The low interest rate environment may have investors on edge but Shane Oliver, AMP Capital’s head of investment strategy and chief economist, has reminded them to avoid distraction and stick to the basics when it comes to investing.
Make the most of compound interest
A one dollar investment in cash in 1900 would be worth $240 today, according to Oliver. If the dollar was invested in Australian government bonds, the investment would be worth $950 today.
Conversely, if the dollar was invested in shares, it would be worth $593,169 if the dividends were reinvested along the way.
Oliver, who was speaking at Morningstar’s Individual Investor Conference says: “Now you must be thinking, ‘how can that possibly be?’ It’s just the magic of compounding. Over time it goes up and the returns build on themselves.”
Don’t be thrown off by the cycle
Investors have been warned that a US recession is on the horizon but Oliver does not think that an inverted yield curve is an indicator we are heading towards another global financial crisis.
Oliver says: “The yield curve inversion has miraculously disappeared in the last few days as bond yields are going back up. The yield curve is not a perfect predictor, it sometimes gets it wrong. Its only inverted for a short period of time.”
Historically when there is long and strong economic recovery, excesses build up and there is wage growth and low unemployment causing wage growth. Prior to a recession, there is typically a spending boom.
Oliver says: “Lately we haven’t seen the excesses that build up prior to a recession.”
Invest for the long term
While Oliver doesn’t think there will be a recession, he warns of risks such as slowing housing construction which is leading to lower consumer spending and the fact that we are experiencing an infrastructure spending boom.
Oliver says: “We’ve got a bunch of things going on that will keep us right but it’s going to be slow.”
Given these circumstances, investors should be investing for the long term that takes into consideration wealth, risk tolerance and life stage.
A diversified portfolio spreads investments across multiple asset classes to reduce the risk of exposure to a single asset. This helps to protect against volatility over time.
Oliver says: “I think the key point is to have a well-diversified portfolio. You never know, someone will cut their dividend but having a well-diversified portfolio will protect you.”
Turn down the noise
Oliver urges investors to stay focused and not be distracted by outside noise. For example in September, Donald Trump made 797 tweets which is roughly 26.5 tweets per day.
In addition, headlines last week showed that around $30 billion were wiped off the ASX. Oliver reminds investors to put that into context which makes it around only around 1 or 2 per cent.
Oliver says: “That can be very confusing, very noisy. You’ve got to try and turn that stuff down.”
Buy low and sell high
When markets come down, look for the value stocks and buy them low and only sell them when the market comes back up. Selling stocks after a 20 per cent fall only locks in a loss.
Oliver says: “When there is a huge gain, a huge guy risk of correction that sort of thing, that’s the time you should be thinking of winding back a little bit if you are thinking of winding back.”
Beware of the crowd at extremes – shares bottom at the point of maximum bearishness
Investors should stay away from hyped up stocks or assets that everyone is talking about as most people have already bought them.
Bitcoin is the classic example of this, as the price peaked at $19,500 and is now roughly $11,834.
Oliver says: “So when everyone is talking about something, it’s often time to be cautious of it.”
Focus on investments you understand and provide decent, sustainable cash flows
In this low rate environment, Oliver highlights the property yield on residential property has come down but commercial property yields are thriving but warns investors to remain diversified.
Oliver says: “If you focus more on getting the income, there is value in the share market and you do need to have a well-diversified portfolio of income producing stocks. You can’t just rely on one or two.
Advice comes in a range of forms from a traditional financial advisor, robo-advice and even a quality research source.
When selecting a research source, Oliver suggests picking only a couple of sources to ensure consistent information about investments.
Oliver says: “If you pick all of them, you’ll get yourself very distracted. I think it’s right to get a consistent approach, maybe have two of three but don’t get yourself blown off by every commentator just pops in your inbox and distracts you.”