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  • Writer's pictureAndre Dirckze

7 Fundamentals to consider in Volatile times.

There is considerable talk about the state of financial markets among my peers currently, while there are not many economist and financial commentators addressing the elephant in the room (Markets). You can be forgiven for feeling depressed and helpless like many investors your probably watching the sliding stick prices and been doing the uncomfortable math about your portfolios value and your probably feeling like overwhelmed by it all and wondering when market will catch a break.

Which poses the question how do make sense of everything that going on. Firstly, market don’t know it all – the market is made up of a convergence of millions of buyers and sellers and these investors are influenced by monetary conditions, future expectations and often can be sensible, though from time to time are prone to panic.

Through late 2021 and early 2022 investors priced markets as “everything back to the new normal,” Sustained in part by the excitement of the legion of new investors who had only ever seen markets go up. Conversely, investors feel like the Armageddon is upon them and the market has shifted from thinking COVID is no big deal, inflation will fade and the economy is rock solid to “we’re all on a sinking ship”.

Just remember, that the market is here for your benefit, not the other way around. It offers investors a slice of a business (for a price) and a share in the company’s potential future earnings. Nothing more, nothing less. Sometimes the market is optimistic and offers higher prices and sometimes the market is fearful and offers lower prices. We as long-term investors are here to:

1. recognise those swings and

2. act upon them to improve returns/lower risk over the long term.

Be wary of those proclaiming to have a macroeconomic crystal ball because no one does. Markets will continue to have volatility over time, and you can be sure that there will be more bull and bear markets in the future. It is my job to help you as investors to observe market surpluses and try to act accordingly, ideally in advance of big market moves the key is not to be too greedy. The current market sentiment and pessimism usually means that there will be some value on offer now and in the near future.

So rather than of trying to pick the direction of the market (Up or Down) try and think about how much are you being charged for a business’s ’future earnings’. It doesn’t have to be complex “price is what you pay, value is what you get” is the basic concept.

The S&P 500 index tracking the US top 500 companies officially entered a bear market, more than 20% decline from the peak. Some economic commentators have argued that things will likely get worse before they get better. Currently I don’t have a strong opinion either way, but on balance probabilities we have not seen the bottom yet. I’m not advocating panic, doom and gloom and not saying sell everything either, what I am saying is that when there is plenty of pessimism and pressure in market it’s usually the best time to hunt for value.

One thing for sure the future is unknown, and that’s ok. This down turn is a your ticket to invest at a discounted or fair value price, like a reset one that will see your portfolio benefit from the wonder of compounding future earnings. So let’s try to reset the way we are looking at this current down turn, it’s not the time to panic, the market is offering us an opportunity to reset for the future. Our research partners estimate that the ASX 200 is currently under valued by 15% only twice in the last 15 years has this discount been greater; once in the global financial crisis and more recently during the short-lived COVID 19 crash.

In times of high volatility knowledge and fundamentals are the attribute that give me the comfort. It’s a great time to take stock of your portfolios and the prevailing market conditions, here are the things we’ll consider and revisit with you soon. I hope this will help ground your emotions and action should the market get better or worse.

1) Revisit investment goals

a. What’s really important?

b. What are the constraints?

c. What is non-negotiable?

d. What is the appropriate risk tolerance?

2) Revisit savings

a. For those still in the asset accumulation phase, does it make sense to increase the level of savings/investment given the reduction in portfolio values, and likely better future returns given markets have fallen?

b. Saving and investing more when portfolio values are down can provide a valuable counter-cyclical bias to wealth accumulation.

c. Is it possible to weather any volatility and uncertainty knowing you can work longer if needed?

3) Asset allocation

a. What is appropriate given your personal goals and risk budget? It is worthwhile thinking about the appropriate asset allocation settings through the cycle as well. Here, our overall Price/Fair Value can be a useful tool to prompt countercyclical behaviour. If our price/fair value metric is anything to go by, now is likely a good time to be maintaining or raising exposure to equities, which is a risker asset class, rather than cutting.

b. Increasing exposure to riskier asset classes when times are good, and optimism abounds—such as 6–12 months ago—is also likely to detract from longer-term returns.

4) Stay invested

a. Markets are cyclical and will have ups and downs. Invest accordingly (it’s never too late to find solid foundations).

b. Going to cash when sentiment is depressed is likely to drag on longer-term returns.

5) Behave countercyclically

a. Plan to do this where possible. It may feel like the horse has bolted now, however, markets will continue to have ups and downs. Prepare accordingly.

b. Even if it feels like you could’ve done better in hindsight—hindsight’s always 20/20—think about how you might play the next cycle. One need not have all the answers first go around but taking those learnings and experiences and incorporating them into your philosophy is key to future success.

c. I think calling specific future cycles is hard but it’s possible to spot market optimism and pessimism and act accordingly. The Buffett quote—be fearful when others are greedy and greedy when others are fearful applies here.

6) The selloff may provide opportunities

a. Did irrational optimism creep into your portfolio? Did the rising price of the securities hold more appeal than the fundamentals of the underlying assets itself?

b. Is there a window for selling some holdings to reinvest in better value/higher quality opportunities? Not to sell because a certain security is down but it’s now clear the fundamentals were not what you hoped.

7) Invest in you!

a. This one we can all control. Human capital is the value of our future work, the product of time and labour rate. Education, training and experience are all ways to improve it.

b. Whatever we can do to further our human capital value has the potential to compound and enhance our financial wealth longer-term.

Please make contact with us directly by clicking the link below if you like to FastTrack your discussion about your portfolio and specific circumstances.

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