Time to put some money to work

Daryl Wilson

Affluence Funds Management

The closure of Cambridge University in 1665 because of the bubonic plague forced Isaac Newton to work from home. There he discovered that white light contained all the colours in the spectrum, developed the fundamentals of calculus, and formulated the basics of the law of universal gravitation. He then turned twenty-four.

Despite what's going on out there, it's important to remain rational and positive. I wanted to focus on what's happening in markets and what can be done about it. The short version is that we believe it is now time to put some money to work while retaining some firepower in case it gets worse.

First, a recap. The selloff, so far, has been brutal. Below is a graph of the ASX200 from November 2007 (the start of the GFC) to March 2020. Each bar is equal to one month's trading on the ASX, except the last one, which covers only the first 16 days of March. Red bars are months when the ASX fell. Green bars are months it rose. It's hard to read, but click the image for a bigger version. 

The fall this month so far (and we are barely halfway through it) has been greater than any month during the GFC. The ASX200 index has fallen almost precisely 30%, from a high of nearly 7,200 only 25 days ago to 5,002 on 16 March.

The CNN Fear & Greed Index in the US tracks seven indicators of investor sentiment and combines them to arrive at a number between 1 (extreme fear) and 100 (extreme exuberance). In January of this year, it hit 97, a rarely achieved level of greed. This occurred at about the time the ASX was making new all time highs. Last Friday (the 13th), it reached an all time low of 1. Extreme. Fear.

In times of stress, investors buy bonds. That demand causes them to go up in price, which means their yield (which is fixed for their term), falls. Last week, the ten year US treasury bond yield fell well below 1%. That has not happened in the last 150 years.

Towards the end of last week, supposed "safe havens" including US treasury bonds, gold and bitcoin all fell at various times. This seemed to be due to selling by those who were overly leveraged or to cover losses in other areas.

If that all sounds pretty dismal, it is. The world has changed in the last three weeks. But the good news is that we appear, for now at least, to be at peak fear and pessimism.

And so, that brings me to what we've been doing in the past month or so. And what we're likely to do going forward.

How we are dealing with this market correction

Four strategies we use to help with the impact of market corrections, depending on investment conditions at any given time, include the following:

  • Hold some cash.
  • Invest with managers you expect to outperform their investment benchmark in down markets.
  • Allocate part of the portfolios to investment strategies that you expect to hold up well in market downturns and assets that are cheaper than long term averages.
  • Purchase some put options, which partially protect against market falls. It's a form of insurance. But it's very expensive, so you can't use it all the time.

Since the onset of the correction, we've been more cautious than usual when deploying our extra cash. In the last day or two, we've started to deploy that cash. We'll continue to do that if markets fall further. The cheaper the deals, the more we intend to buy, and the higher the long term returns are likely to be. It is that simplest of strategies - buy low, sell high. 

Easy to say, but when it comes down to it in an environment like this, much less easy to do. What we are very confident in saying, is that this is not the time to sell.

I've fielded quite a few calls and emails this month from investors and friends, asking if now is the right time to invest more. My answer is that investing is a personal endeavour. What is right for one person may not be for someone else. All I can tell you is what I'm doing personally, and what we're doing with our fund portfolios. 

We've been cautious for much longer than usual. But we've now started investing more. And if markets fall further from here, we'll continue to do so. We're not going all in yet, because we're in no way certain we have seen the bottom. 

But the more markets fall, the more we will invest. And we expect to be rewarded handsomely for it over time.

In the meantime - look after each other and be careful out there. 

This article is prepared by Affluence Funds Management Limited ABN 68 604 406 297 AFS licence no. 475940 (Affluence) to enable investors in Affluence Funds to understand the underlying investments of the funds in more detail. It is not an investment recommendation. Prospective investors are not to construe the contents of this article as tax, legal or investment advice. Neither the information nor any opinion expressed constitutes an offer by Affluence, its subsidiaries, associates or any of their respective officers, employees, agents or advisers to buy or sell any financial products nor the provision of any financial product advice or service. The content has been prepared without considering your objectives, financial situation or needs. In deciding whether to acquire or continue to hold an investment in any financial product, you should consider the relevant disclosure documents for that product which are available from the product provider. Affluence recommends you consult your professional adviser to determine whether a financial product meets your objectives, financial situation or needs before making any decision to invest.

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Daryl Wilson
CEO/Portfolio Manager
Affluence Funds Management

Daryl has over 25 years’ experience in finance and investing. He formed Affluence to provide investors with regular income and long-term capital growth by investing with some of the best fund managers available in Australia.

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