Volatility and Diversification - Why you need a long term focus

Over a long term we can predict reasonably accurately what returns an investor is likely to receive.  What we can't predict accurately, is exactly when markets and asset classes like shares or property will peak and trough.

We finished 2018 with a bloodbath on global markets, the worst stock market performance since 2011, and the worst property market performance since 2008, the worst for NSW in 30 years.  It was a bad year!

It is human to worry about short-term volatility, but should you act on it?

As someone who has worked in finance for over 20 years, I still catch myself considering trying to pick the next best investment, or pick market cycles, only to talk myself out of it because I know better, I know it's a fools errand to even try.  Yet I still considered it in 2018, why???

I use a micro investing app called Raiz (formerly Acorns).  I have used it since it launched 2 years ago, and up until late 2018, the performance was fantastic.  By mid last year I'd had lifetime (2 years) and 12 month returns of almost 14% respectively, amazing!

My own Super returns were sitting at around 7.8% and my mortgage interest rate is 3.95%.  Raiz only costs $15 p.a., yet my Super investment fund costs $1,500 p.a..  So the smart thing to do would have been to stop contributing to my super and my mortgage, and invest with Raiz to get 14% at a much lower cost, right?  Except I knew better, it wasn't sustainable and it wasn't diversified enough to manage risk!

Fast Forward to 2nd Jan 2019, it's only 6 months later and it's an entirely different story.

Now, my Raiz fund has a 12 month return of -7.27% (a lifetime return of -8%), while my super has a 12 month return of -2.78%.  That means my super has outperformed it by 4.49% (since inception it's significantly higher at nearly 5.5%).  Don't get me wrong, I still have and use Raiz, knowing that over time it'll come back again and that it's a good low balance passive micro investing solution, but it's a reminder of the dangers of not being diversified and having a short term focus.

My Raiz fund now needs a return of 15% to get back to where it was, but my Super only needs a return of 5% to recover.

Why were the returns so different?  Diversification, time and actively managing the down side.

Last year the ASX200 was up 7% at one point, to then lose 16.3%, in less than 12 months.  They say a broken clock is still right twice a day, it's so true when it comes to investing.  There were those that thought 2018 was the year for shares, and those that said you should be selling your shares - they were both right!  Simply because no one can accurately predict short term performance.

At Equitem, our job is to manage risk, this means diversification and not trying to outperform in the peaks, but to minimise the downside as best we can, though avoiding it entirely is impossible.

With increased investment knowledge, and real time news and data at your fingertips, don't lose sight of the fact that real time and short term data is not a substitute for long term strategies.

Bradley Ellison
Director - Equitem