Some thoughts on investment strategy

Stocks up yet again in the US overnight. We've heard nothing but doom and gloom from some quarters for the past half decade and yet all you needed to do to generate returns of well over 100% since 2009 was to hold the Dow Jones index, a price-weighted index of 30 blue chip industrials.

Warren Buffett once said that being out of the market introduces a different risk to being in the market, and over the history of stock markets, it has indeed been a costly one. Here's the Dow 5 year chart, courtesy of Bloomie:

Source: Bloomberg

A huge deal was made at the time about the blips in the chart, such as the corrections caused by the US debt ceiling crisis and the European debt crises, yet over time corrections tend to take on a decreased significance as share index values run higher.

The stock market recovery has not been as pronounced in Australia, but you would have done very well had you focussed on the industrials and financials, as opposed to resources.

Australian Share Price Indices graph

Indeed, over the decades in Australia, profit-making industrials have tended to outperform resources stocks and listed property trusts, tending to be more self-perpetuating businesses which pay strong dividends, while mining companies re-invest capital in further projects and have often paid weaker dividends in downturns.

Property trusts (once known as LPTs, now as A-REITS) have paid out high dividend ratios but demonstrated weak capital growth, sometimes diluting values through capital raisings for new projects.

Resources stocks have had a poor run since the onset of the global financial crisis. The 5 year chart of Rio Tinto (RIO) is an example of this under-performance, until its recent upturn which was buoyed by a bounce in the iron ore spot price.

Source: ASX

Generic advice

There is a worrying trend towards generic advice being issued from a wide range of sources on the internet. Each person has different financial goals, needs and risk tolerance levels, so generic advice is often misleading and could result in capital loss.

Even more worryingly, an awful lot of generic advice is dished out about investing (or very often not investing for whatever reason) by people who have never built an investment portfolio of their own.

Free advice is usually worth what you pay for it, as the old saying goes.

Ben Graham once said that if you have an amount available to invest regularly, then the only sensible investment strategy is to write yourself a contract committing to buying shares in good times and in bad on a regular basis.

This strategy is even more straightforward today because instead of having to buy a cross-section of the index to diversify your specific investment risk, you can simply invest regularly in a diversified product (such as an ETF or, my preferred option, an Australian LIC with heavy exposure to industrial stocks) which mirrors the balance of investments and risk profile you require.

My wife's index fund has just entered its 17th year of existence; that's nearly 200 consecutive months of share market acquisitions. This investment approach offers great peace of mind and requires very little skill other than discipline - you don't need to fret about how the market is performing on a day-to-day basis (if you are doing so, this maybe an indication that you have adopted the wrong investment strategy).

If the market falls, your money will just buy more stocks. And if it rises, your net worth increases and you buy fewer shares while the market is high. In the meantime, you can enjoy the growing dividend streams.

The only calibrating this investment approach might need is to learn to buy more heavily when the market suffers a major correction, such as it did through the financial crisis.

Most developed world economies are not like Japan and do not fall into a long spiral of deflation. Indeed, even in Japan, lessons have now been learned and stimulatory monetary policy has seen stock valuations surge by an astonishing 74% in the past year.


Investment strategy in Australian property is a different beast for most average investors.

Statistics show that most Aussies do not ever invest in more than a handful of properties and therefore are unlikely to benefit from the averaging approach which so benefits share market investors.

The leverage involved can also mean that even when only buying a small number of property investments, the balance of a portfolio can be skewed towards this asset class, increasing the portfolio's risk.

Further, yields are so low on residential investment property that the asset class only becomes worthwhile for most if the investor can source reasonable capital growth. Cash flows can be reasonable on some commercial property types, but mostly this is not the case on residential stock.

For these twin reasons, it is important to invest only in areas where the population is forecast to increase for decades to come and there is little land available for release.

Commentators will continue to give the impression that they can forecast short-term market movements, despite the not-so-secret truth that they can't.

When you are granted a mortgage, the lender tends to give you a handy hint as to the appropriate time horizon for limiting risk in property investment in the terms of the loan: banks are comfortable that real estate is of an acceptable risk over 25 years.

Historically, this has been true, but investors would be wise to exercise care when selecting property investments and stick to those which suit their own risk profile.


CPI (inflation data) today, which will determine whether interest rates are cut again in August.

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