be remembered that even the very best economic forecasters are not always on the money.

“Long-term investors need to ignore such actions and reactions, and shouldn’t feel any pressure to make quick market judgements themselves.

“They should be looking at long-term trends, which at AUI we believe includes increasing investor optimism; a greater amount being paid for earnings; and diminishing tail risk.

“It all comes back to the basics of solid long-term investing – a portfolio that is diversified and has the flexibility to ride out short-term volatility,” Mr Smith said.

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