Financial Planning

Help! My growth assets aren’t assets anymore!

By Greg Bonner
Certified financial planner

Growth assets may be defined as assets which outperform inflation over the long term, such as shares and property. During the nineties in particular, they represented a portion of a balanced type portfolio that would create the growth required to allow the investor to achieve their personal financial goals. Growth assets were viewed as more tax efficient, inflation proof and offering superior rates of return over defensive assets such as fixed interest or cash.

The last couple of years have been particularly disastrous for unseasoned investors, and the more panicked of these have been desperate to dump their once loved growth assets both here and especially overseas. This has in turn created a self-fulfilling prophecy. As asset prices have diminished other investors have become unnerved, sold out and driven prices, and so performance, well below long term averages. This is illustrated by the representative index figures given in Table 1.

Table 1: One Year Returns versus Historical Returns from January 1920

Index	Represents	1 Year Returns to 28th February, 2003	Historical Returns to December,2002
S&P/ASX 300	Aust. Equities	- 14.7%	12.79%*
MSCI World Ex Aust (Aust. Dollars)	International Equities	- 23.3%	8.02%

This raises two questions:

Is it time to cut losses and sell out of growth assets altogether?

If I was an investor, more than ‘uncomfortable’ (losing
sleep) with the volatility associated with growth assets,
unhappy with lack of income from overseas equities and
thinking that ‘long term’ means next year, the answer
might be a resounding ’yes’. Alternatively, if I decided I
could cope with the vagaries of growth asset investing
and really could take a longer-term view (particularly with regard to the part of my portfolio that was exposed to growth assets), then maybe a smaller adjustment could be useful. For example, more exposure to listed property and less to international shares can ‘cool’ down a portfolio while providing sound income yields.

Why not pull out of equities till things settle, then buy back
in later when things improve?

This can be useful on a tax basis when matching gains and losses. Sometimes, with a little luck, this technique may work well, safeguarding the performance of a portfolio. Just as often, market timing can be disastrous. Since I have yet to meet the broker, analyst or other expert who can consistently sell out a portfolio of investments, wait a period of time, buy into a new portfolio and sell for profit, all at the right times, I’m loathe to assist anyone to attempt it. Moreover, market timing has the potential to produce significantly more nail biting stress than a ‘balanced’ investment approach ever could. For an investor unable to cope with current levels of discomfort, why raise the temperature further? The figures in Table 2 how sensitive the value of a portfolio of investments can be, relative to which days these were invested.

Table 2: Effect of being out of the US markets

For example, just by excluding the ten best days can result in a notional loss of return by -126 %. Excluding best and worst days can result in a positive effect 29.95%. Although this would not, I suspect, alleviate the pain of choosing when and how to perform the task.

There is of course a third option, using alternative type investments to raise the return potential of your portfolio whilst lowering the volatility/risk at the same time. In theory, direct derivative investments like warrants and options (imbedded with the right strategies), have the potential to lower portfolio risk, significantly so at times. This is due to the fact that their up-swings and downswings vary from those of traditional investments, thus producing a counterbalance which is more comfortable to the investor. The same effect is found with certain hedge or absolute return funds, subject to the specialist skills of the manager/s. However, before you think this is the panacea for all financial ills, a word of caution; in practice these are very complex instruments, which for different reasons may be quite unsuitable for you, and allocating too much to this area can be counterproductive in itself. Also, the independent, qualified advice required to assist you may be necessary but still not be sufficient in itself, largely owing to the huge number of uncertainties with investing. Ultimately, whether you choose to actively take control and seek professional advice or simply wait till the market drought is over, the past two years are part of the conundrum and nature of investing. Sometimes it’s healthier to have the grandchildren come and stay, contact friends you haven’t seen in a while or find that beach you always wanted to see on the other side of the country.