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Portfolio troubles - you're not alone

Portfolio troubles - you're not alone

Investors are having a tough time. Current market conditions are difficult and many are facing lower overall returns. It’s hurting individual investors and professionals alike, and the pain is not limited to any particular investing style or approach to markets.

The woes of “value” investors over the last two-plus years are well exposed. However they are not alone when it comes to unsatisfying investment performance. Share markets delivered a cruel lesson to investors over the last twelve months.

Statistically the period from November to April is a more positive time for stocks. On average (since 1955), the share market performance over this period exceeds returns for the period May to October. The problem with averages is that they may not apply in a single instance, such as 2018/19.

The share market drop that started in September 2018 continued until late December. A peak to trough index fall of around 7% spooked many investors into a cardinal market error – buying high and selling low, and thereby increasing portfolio cash levels. The market then aggravated the pain by rising sharply from that point, hurting more conservative investors with higher cash holdings.

Many discovered that investing wasn’t meant to be easy (apologies to GB Shaw). One of the essential ingredients to success in the markets is recognising the medium to long-term drivers of market action. At the moment these are the growth outlook and the activities of central banks. The relationship between these factors is crucial to understanding why investors are having such a tough time.

Central banks sprang into action after the Global Financial Crisis. They dropped interest rates and pumped the global monetary system full of liquidity in an effort to support activity and asset prices. The response was driven by a lack of growth. The intent is to withdraw funds and lift interest rates as economic growth recovers. In effect these central banks borrowed growth from the future, and the “normalisation” of monetary conditions is how the debt is repaid.

Improving growth conditions (good) lead to tighter monetary policy (bad). Conversely, slowing economies (bad) mean more central bank support (good). The trade disputes are a focus for markets because of their impact on the growth outlook. A stronger GDP reading could see shares rise or fall, depending on whether investors respond to the better data, or the potential for a central bank response.

This makes predicting market responses to news very difficult, and is one of the key reasons why investment decisions are currently complex. The market currents are flowing at cross-purposes. The response to news tells us more about sentiment than it does about fundamental factors.

Naturally this means more weight is put on sentiment indicators, such as consumer and business confidence. Forward indicators like factory and durable goods orders also gain in influence.

However many investors ignore the most obvious of sentiment indicators. The price of a share, and a share market index, is primary evidence. Changes in price reflect the shifting balance between buyers and sellers.

The daily chart of the Australia 200 index shows the market has traded a range between 6,400 and 6,760 since May this year. Chartist and traders describe this as a sideways market, despite a few peeks outside the range over that period. One of these levels must be broken convincingly for the Australian share market to begin a new trend, up or down. Until it does, the market remains sideways.

Strategic responses to current market conditions depend on individual circumstances. Long-term holders may wait for a sustained move through one of the bounds of the range. Active investors may trade the range, buying when the market is nearer 6,400 and selling as the market approaches 6,760. This is a price-based way for investors to doubt the extremes of sentiment in a “muddle through” environment.

The same principles apply to individual stocks. While the chart of any given stock can vary enormously from the index, investors with a good grip on the basics of technical analysis are at an advantage because of the primary evidence of sentiment they provide. There’s no need to grasp the intricacies of a five count Elliott wave formation. Support and resistance, and trend identification, are enough to improve overall investment performance.


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