By Craig McAvinue – 6 June, 2023
“If you can't explain it simply, you don’t understand it well.”
May has come and gone and from where I sit in Thailand it’s feeling super hot every day. With Europe and the US moving into their summers, we can expect the annual seasonal slowdown in market activity. While the expression “when Wall Street sneezes, the rest of the world catches a cold” is often cited, it’s not always true that markets follow suit, as indicated in last month’s data:
Data table is from Google Finance
On the foreign exchange front, the USD made gains against other currencies:
Data table is from Google Finance
Diversification is a term you will hear bandied about often in financial publications. On its face, this seems good like advice and is certainly true when considering your overall financial position. As we all know, stock markets are volatile and having some exposure to unrelated investments is key, especially in times when markets are tanking as they did in 2022. So, holding a mix of assets such as property, shares, businesses, etc. is a useful approach.
Then within your equity portfolios, there are additional diversification opportunities: equities, bonds, treasuries, alternatives. Within these asset classes you have ETFs, active managers, hedge funds. These managers may specialize in sectors like technology, healthcare, energy, while others focus on areas like Emerging Markets, Developed Markets. Geographical locations offer further choices: India, China, South Africa. Within most segments you have mid cap, small cap, large cap. It’s no wonder that the complex nature of investing means individuals who do so without professional advice are more likely to lose than make money.
I have often written about sectors and those that I favor over those I do not, such as consumer staples over energy. Geographical locations are also a factor for me, although identifying these specific areas is difficult. Last month’s results demonstrate this dynamic: the Nikkei in Japan is flying, having had its best month in two and a half years, breaking the 30,000 mark for the first time. Large foreign investment is reportedly behind this growth. And while the S&P in the US was flat, the UK was down, due mainly to being behind with its fight against inflation.
The differences between similar geographical areas should discourage investors from trying to be too cute with asset and area selection. If you look at the last five years, investing in an ETF that focused on the Denmark market would have yielded 11.5% per annum, the top performing country. Yet neighboring Norway, which may seem similar, was down 2.7% for the same period. In Asia, Taiwan was a top performing market with an annual return of 10.5%, while China was down 9%.
It’s often true that people are successful because they are able to make things simple. This concept holds true in investing. Global brands such as Proctor and Gamble, Unilever and Nestle sell their products in almost every country in the world, which allows investors to avoid the geographical location risk. Regardless of what is going on politically, people still need to eat, drink, wash, etc.
Taking a simple approach over time will always work for investors. The great Peter Lynch said, “Know what you own, and know why you own it,” which is just as relevant today as it would have been fifty years ago when he coined the phrase.
A good financial advisor should be able to recommend areas where there is growth. Emerging Markets are an area that most (myself included) believe clients should have exposure to (within their timeline and risk profile). But which markets? Mexico, South Africa, India, Malaysia; there are so many choices, so much information to parse. Times like this are when using expert managers is the way to go. Using active managers to identify the best opportunities in the best countries is worth their cost.
There will be moments when certain complex strategies will have a good run, such as asset classes like crypto or hedge funds that double or treble S&P trackers. But for most investors, the consistency in the simple approach will produce the best results over time.
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