January 14, 2016
Mark Minchin

Make sure you have a process for dealing with volatility

At Minchin Moore we take the novel approach of focussing our time and attention on the things we can actually control, whilst remaining cognisant of the things that we can’t. Some key elements here are:


Questions we can’t confidently answer (the ridiculous list):

  • Will markets go up or down?
  • Is there a cataclysmic market event coming, or will it be another good year?
  • Is Tuesday a good day to buy?
  • Is Wednesday a good day to sell?
  • Is the journalist/analyst/economist saying the end of the world is nigh right, or is the optimistic guy the smarter choice?
  • Who is the best guru to follow? You know, the guy that always gets his market calls right?
  • Surely we can just sell at the top and then buy back in at the bottom?


Things we do know (the sensible list):

  • Diversification works.
  • Successful investing takes time.
  • The odds of ‘timing markets’ successfully are extremely low.
  • Markets are in a perpetual cycle of boom and bust.
  • Portfolios that are evenly exposed to shares, property, cash, and bonds tend to exhibit much lower risk when compared to concentrated or single asset class portfolios.
  • Stock markets tend to overshoot on the up and overshoot on the down, but in the long term the average return is quite good (around 9%).
  • When markets go up its often a good time to take some profits.
  • When markets go down its often a good time to top up.
  • Around three quarters of the guys who are paid to pick stocks for a living, fail to beat the market.


Whilst the futility of the first list and the sense of the second may appear obvious, the truth is very few investors are mindful of each of these factors when investing. Most investors still spend more of their time focussed on the “ridiculous list” than on the “sensible list”.

A common misunderstanding is that the average return of a diversified portfolio isn’t good enough, and hence the temptation to go out on a limb and bet it all on “your Mate Bob’s BBQ stock tip” or on “getting out of the market today and back in at the bottom”. These approaches are common but have extremely low odds of success.

Moreover, these attitudes are at odds with the obvious benefits of steady, disciplined, long term investing. Did you know that if you invested $1 in the ASX 300 Index (ie the Australian stock market index) in 1990, it would have turned into $8.75 by 2015? That’s a nominal return of over 800% in 25 years (inflation alone would have got you $1.97). That’s not some hot stock tip, but just the average return of the market index over 25 years. This was a period of time that saw some major market calamities such as the tech wreck of 2000 and the global financial crisis of 2008. Nevertheless, investors who were patient and took no action other than staying in the market, were rewarded handsomely.

So how are we dealing with the market turmoil in here at Minchin Moore…. perhaps unsurprisingly we’re sticking with our strategy of adhering to time proven academic principles.

We diversify broadly, endeavouring to not be overly exposed to any particular asset class. We obsess over keeping investment costs low (something we can control), and we rebalance portfolios to benchmark weights regularly.

This process involves taking profits from assets that have been outperforming and topping up assets that have been underperforming. So, in the current climate we are selling bonds and buying equities (the reverse of what we were doing a year ago). This action is not stirred by some belief that we have reached a market bottom (it certainly could go lower), but rather we have confidence that our systematic approach of regularly buying low and selling high will stand us in good stead through the full cycle.

A key ingredient of successful investing is sticking with your process and not getting caught up in the hype.


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