By Elio D’Amato, Part of Team Stockopedia Aus & NZ

28 February 2024

Over the many decades that I have taught investors, Australians tend to be pessimistic and it’s hard to pin down why. There seems to be a shroud of perpetual gloom that hangs over the psyche of Australian investors. Even when markets are trading at all-time highs like they are now.

Talking to investors in the current climate is always interesting. I will often ask investors how the market is treating them. To which the most common response I get is, “It could be better.” An extraordinary response given that last calendar year was a strong one for the humble VAS ETF which achieved a total return of 12.06% in 2023 (dividends re-invested).

What’s more is that it never takes long for the current discussion to stray towards, “Is now the time to get out of the market?”

At Stockopedia, we profess a systematic approach to investing. While ours is not to pontificate about whether or how you should be investing, we rather focus on providing a tool that allows you to invest yourself, your way, whilst also blocking out the noise. Me personally, I love the market, so I am always in it if I can be, based on the systematic approach I follow.

In fact, when I last wrote on this topic it was on the eve of the COVID correction. The market subsequently fell over 30% in a very short space of time. Likewise, it rebounded just as quickly, giving the doomsdayers not much time to remind us that they told us so. Not that anyone remembers, but even in these dark days, there were always stocks that were higher Quality, better Value or had a price performing better than their peers and the market.

But for old stock dogs like me, I just remind myself, that while the actors on the market may change, the plot remains eerily the same.

Chasing Lasseter’s Reef

Not wanting to discredit the fears of investors too strongly, the “doom or boom” question is normal for someone who believes investing is a simple game of binary outcomes. Binary in the sense that everything is black and white, with outcomes explained by obvious and rational events.

For what it is worth, in our view there are plenty of reasons that the market can continue its recent upward trajectory (even though we have really been sideways the last few years). But the latest earning season has reminded us that the margins matter, the cost of doing business matters, as does the sentiment for the remainder of the year.

It also points to areas of outperformance with Price Makers absorbing the current climate better than Price Takers who have suffered.

Further, I hear the names of Uranium stocks get thrown around as the next big thing. Sure, as investors lets have fun. But if you know the drivers of a stocks returns before you get in it, you’ll know when it’s time to look away. While I haven’t been trading long enough to remember Tulips, I can recall several boom/bust cycles, from Lithium (multiple versions) to Virtual Headsets – I’ve seen them all.

Of course, the Bears will remind us that there are real risks to be considered which are ignored at our own peril. Most recently we seem to be living in a Goldilocks scenario where economic news can’t be too good, but it can’t be too bad either. And all this encased in a powder keg of rising geo-political risks that never seem to go away, the likes of which were the same concerns when I raised this issue years ago.

But if there was something that time has taught us as investors is that stock and/or market moves are totally unpredictable, and while we can form an educated opinion on the current state of play, planning on that scenario occurring with 100% certainty is akin to seeking Lasseter’s Reef. Sure, it would be lucrative, but who cares when there is stacks of the stuff around elsewhere.

The reality is that investing in the share market is nuanced. We know that investing in companies on the share market is a wonderful way to accumulate wealth over the long-term, however it can be volatile and in the short-term it can turn nasty resulting in capital erosion. And whilst the appeal of picking tops and bottoms is obvious, the reality is that it is beyond the capabilities of luck to do so on a repeatable basis. That is why we like our systematic approach so much.

Ask the bigger question

Therefore, in our view the more relevant and answerable question investors need to ask themselves is whether after this period of strong growth, their total net wealth allocation to the share market is correct relative to their stage of life and tolerance to risk?

While a financial adviser may cover this question in a review, many DIY investors such as ASA Members who choose to manage their own money often ignore this important aspect of prudent portfolio management. Further, too many only consider the question at the start of their investment journey and fail to consider the implications of performance and additional contributions over time and what that does to one’s overall asset allocation.

So, given reporting season is now occurring, it is an opportune time to rebalance back to your ideal asset exposure levels. It’s a great way to be prudent, lock-in those well-earned profits from last year and satisfy those inner conservative tendencies by selling to get you back to your correct asset allocation.

Your best investment this year will be not to get bogged down in trying to predict the unpredictable. Rather focus on good investing habits and following a systematic framework. Rather than be worried about what is to come, put on your best smug smile because should you have your asset allocation correct, then a pullback will be a great buying opportunity come your next rebalancing event.

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