News & Commentary

A forecast for all-seasons 02 Dec 11

Keeping score is essential to knowing where you are on your financial planning journey.

But this year the scorecard for the respective asset classes for most people is likely to prompt feelings akin to turning up to a football match confident of a good showing only to see your team go from bad to worse.

As we head into the last month of 2011 it has certainly been a year investors in growth assets will be glad to see the back of.

To the end of November the asset class league tables looks like a rerun of 2008 with cash and fixed interest delivering relatively strong returns while growth assets like Australian and international shares were in the red.

Which makes this year’s silly season more risky than usual.

The silly season is not referring to festivities over the Christmas-New Year period but rather the seemingly irresistible temptation for market pundits to put pen to paper around this time of year to give the latest forecasts of market returns for the year ahead.

Now the start of a new year brings with it the sense of a fresh start, the chance to start anew.

And after the year we have just had who would not like to start again given the wave upon wave of sovereign debt issues in Europe that swamped the promising signs of growth we were seeing at the start of 2011.

In Australia even that cornerstone of investor confidence – residential property – had a sinking feeling in most capital cities with the flow-on hit to confidence.

Cash and fixed interest returns were one of the few bright points on the investing landscape courtesy of our relatively high interest rates but that was as much about avoiding risk as seeking return.

Now it is not surprising that investors look to professional fund managers, researchers and other assorted industry experts for a view on how their portfolio will perform in the year ahead.

But forecasts have the potential to give a false sense of certainty and confidence. The undeniable truth is that no-one has some secret recipe that lets them foretell the future reliably. And a good question to ask yourself is if someone did have that ability why would they tell the rest of us?

At Vanguard at the end of each year we add another panel to our asset class performance table that ranks each asset class from top performer to bottom going back to 1970.

You can check it out on the website and take the time to study it for awhile to see if you can see a pattern among the colorful ensemble of asset class returns. In reality it looks more like a game of snakes and ladders than a record of global investment market activity.

There are a couple of times when strong performance has persisted over a number of years but the overwhelming sense when you look at the 30-years of colored squares is one of a random walk.

And it helps to keep this apparent sense of randomness in mind when you are reading the various forecasts in the newspapers and magazines in the weeks ahead.

For investors it is about accepting what you can – and cannot – control.

You cannot control future returns but you can control the amount of risk in a portfolio.

What this year’s investment markets have reminded us of again is the value of diversifying across all the major asset classes – from cash, fixed interest, property, to domestic and international shares.

Diversifying your portfolio and getting the balance right between defensive and growth assets for your age and risk profile is a straightforward but effective way of staying on track with your financial plan.

Review and rebalance your portfolio at year end by all means but treat market forecasts with the healthy skepticism they deserve.

* Written by Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.
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