Most people don't take an active role in managing their Superannuation. As a long term investment, that’s generally fine. An old stock market proverb says "It's not timing, it's time in". For most people, most of the time, that's true. Now is an exception for me. I've moved all of my super into cash.
I've considered whether to mention this for a couple of weeks. On balance I've decided my observations may be useful for my friends because not everyone has my interests.
Nobody can predict investment markets and I'm no seer. I look at fundamental value. My decision will have an opportunity cost in short term performance but I've made the assessment markets could decline across a range of asset classes. I see lots of risk without corresponding value. So I'm getting out now.
I consider the market in macro terms. I don't move my money around often, I pick a trend and I go with it until I hit a threshold that causes me to adjust strategy. Now is one of those thresholds.
Fund managers would consider me to have a high investment risk profile. I don't think of it that way but it's true I make decisions that professional advisors would be unlikely to recommend to their clients. I seldom invest in "Growth" or "Balanced" choices for super funds, usually choosing specific classes like "International Equities", "Australian Equities" or "Property".
If I'm such a confident investor, why am I pulling my funds out into cash?
My reasons include;
- The domestic economy is imbalanced, especially with respect to property prices. Property values are way out of line with affordability, which has to impact price eventually. People borrow to the limit of their capacity expecting the market to continuously increase. This is a risk, especially if there is a shock to the economy.
- The stock market is also exposed. Not as badly as property but credit is cheap, and superannuation funds are flowing into the market in a way that concerns me. I'm not suggesting the stock market is a Ponzi scheme, but the way funds flow into the market looking for an effective way to be utilised means asset values have been increasing out of line with value, and not pricing in risk.
- I'm not convinced the Euro currency fiasco is over. The problem economies of the Euro zone are not fundamentally "better" than they were. There are a number of geopolitical issues in Europe, from disagreement over migration and Brexit, to weakened economies of member states, to external forces attempting to undermine the EU.
- If the political situation in the USA looks bad, it's worse than it looks. The economy has been doing okay under Trump, but that will not last. That is momentum from the end of the Obama administration. The mismanagement of the current federal administration is so serious, and the dysfunction on capitol hill is so bad, things will inevitably fall apart. The economy cannot be shielded indefinitely from the disaster unfolding in Washington.
- That lack of confidence is compounded by a range of concerning trigger points in the global landscape. North Korea and Iran are just two bad actors. There are more. Even if we don't get a war caused by stupidity and bravado, America is fast losing its diplomatic credibility. The inability to respond to the humanitarian situation on US soil in Puerto Rico will have been noted. The wavering on diplomatic agreements like the Iran nuclear deal, or even the refugee resettlement deal with Australia causes foes and allies alike to question whether the USA can be trusted to keep its word. When that crystalizes into the next global power shift, it's likely to be bad for investment markets.
Markets are based on trust and confidence. Everything is fine until our collective nerve breaks, then it's carnage as we all rush for the exit. I've taken a view that trust and confidence are a bigger risk than the market has priced in.
What this means is up to you. I'm not saying you should do what I've done. But it is a good time to think about how your investments are structured, particularly if you haven't thought about it for a while. At the very least, you should be comfortable with the idea you are riding a bull market. If not, it's time to consider a more conservative investment stance.