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Why Equity Investors Should Ignore Annual Predictions

21 January 2019Bellwood Capital

After reaching new all-time highs in September, the S&P 500 lost nearly 13.5% in the fourth quarter of 2018, while MSCI World ex-USA declined by 11.4%. Equity markets have recovered somewhat from their December lows – the S&P 500 came within a hair’s breadth of official bear market territory (-20%) on 24 December, before rallying 5% in the following trading session, the largest one-day gain since March 2009.

This is according to David Nathanson, Portfolio Manager at Bellwood Capital – a specialist global equity investment manager – who reflects that 2018 was one of the rare years in which none of the major asset classes generated returns for investors.

This rarity, Nathanson says, has many investors asking ‘So where to from here? Have we bottomed?’ “But at the end of the day, the real answers to these questions are unknowable. Market movements like these are inevitable, but unpredictable,” he explains.

Despite this inherent unpredictability, Nathanson remarks that this time of year is always marked by an influx of predictions and forecasts for where the market is headed next, which sectors are likely to do best, which stock picks will do well in 2019, and so on. “Ignore them,” he says, pointing out that 85% of the major investment banksexpected the S&P 500 to end 2018 higher, with the lowest price target still 5.7% higher than the final outcome.

“Allowing short-term forecasts to influence your long-term financial planning is a sure way to destroy wealth,” argues Nathanson, who is a firm believer that – despite their popularity – short-term predictions don’t work. He challenges investors to ignore the noise and use the new year as an opportunity to “reassess your financial plan and make sure you’re well positioned for the long-term.”

To assist with their planning, Nathanson suggests that investors ask themselves the following three questions:


1. Does your asset allocation adequately match your future liability profile?
a. Do you have enough liquidity to meet short-term/contingent liabilities?
b. Do you have enough equity/growth assets to counter the creeping effects of inflation and to build wealth sustainably over the long-term?
2. Is your overall investment portfolio being managed transparently and cost-effectively, or are there too many layers between you and your money?
3. Are you sufficiently diversified, particularly in terms of a global portfolio?
a. How much of your wealth is concentrated in South Africa? Are you comfortable with this?
b. Outside of South Africa, are you overexposed to any other country?


A globally diversified portfolio of consistently profitable businesses, with strong financial positions is likely to deliver good sustainable returns over time, through the inevitable highs and lows, says Nathanson.


“As such, in our view, the best approach will always be to invest in a global portfolio of good businesses at good prices, ignore the noise and the unpredictable swings of the market, and allow the effect of compounding to do its work as the years roll on,” he concludes.

 

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