2017 – The Year of Bubbles

Stock market bubble

Every day, investors are scratching their heads, undecided as to where they should be investing their hard earned money (fiat money, cash, not Bitcoin – more on that another time).

And rightly so. Financial markets have trotted along over the last 11 months, without stopping for much of a breather. Here’s a quick wrap up of the dizzy climbs in asset prices:

  1. Leonardo da Vinci painting sells for US$450 million at auction after the owners originally purchased it for less than US$10,000 in 2005
  2. Bitcoin is up 677% from $952 to $7,980
  3. 702: The number of global interest rate cuts since Lehman Brothers collapsed.
  4. Argentina issued a 100 year bond (they’ve defaulted 8 times in the last 200 years)
  5. Sydney house prices have doubled in the last 8 years
  6. The US stock market volatility fell to it’s lowest on record, while prices continued to make record highs

To put 2017 into perspective, here’s how US assets have performed compared to periods 1926-2008, and 2009-2016:

Prior to these “bubble” prices, we saw these bubbles:

  1. The highest known sale price for any piece of art was US$300 million
  2. Between July 2010 and February 2011, Bitcoin went from 5 cents to $1.10, that’s a 2,100% increase
  3. By the end of 2016, global central banks had cut interest rates 690 times since the collapse of Lehman Brothers
  4. Walt Disney and Coca Cola have previously issued 100 year bonds. Venezuela, Uruguay, Peru, Mexico, Ecuador, Costa Rica, Chile, Brazil, and Spain have all defaulted at least 8 times
  5. From 1996 to 2006, Melbourne property prices climbed 148%
  6. The S&P500 made 12 all time highs during 1997

Bubbles have been growing and popping for centuries, as far back as 1637. Since then, mainstream media has had a terrible track record of identifying bubbles accurately, and in real time. In fact, it’s probably quite the opposite.

Investors spend way too much time talking about, and worrying about things that happen 1 in every 4 years. There is no formula or model that accurately identifies bubbles in real time. If there is, it certainly is not public.

Will the market crash? Yes. When? I do not have the fainest idea. If anybody tells you they know when and by how much, they’re taking you for a fool. Or perhaps they’re the fool.

Markets are not cheap, relative to historical averages. The alternatives however, are forcing investors to move up the risk spectrum. Yet, the scars from the GFC have not healed, and this is probably why we haven’t witnessed complete euphoria.

The market is going to crash. We’ll see a decline of up to 60% in stocks. Investors will flee risky assets and pile into the safety of gold and cash (maybe Bitcoin – more on that another time). Unemployment will spike, and we’ll witness a domino of defaults on loans. The property market will shutdown, and sellers will be caught out with their pants down.

There was a study done a little while back now. A study that included bananas and chocolates. Let’s say your attending a conference next week. One week prior to the conference, you’re asked whether you prefer bananas or chocolates as a snack. 74% of you respond by choosing bananas. Fast forward to the day of the conference. The same people that imagined themselves eating bananas, ended up eating chocolates. Self-control is not a problem in the future. It’s only a problem now when the chocolate is in front us.

Design and construct your portfolio as if the market is going to collapse tomorrow. Because whatever you’re feeling and telling yourself now, is not how you’re going to act when the time comes. You’ll tell yourself you’ll have the bananas, but we all know you’re going to each the chocolates, and it’s not going to be good for you.

Don’t say I didn’t warn you.

Ignore the Headlines and Advice From the “Experts”. Here’s Why.

When a major global bank advises clients they should “sell everything” investors had better take notice. Or should they?

It’s January 2016, RBS advised it’s clients to brace for a “cataclysmic year” and that they should

“sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small”

The bank expected stocks to fall by 20%, with a deeper decline for the London stock market. The bank’s research chief for European economics and rates was convinced, “This is your number one theme for 2016, without any question in my mind”.

UBS quickly jumped on the bandwagon, and issued a “significant change” to it’s house view, saying policy chaos in China had unsettled markets. They went so far as to cut their stock market exposure from overweight to neutral on a, wait for it…”six-month tactical horizon”. They went underweight emerging markets.

Pessimists were warning that unless there was a batch of unquestionable good data over the coming months (remember, this is back in January 2016), the sell off could become self-fulfilling and quickly metamorphose into the next global crisis.

So let’s take a look at how your investments performed since.

Source: Thomson Reuters

  • Blue line – London stock market: +1.24%
  • Red line – International fixed interest: +2.22%
  • Orange line – US stock market: +13.34%
  • Green line – European stock market: +17.83%
  • Purple line – Emerging markets (the asset class you were specifically advised to underweight): +25.70%

As tempting and enticing these splashy headlines can be, the reality is that it’s simply guessing. Making large bets like this on outcomes that are difficult to even place probabilities on, is simply speculation, it’s not investing.

Investors should focus on the things they can control. Having a game plan, maintaining diversification across stocks and bond, currencies and geographies, keeping costs low, and avoiding short-termism.

Wealth is created over long-periods of time. It requires discipline and patience – probably the two most common attributes of successful investors.

Don’t believe me, here’s more from an ex-finance journalist.

Compare the pair

You’ve seen the ads? You know, the ones where industry superannuation funds have a crack at all other superannuation providers. I’ve largely ignored them. They actually humor me. Yet the message is loud and clear to many other working folk and retirees – Industry Super Funds are run only to benefit members, have low fees and have never paid commissions to financial planners.

We’ve been doing a bit of work in this space for long enough to know a thing or two about superannuation funds, In fact, I was having a conversation with someone recently on this topic, so I decided to crunch the numbers and compare the pair.

I selected the four most common industry funds, Hesta, CBUS, Australian Super, and HostPlus. I’ve assumed you invest $100,000 in each, and have broken down their respective fees on the far left hand side. I’ve then calculated the dollar value of each expense, summed these values, and translated it back to a percentage.

I’ve then added a fifth superannuation fund, Macquarie Super Manager, to put things into perspective. Here are the results (click for larger image):

Compare the pair

Of the four industry funds, Australian Super seems to be the cheapest at 0.98% pa, and HostPlus sitting on the other end of the spectrum at a whopping 1.54% pa.

Meanwhile, the Macquarie Super Manager is chugging along at 0.66% pa. Fees are charges are the one thing you, as an investor, can control – I encourage you to do so. It’s your hard earned money, and you deserve to know what your options are.

Next time you pick up your superannuation statement, please try really hard to see through the marketing, and find out what you’re really paying. What you may be told and what is actually happening could be two different things.

In fact, next time you receive your superannuation statement, call our office and mention this post, we’ll do the hard work for you. Obligation free – no strings attached.