Copy of 1300px x 300px – Untitled Design (2)

6 November 2017

Over the past week Australian shares were up 1.0% while small company shares rose 1.5%. Shares in developed countries were up 0.5% with the US market rising 0.3%. Shares in emerging markets climbed 1.4%. The Australian dollar was down 0.4% to 76.50 US cents. The Australian 10 year bond yield fell to 2.57% with the US 10 year bond yield falling to 2.33%. The oil price rose 3.2% to 55.64 US dollars per barrel.

Following positive feedback on last week’s desert island note, we’ve decided to run with the same theme this week.

Gilligan and Grace each inherit identical investment portfolios from their parents, wealthy pineapple farmers from Honolulu. Their parents intended for Gilligan and Grace to hold the investment portfolios for the long-term.

Gilligan is unfortunately stranded on a desert island after his charter boat sinks, spending 10 long years there eating fish and drinking coconut milk before being rescued. Grace spends the same 10 years actively managing her investment portfolio of mutual funds on an ‘informed basis’ - paying attention to market movements and the financial press – and, not being able to help herself, adjusting it along the way. 

Do you think Gilligan or Grace would be financially better off at the end of the 10 year period? The answer may surprise you.

Research suggests Gilligan, who through circumstance was forced to hold the investment portfolio, would end up far better off than Grace, possibly by a number exceeding 20%. Studies suggest that active retail investors trail their ‘buy and hold’ counterparts by around 2% pa.

The reasons behind the difference appear to be behavioural: investors may overreact to short-term news that has little effect on the long-term fair value of the company, sector or market. This seems to contribute to retail investors tending to buy high, entering after a period of big gains, and sell low, exiting as share prices tumble.

So, as well as having a much better tan and lower blood pressure, Gilligan will likely have a much more comfortable retirement than his ‘more fortunate’ sister Grace.

Trying to time entries and exits in investment markets is very hard. This is true for both retail investors and sophisticated institutional investors. We’ve seen many fund managers, some quite famous, fail when it comes to successfully timing the short-term moves of the market. 

Media tend to celebrate the winners, while the losers, often the same ‘successful’ people a little further into the future, disappear without much mention. At Mine, our investment process incorporates asset class valuations with a long-term perspective. While we are conscious of the risks we don’t attempt to time short term moves in markets. 

Signing off

Robert Graham-Smith | Senior Investment Analyst

Past performance isn't necessarily an indicator of future performance.

All data sourced from Bloomberg.

Sources: Morningstar, Research Affiliates.