It was no Winter of Discontent in 2021, with the ASX200 continuing it’s upward march, rising nearly 5% over the last 3 months. Strong corporate earnings and positive investor sentiment more than offset Australia’s increasingly deteriorating COVID situation.
Last quarter, we questioned what could stop or slow this exuberance. We cited a correction in iron ore prices and worsening of the pandemic as potential triggers, and both of these have occurred to a certain extent. Not enough to sooth the market in any significant way though!
Our discussions with clients have been as much about cashing out as they have been investing further.
Should I take profits?
Legend has it that in 1929, Joe Kennedy Snr (JFK’s father and a prominent US investor) stopped to get his shoes shined. The shoeshine boy started to give him stock market tips. Joe left the chair, went to his office, and sold out of his entire share portfolio. He avoided the entire 1929 share market crash. Joe’s logic was that when even the shoeshine boy wants in, maybe it’s time to get out! Interest in shares is increasing and we are having more conversations about them (often outside of our normal work environment). Still though, it doesn’t feel we are quite yet at “mania” levels of exuberance (well, maybe in cryptocurrency but that is a story for another day!), and in any case, we rarely advocate a full share selldown. However, it is important to continue to be wary. As holdings hit record highs, it is a natural process to consider taking some cream off the top. However, there are several issues that need to be considered here.
What was the reason you invested in the first place? If, like many of our clients, it was to create a sustainable income, you need to consider if your holdings are still providing this. Long term investors will inevitably experience the ups and downs of investment markets. High quality, robust portfolios provide diversification and some protection against significant market downturns.
Has your portfolio fallen “out of balance”? If increasing share prices have resulted in your portfolio becoming overweight to a particular sector or holding, or out of line with your risk tolerance, this market provides a good opportunity to rectify that.
What are you going to do with the profits? Clients often suggest taking profits, but I counter with the question “what are you going to do with them?”. Often they haven’t got that far! Alternative investment options (particularly in the cash/fixed interest space) are not currently impressive, particularly for those reliant on income. Simply taking the profits is not a strategy, you need to consider what you will do with them.
Consider the capital gains tax implications. This can be a complex area, but if a significant portion of the profits is lost through taxes, is it a worthwhile strategy?
Should I start investing/invest more?
Fear of missing out (or FOMO) is very real. Timing the market is very difficult. Deciding to start investing or adding to existing investments needs to be part of a broader strategy that is personalised to you. Just because your mate is going “all in” or “staying on the sidelines” doesn’t mean these are the right strategies for you. We work with our clients to help them understand there are many different ways of investing, and many different approaches/strategies that can be adopted. Those looking for long term capital growth and/or a sustainable income stream can find opportunities in all market conditions.
This is a long way of saying there is no one right answer. We tell some clients to regularly drip feed funds into this market, we tell some to be fully invested and we tell some to sit it out for the time being. Understanding your overall position is critical to our provision of advice.
In many ways, strong performing markets can be just as difficult to navigate as poor performing ones. Please contact us for a portfolio health-check and to ensure you are optimising the opportunities that exist.