Things are always darkest in the middle of the storm
This week has turned out to be a very turbulent week for markets. This is, of course, very hard to handle emotionally as we see our retirement savings eroded by events (interest rates rising/supply chain inflation/Russia invading Ukraine). However, this is the time that we need to remember my favourite saying – “shelter in place”
Tim Farrelly runs a successful investment strategy firm advising on what asset allocation portfolios should have and came out with this comment on 13th June 2022
The market’s worst nightmare is on its way - stagflation, being low growth and high inflation.
Now, this particular idea very much depends on exactly what we mean by stagflation. Most economists tend to think of it as a label that describes the 1980s. To get a handle on what they mean, let’s look at the inflationary 1970s and stagflationary 1980s from the perspective of Australia, New Zealand, the UK and the US.
From 1973 to 1980, inflation soared worldwide, averaging 8.1% per annum in the US, 11.1% per annum in Australia, 12.6% per annum in NZ and 12.9% per annum in the UK. Real GDP growth was reasonable throughout this time, in the order of 3% per annum. Unemployment was fair, averaging 6.5% in the US, 4.9% in Australia and 4.7% per annum in the UK. Thus, the 1970s were more about inflation than stagflation.
The 1980s presents a different picture altogether. Inflation eased during this period to 5.1% per annum in the US, 8.3% per annum in Australia, 11.4% per annum in NZ and 6.4% per annum in the UK - high, but below the peaks of the 1970s. Real GDP growth once again was reasonable but unemployment went through the roof. In the US, it rose from 6.5% on average to 7.3% for the decade; from 4.9% to 7.6% in Australia; and, from 4.7% to 9.7% in the UK. NZ unemployment rose to 5.9%. When used to describe the 1980s, it appears that stagflation actually means a very long period of high inflation and very high unemployment.
Through the 1970s, central banks and governments tried to control inflation through a range of ineffective policies until, towards the end of the 1970s, they finally employed the heavy hand of crushingly high interest rates. That regime continued through to the end of the 1980s as it took a decade to finally control inflation because it was thoroughly embedded in the system.
The high rate of unemployment was, for the most part, the end result of a period of restructuring by many industries as inefficient factories were closed and inefficient work practices were removed, all accompanied by loads of industrial strife. The result was huge increases in productivity with fewer people doing the same amount of work and, so, while the economy continued to grow, unemployment soared. From a societal point of view, it felt awful but the reforms of this period created the platform for the boom conditions that occurred for the 15 years up to the Global Financial Crisis.
Unless farrelly’s has it very wrong, the pundits predicting a return to stagflation are implying we are set for a re-run of the 1980s. That’s unlikely on any number of levels. Central banks know what to do, we don’t have inflation embedded in the system, and we don’t have work place inefficiencies needing to be restructured. It is a very different set of circumstances.
When these pundits use the word stagflation, we should assume that they actually mean something very different to the experience of the 1980s. They may simply mean we are facing a period where inflation is elevated and growth is lower, as central banks lift interest rates. And the time frame - rather than a decade - may be much, much shorter. One such prediction suggested we may be facing stagflation for a few months!
We may indeed be in for a shortish period of high inflation and low growth - but as to this leading to 1980s-style stagflation?
It’s nuts and you can clearly see it’s nuts!”
Tim is very clearly of the view that this period of time will not be long – and Central Banks will move hard and fast (and this week the US Federal Reserve lifted rates by 0.75%. Australia is now expected to follow suit in July 2022 to control inflation.
The Financial Review stated this week (15/06/2022)
The biggest minimum wage rise since 2006 and $12 billion of low and middle-income tax refunds due to flow from next month will further fuel inflation and force the Reserve Bank of Australia to increase interest rates more aggressively, economists warned.
If this week’s market movement have made you nervous – I think you should look at how often you check your overall portfolio. CBNC (US) put this article out in 2021.
Nearly half of investors check their performance at least once a day — here’s why that’s a problem
With investing apps, it’s easier than ever to get instant information on the status of your portfolio. In fact, a new survey by Select and Dynata found that almost half (49%) of investors are checking their investments’ performance once a day or more.
While it’s certainly easy to get caught up in the excitement of the stock market, being highly engaged can backfire. In many cases, frequently checking your portfolio can actually be a detriment to your performance. Dan Egan, managing director of behavioral finance and investing at Betterment, calls this habit “high-frequency monitoring.”
“Looking at your portfolio frequently can make you feel like it’s performing worse than it actually is, and the less likely you’ll invest correctly for long-term success,” Egan says. Excessive monitoring of short-term returns can lead to knee-jerk reactions and impulsive decision-making that doesn’t lend itself to letting your money grow over time.
Research shows that the more frequently investors monitor their portfolio, the riskier they perceive investing to be, says Egan. This is also known as myopic loss aversion: When investors constantly check their investments, they become more sensitive to losses than to gains.
“The more frequently you monitor your portfolio, the more likely you are to see a loss since you last looked,” Egan adds.
Investors are more willing to accept risks if they evaluate their investments less often. Research on myopic loss aversion and stock performance shows that an investor who checks his or her portfolio quarterly instead of daily reduces the chance of seeing a moderate loss (of -2% or more) from 25% to 12%. “And that means he or she is less likely to feel emotional stress and/or change allocation,” Egan says.
How often should investors check their portfolio?
In short: as little as possible, advises Tony Molina, a CPA and senior product specialist at Wealthfront.
“I know from experience how hard it can be to avoid looking completely,” Molina says. “But the more you can avoid it, the better off your investments will be in the long term.”
Ivory Johnson, a CFP and founder of Delancey Wealth Management, recommends you wait a even longer. He suggests investors take a cursory look every two or three months to make sure there are no dramatic changes in either direction. “A portfolio that doubles the return of the market in a short period of time may have more embedded risk than you originally thought,” he adds.
At the minimum, Johnson suggests reviewing your investments annually to ensure your portfolio is performing and is still suitable for what you’re trying to accomplish.
It can be tempting to look at your investments especially when there are big fluctuations happening in the market. Research, however, shows us that looking every day can make us more susceptible to rash decision-making and ultimately risk losing money.
Investing is more accessible than ever, but the old rules are still worth following: “As long as you set your long-term strategy when getting started investing, you need to trust the process and take a bird’s-eye view approach with your investments,” Molina says.
Remember things always look darkest when we are in the middle of the storm – but this will come to an end and markets will return to their normal growth pattern.
Take care – I am more concerned that we have not yet prevented COVID19 transmission in Australia and wenow a particularly tough version of the flu is making way through Australia.
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