The markets are down sharply again today. This is largely a carryover from the US Friday’s reaction to the Consumer Price Index (CPI) report.

Remember our economy in Australia represents only about 2% of the world markets and what happens is the US filters through to the world, including Australia.

The main takeaway is that inflation is mainly hitting food and energy prices. That is somewhat convenient for the US Fed in terms of not having to raise rates too aggressively, (only threaten) if the inflation is contained in these areas. Because, naturally, as we spend more at the service station and at the supermarket, we spend less everywhere else. This helps to curtail inflation. And when finally food and energy prices start to come back in line, the economy has cooled. That’s the theory of how it would work.

But people are grumpy and feel miserable. Prices are high. Everybody is talking about fuel prices and food prices. It’s expensive to do anything, to go anywhere. We also know that wages are not going up and so people are cutting back. So the economy is slowing down.

And right now, people are nervous and some investors are displaying classic signs of panic.  But It’s important to point out how quickly pendulums of emotion swing.

Now, in terms of investments, the sentiment is at an all-time low. Let’s keep in mind that things were remarkably grim in 1987, in terms of sentiment. Things were remarkably grim in 1999 into 2000 when the internet bubble popped. And things were remarkably grim after September 11th and remarkably grim during the GFC of ’08 and ’09. And things looked pretty grim, at least from my standpoint, when COVID came and shut down the whole country, and the whole globe, and stopped life as we know it.

Historically investors make poor decisions in times of heightened emotions (discussed below re: DALBAR study) and fear and greed are two powerful emotions to manage when it comes to investing. It is also why we have an investment philosophy we refer to as CARE.

The CARE Investment Philosophy believes that 50% of your returns are made up of your investment behaviour. 45% of your return is to do with asset allocation and the remaining 5% is timing and selection. The traditional investor would contest this and say the investor return equation is 90% asset allocation and 10% timing and selection and has nothing to do with investor behaviour.

However, based upon the DALBAR Study we do know that 50% of returns are based on investor behaviour, which has a critical impact on your returns.

The original DALBAR Study was conducted between 1980 to 2000 in the USA on the top 500 US listed companies. The study found that the average return over that 20 year time period for the 500 companies was a 12% return. However, the return for the investors over the same period was around 4% -over the same 20 year period! That’s a poor average investor return. The number one reason for the 8% difference was bad investor behaviour.

Yes, external conditions are uncomfortable at the moment and may not get better right away and it is not easy to look at investments as they decrease in value.  It causes us to feel uncomfortable and this pain is something we want to escape from, so often the idea of getting out of the market is the natural response, however we know over time this can be the wrong decision.

Financial advice is about developing more effective strategies that help you reach your goals in the best way for you.  Think about it like having a road map to get you from A to B with all the shortcuts built in.  Then there comes the investment strategies to drive them.  Think about this like to vehicle you take on your journey.  Our investment recommendations focus on quality investments and are highly diversified.  Where necessary we build in cash reserves to stop you from selling down assets when markets are volatile like now.

If you are experiencing any form of discomfort at the moment – welcome to being normal, but as it has in the past, it will pass and better times lay ahead. If you need to reach out and speak to us, please feel free to call the office or set up an online meeting.