Don't be derailed by market fear-mongers, visiting strategist tells investors
Russell’s senior US strategist says the current market environment compares favourably to other challenging market periods within twentieth century
Australia, 14 February 2008 – Global investment firm Russell Investment Group is encouraging investors to stay the course and not let their investment strategies be derailed by “fear masquerading as formal analysis” in today’s volatile markets.
Russell’s US-based senior portfolio strategist, Stephen P. Wood, Ph.D, says history shows that equities continue to outperform bonds over time, so long-term investing and diversification remain the best strategies for investors.
Speaking alongside Russell’s local investment strategist, Andrew Pease, at a Russell “Meet the Manager” luncheon in Melbourne today, Dr Wood discusses the worst investment periods of the Twentieth Century (Great Depression, World War II, 1970’s oil crisis and recession, and the Internet bust) and examines how investors fared with portfolios beginning at various times within these periods.
“In the current market, with no shortage of bad news, what we have is fear masquerading as formal analysis,” Dr Wood said. “The extreme ‘doomsday scenarios’ being bandied about lately are causing many in the investment community to consider these outlier events, such as the sub prime crisis, as normal occurrences that should be incorporated into investment strategies, which is a terrible methodology to adopt for investors in the long term. This causes investors to suffer, because they become locked into an extremely low probability payoff structure.” he said.
Dr Wood emphasised that investors tend to fare much better when they rely on long-term investment strategies that offer proper portfolio diversification based on an investor’s risk profile, but that do not attempt to time the market.
“If you compare the present market situation to difficult markets of the past, such as the Great Depression and World War II, investors with a long-term investment focus should not be as concerned about this market, despite pundits’ protestations to the contrary. In hindsight, over relatively short periods, there will always be asset classes that appeared strong and others that seemed weak. In truth, there is no guarantee that the seemingly ‘great’ performers will not become weak, and vice versa, from one period to the next,” he stated.
Dr Wood further noted that over time equities have continued to outperform bonds, so long-term focussed investors should understand the enduring influence that the equity risk premium (ERP) - ie the long-run difference between the equity return and the intermediate Treasury Bond return - and proper diversification will have on their investments’ returns in the future.
“ERP is important because it drives the asset allocation choice between stocks and bonds, which determine about half of an investors’ performance (that is relative to a reasonably diversified portfolio). Right now, ERP is approaching its lowest level in over 30 years, but this is also in an environment where fixed income has dropped by 3 per cent in the last 20 years. Based on historical data, however, the odds are that equities will continue to outperform bonds in the long run, but could be subject to wide variances in the short term,” Dr Wood contended.
Dr Wood concluded, “History shows that even the scariest markets of the last 77 years did not derail long-term market probabilities. In the short-term, markets can be disorienting – even deceiving – so investors are better placed when they implement more long-term oriented investment strategies.
“Also, there are many reasons to be optimistic about where equities are headed in the long run. For instance, prior to the recent ‘correction’ in the market, global equities’ valuations were not too stretched. And, the US equities market’s valuation is quite compelling at the moment. The Fed’s monetary policy is very accommodative and there is a big fiscal stimulus package that was recently signed into law by the President on the way that should trickle down into the economy by mid year. We expect that the Fed’s aggressive monetary easing will boost the US economy by year end.”
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