Don’t be distracted.
News headlines are today fixated on the US Congress leaving itself just one day to end a budget stalemate surrounding another possible breach of the debt ceiling on Oct. 17.
While we need two hands to count how many times we have seen similar news stories published over the years, the market is ‘reacting’ to a perceived risk that the first US government shutdown in 17 years may occur if the political impasse is not broken.
The Australian sharemarket is falling on the back of this and it’s entirely possible that your portfolio is doing the same.
If you are like us, the chances are you have already taken a number of calls offering advice on how a portfolio could be ‘adjusted’, say taking profits and raising cash, to protect from further price falls.
Putting aside the fact that an ability to predict further price falls with reliability and predictability is a skill we don’t believe exists, no doubt after strong share price gains in recent months, you have asked yourself the question – should you do something about it?
We believe that Warren Buffett summed up how investors should be behaving:
“American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favour. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialised despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)
Since the game is so favourable, Charlie and I believe it is a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts”, or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”
You’ll find no mention of news grabbing headlines in this missive, nor an attempt to jump from stocks into cash and back again on a daily basis.
We whole-heartedly agree that the sharemarket is a long-term game whereby investors will do well if they continue to focus on what they control.
That is, on understanding the businesses they own. The sharemarket is a simple wealth creation tool in that anyone with an ability to boil it down into a concentrated portfolio filled with excellent businesses with bright prospects and whose earnings march upwards over the years will likely do well.
If the best in the game suggest keeping things simple, close down all those market grabbing headlines and open a few annual reports instead.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Andrew Legget
:
I agree, dancing in and out due to perceived threats that may or may not eventuate is energy best spent elsewhere.
My belief is that making decisions based purely on a long term and value perspective is the most efficient and effective way to manage your investments. In this case you will see cash holding increase and stock holding decrease during boom times which will insulate you from any impending correction or crash. You can then use this increased natural occuring cash holding to take advantage of any value that may appear as a result of that correction and crash magnifying the potential rewards.
This kind of “investment automatic stabilisers” also would result in minimised transaction fees and also the amount of time spent needing to manage your investments.
The market tends to go in cycles and as Warren Buffett said in the excerpt above, the market has continued to rise even with some pretty significant events happen. The shorter term volatility is actually an opportunity and not a threat.