07 Nov September 2022
At Forrest Private Wealth, our investment philosophy underpins our financial planning advice, which ensures our client’s wealth benefits from long-term exposure to equity markets. We believe holding a well-diversified portfolio of predominantly dividend-paying businesses over a long-term period is essential in financial planning for wealth accumulation and, ultimately, retirement planning.
By following our retirement planning process, a Forrest Private Wealth financial planner stays true to their investment advice, ignoring the noise and pressures of the market to provide their clients with a stress-free retirement. At Forrest Private Wealth, our financial planners capitalise on an investment philosophy that provides predictable income streams from equity markets, setting clients up for their desired retirement.
Long Term Portfolio
September proved a harrowing month for markets as central banks continued interest rate hikes and recession risks persisted. The Long account was certainly not immune from the turmoil. On any given day, month or year, the direction of the share market can make many feel we are either missing out (strong bull market) or scare us (bear market). In a world of instant gratification, making a conscience decision to stay the course, stick to the strategy and more importantly, remain patient, is critical. How many of us know someone who “lost everything” in the 1987 crash, the Tech wreck, GFC or more recently “took a hit” through Covid. These “investors” took action, invariably selling to cash, to try to to insulate themselves from the uncertainty. Few picked the time to reinvest. The reality is such steps rarely yield the desired outcome over the long term.
Exhibit 1 illustrates the impact of missing just one, five, and ten days in the market with the highest total return for the Russell 1000 Growth and the Russell 2000 Growth over the past 20 years. Notably, some of these “best days” can occur during highly uncertain times, such as the challenging market downdraft at the end of 2008, and the early “world is ending” phase of the COVID-19 pandemic. In our eyes, overlaid with appropriate allocations to cash, fixed income and share markets, it merely highlights the wisdom of staying invested for the long term.
Exhibit 1: Impact of Missing the Best Days in the Stock Market, August 31, 2002 to August 31, 2022
Source: Bloomberg, as of August 31, 2022
Patience isn’t just a virtue. It’s the essential ingredient in any successful financial strategy.
Short Term Portfolio
The volatility witnessed in interest rate markets in the first half of the calendar year continued throughout the September quarter as investors attempted to negotiate significant swings in both interest rate and corporate bond markets. Bond yields ended the quarter notably higher as both the US Federal Reserve (Fed) and the Reserve Bank of Australia (RBA) increased official interest rates aggressively in an attempt to slow their overheating economies and get inflation under control. Locally the RBA increased from 0.85% to 2.60% and the Fed in the US from 1.75% to 3.25% at their upper limit.
Interest rate markets are currently factoring in a peak in the RBA cash rate of just under 4% in 2023 with one outcome of this being that higher mortgage rates are impacting property prices. Additionally, higher inflation in general is further reducing household disposable incomes. At this point in time it is apparent that the RBA has so far been successful in terms of slowing down the economy. We would hope that a period of fewer and smaller rate increases near term seem appropriate to allow the RBA to assess just how successful they have been.
Micro Cap Portfolio
Equities are still mainly driven by the ever-changing macro backdrop which seems to be driving share prices more so than company fundamentals. Global equities sold off during September on growing global recession fears and another high US inflation report. This had the impact of driving bond markets to price in a higher and steeper trajectory for the official cash rates.
Softening global economic data suggests that restrictive monetary policy settings are starting to dampen demand, however tight labour markets remain a key challenge. At this point in time when the US Federal Reserve discusses or sets the price of money, the reverberations are felt in equity markets worldwide.
Domestically, at the start of this month the RBA has raised rates by 25 basis points to 2.60 per cent instead of the 50 basis points broadly expected and talk immediately moved to “what is the next move?”. The inflationary forces in the Australian economy are weaker than those elsewhere, their drivers and transmission also different although given the extent of the Australian consumer’s indebtedness, particularly to the variable home loan regime, the policy freedom of the RBA is also different.
Continuing to invest in companies that have strong balance sheets, generate strong cash flows and are positioned to continue to grow is important in this market. The investment managers we work with in this portfolio have a proven track record of investing in companies with this fundamental focus and a strong track record or above average returns.
Forrest Private Wealth’s discipline in providing financial planning, retirement planning, and wealth management services to its clients allows our clients to benefit from years of experience providing financial advice through major impacts to equity markets where staying the course has helped them.
Forrest Private Wealth has a dedicated team of financial planners and support staff providing clients with peace of mind in working towards and achieving their life goals.