March 27, 2020: Live from the desk of our CIO, Piers Bolger

March 27, 2020: Live from the desk of our CIO, Piers Bolger

March 27, 2020: Live from the desk of our CIO, Piers Bolger 150 150 Piers Bolger

Financial markets have continued on their roller coaster ride this week but we’ve had a couple of positive days as it relates to equity markets. That’s something we haven’t seen in the month of March particularly so that’s definitely a positive.

There are a couple of key points that have driven that from our perspective. First and foremost, the significant stimulus package that was agreed to overnight in the US. This equates roughly to about 10% of US GDP or $2 trillion in total. We believe it’s certainly going to provide a base level of support to the US economy, not only to households directly, but equally to businesses. What’s important around that package is that the administration certainly hasn’t indicated that it will be the only package going forward. We expect there will potentially be further stimulus measures down the track and we think this is a real positive.

Secondly, we continue to see Federal Bank support. The US Federal Reserve is continuing to provide targeted support to parts of the market and certainly ensuring that the markets can continue to function with sufficient liquidity. Investors aren’t necessarily being overly concerned with the state of the market in the context of being able to trade. This is certainly in areas relating to the property market particularly as it relates to syndicated type lines and the like. This has been positive for our local equity market and it reflects what we’re seeing here domestically and elsewhere around the world in regards to packages.

We just thought it would be worthwhile just reflecting from a portfolio standpoint. When you’re thinking about investing, you have to be cognitive of what’s occurring in the short term but sometimes it is worthwhile to take a slightly longer lens to the way that you position portfolios and the way you think about investing. We have two charts to highlight this point.

Balanced portfolio returns

The first chart is really just a reflection of what we would say is an atypical balanced portfolio. It has roughly 67% in growth assets, which are a mix of equities, property, growth alternatives, as an example. Then 33% in defensive assets made up of fixed income, cash, and defensive alternatives. If you looked at this portfolio over a rolling 12 month period over the last sort of 15 to 20 years you can clearly see some quite varying performance in the portfolio, both in terms of its highs as well as the lows and includes that period of 2007-2009 through the GFC really highlights that point. When you look through the entirety of that time period and look at the red dotted line, you can see that the portfolio has actually generated roughly around about an 8.9% return. So for a balanced portfolio, investing in a mix of both gross and defensive assets, we believe that’s actually a really solid desperate return.

When we talk about investing we always talking about the time period. You can see in this chart that the absolute number of negative periods over a rolling three year period reduces significantly. Yes, you’re still going to have an environment like we did through the GFC, where we obviously had a number of years of negative returns. When you compare those negative returns to the first chart you can clearly see that the level of negative performance is a lot lower. Equally, on the flip side, you don’t get the same highs, but you are getting a more consistent investment return through time. The other aspect to note around is that when you think back through the entirety of that period, the average level of performance over that period is not too dissimilar to the first chart, it’s roughly 8.5% – a very solid investment return.

From a portfolio standpoint, when you actually look through the cycle you can balance the risk prudently. On that basis, you don’t necessarily see a degradation in return, but it produces the negative periods that you are experiencing from a portfolio standpoint. When we think about the environment that we’re in the moment and the challenges that we’re facing, clearly in terms of financial markets, it’s really important in our view to have one eye on what your strategy is, what you’re trying to achieve in terms of your wealth goals and ensuring that you’ve got that adequate balance in terms of both growth and defensive assets in a portfolio framework. Ultimately, that will deliver you the wealth creation that you’re looking to achieve through time.

As always, please reach out to your advisor if you have any concerns.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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