25 September 2023

Taking time: How long term plans depend on short term knowledge

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Jean-Paul Pelosi* says that time is only on the side of investors if they take careful note of what is happening now.


Investors can improve their ability to achieve their long-term objectives with better management of short-term shifts in asset values.

Having a long-term view is typically seen as a wise investment strategy, yet a Russell Investments report asserts that investors can’t ignore short-term numbers within their longer-term focus.

For example, for the 20 years to the end of 2017, the returns for all asset classes except Australian shares were weaker than for the 20 years to the end of 2016.

By the same token, Australian residential property was the best-performing asset class in 2001 and 2002, but the worst in 2004 and 2005, the report shows.

Furthermore, last year property underperformed global shares hedged by more than 10 per cent.

Director of Client Investment Strategies at Russell Investments, Scott Fletcher says this type of information shouldn’t be used to pick quick wins but rather to help investors better define their long-term investment goals.

“It’s important to avoid the human factor of decision-making,” Mr Fletcher says.

“Often when you see things changing year to year in asset classes, there’s a tendency for some to try to predict the next year.

“Often these people think they’ll do better than the market.

“The better path is if you’re more diversified across a range of different asset classes, you can achieve your objective with a smoother ride.”

Mr Fletcher says that as we head into the latter part of the current cycle, investors can expect volatility, so the last 10 years of information is not going to be that helpful.

Instead, the focus should be on long-term outlooks.

Return objectives in the market are commonly inflation plus four per cent.

However, Mr Fletcher said return assumptions for the next five years across a typical 70/30 or balanced portfolio have an average return gap just short of two per cent a year.

He says investors should, therefore, employ a combination of additional return sources, dynamic management, downside limitation strategies and implementation efficiencies as the market trends downward.

Russell Investments’ report also notes that when presented with both short and long-term observations, it’s tempting to switch investment strategy every year.

However, an investor who regularly switched asset classes to follow the previous year’s ‘winner’ would have a portfolio 29 per cent worse off than one who stayed invested in a sample balanced fund over a 20-year period, the report states.

*Jean-Paul Pelosi is a Sydney based journalist and content writer who can be contacted at https://jppelosiwriter.com

This article first appeared at investmentmagazine.com.au

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