Is it really a worry?

Thursday, December 11, 2014

This year has seen an endless list of worries. Ukraine, a property collapse in China, the end of quantitative easing and talk of rate hikes in the US, global deflation, renewed weakness in Europe, the troubles in Iraq, protests in Hong Kong, Ebola, Australian Budget cutbacks, the collapse of the iron ore price, etc.

Had you noticed that last year was the same?  With the US fiscal cliff, worries about Italy and Spain, Cyprus (remember how the bailout of Cypriot banks was going to destroy the European banking system!), Syria, the US Government shutdown and debt ceiling, Fed tapering, etc.

And 2012 was also packed with worries including predictions that according to the Mayan calendar the end of the world was near.

The global economy has had plenty of difficult phases since the beginning of last century including The Great Depression, Vietnam War, savings and loans crisis, and the list goes on and on.  And it got over them.

Often the doom sayers dramatically underestimate resources, the role of price increases in driving change and human ingenuity in facilitating it.

And yet despite this litany of problems and the continuous fears of doom, since 1900 US shares have returned 9.8% per annum (or 6.5% pa after inflation) and Australian shares 11.9% pa (or 7.8% pa after inflation). In addition, since 1900 Australian shares have risen 8 years out of ten.

Certainly, the communications revolution has given us access to the daily gyrations of the world economy and combine that with human nature there are constant concerns being generated.

In theory the access to information that has come with the information and communications revolution has made us all more informed and one would think this would mean investment markets should be more efficient than ever resulting in a better allocation of resources resulting in stronger long term growth and profits. And hence better returns for investors. However there does not appear to be a sign of this - volatility in Australian and US shares is basically in the same range it’s been in over the last century.

It is important to recognise that shares and other growth assets have historically climbed a wall of worry and they will most likely continue to do so.  

Often, the best opportunities in investing arise when many are engulfed by gloom and doom and the market is cheap.

It is important to have a long term strategy and stick to it. The environment we are now in has increased the importance of asset allocation – but this is best left to experts and those who can really put the time in to filter the noise from fundamental signals.