Episode Details

Investment update: How to navigate current uncertainties

There is never a perfect time to invest. The stars never align. In reality, there will always be reasons why investing now feels risky. The solution is to learn to dance with uncertainty.

Generally, most people can achieve this by doing two things. Firstly, focus only on generating quality investment returns in the long run. Ignore any short-term outcomes, as they are rarely relevant. Stick to proven investment fundamentals. Only adopt evidence-based strategies. Playing the long game often inspires higher levels of confidence.

Secondly, embrace the fact that uncertainty is your friend. Potential investment profits are greatly improved during times of higher uncertainty. Early April is a good example. We helped many clients invest in the share market during April and subsequent months. Whilst we are fixated on maximising long term investment returns, our clients have generated very good returns in the short run.

With this in mind, I thought it would be useful to share my thoughts on a number of risks (read: opportunities) that present themselves at the moment, and how I think you best navigate these.

The US election

The first thing to realise is that markets focus on policies, not personalities. From a pure market/economics perspective, a Trump victory is probably more attractive, at least in the shorter term. The reason for that is Trump’s agenda is to continue reducing taxes, whereas Biden wants to wind back some of Trump’s previous cuts. It is questionable whether now is the right time to raise taxes, especially since the US economy needs all the help that it can get at the moment. That will be ‘the markets’ primary concern.

There is also some divergence in energy policies. It is fair to say the Biden’s energy policy generally favours environmental protection (Biden plans to impose a ‘carbon adjustment’ fee).

Of course, whether a President can implement their policy agenda depends on whether they control the House of Representatives and Senate. The Democrats already have a majority in the House of Representatives, so it needs to win the Senate in next month’s election to control all three arms of government. If they don’t, the Republicans can block legislation unless the Democrats can get rid of the filibuster, which you can read about here.

The big question is whether Trump will go quietly. I’m sure most people would agree that this is unlikely. A refusal to leave the white house, a legal challenge and who knows what else are all possible outcomes. Market’s dislike uncertainty and such events will probably result in higher levels of share market volatility, which investors must be prepared for.

In addition, any delay in inaugurating a new president will further delay the approval of a second trillion-dollar stimulus package which could exacerbate economic damage.

There is nothing long term investors can or should do to accommodate these risks. It is merely a case of acknowledging that this volatility could arise, but it’s unlikely to persist for more than a few months (hopefully).

US tech sector valuations

The chart below eloquently illustrates the impact that the FAANGM stocks have had on the overall US share market index’s performance (the FAANGM stocks include Facebook, Apple, Netflix, Google, Amazon and Microsoft).

These six stocks have contributed approximately 40% of the index’s return (i.e. the return over the past 7.5 years was 10.4% p.a. or 7.4% p.a. excluding the FAANGM stock).