Over the last week, we have seen extreme volatility in financial markets, with the Australian equity market suffering its largest one week fall in over a decade. In America, the S&P 500 fell by over 10% in just 6 trading days, the speediest decline. of that magnitude on record.
Markets have calmed for now, but last week’s movements are a reminder of the importance of protecting wealth, and making sure your portfolio is appropriately positioned for the times we live in.
To that end, we were pleasantly surprised to come across a great ‘investment checklist’, which contained nine points for improving the performance of one’s investment portfolio.
The checklist came to us via the Australian Shareholders Association, an organisation that we have worked with in the past in order to spread the word about the investment case for pink diamonds, and how investors should go about incorporating them into their portfolio.
The full checklist is as follows.
- Avoid gathering a ‘long tail’ of small companies
- Avoid building the unmanageable ‘monster portfolio’ of 80 stocks
- Don’t forget to sell when the time is right
- Diversify by asset class, not just by stocks
- Deploy your cash; it has a negative real return in term deposits
- Go global. Aussie stocks are just part of the market
- Don’t just focus on income
- Focus on growth (missing out on this is ‘the biggest mistake in Australia’)
- Avoid trading. Take a long-term approach
Whilst this checklist was tailored toward stock market investors, and lessons on how to maximise returns in that space, we think there are several insights that are also relevant for pink diamond investors. These include;
Diversify by asset class, not just by stocks
This is an obvious one for investors to consider, with most research suggesting that the key driver of investment returns is asset allocation, not individual stocks you own in your portfolio.
You are likely to be much better off ensuring you have the right mix of shares, cash, bonds and hard assets like pink diamonds in your portfolio, rather than fretting over what percentage of your portfolio should be in bank share A, and how much should be in bank share B.
Given their supply/demand profile, pink diamonds offer a unique investment opportunity in the coming years, and one that can’t be replicated no matter how many stocks you own in your portfolio.
Deploy your cash; it has a negative real return in term deposits
This statement is truer than ever after the crash in bond yields last month, with Australian 15-year government bonds now yielding just 1%, which is barely half the rate of inflation.
The way rates are going, money in the bank will lose value for the next two decades. Little wonder more investors are finding the potential returns of 10% or more per annum in pink diamonds a much more attractive option.
Go global. Aussie stocks are just part of the market
Whilst this point specifically references the stock market, it has implications for other asset classes too, including pink diamonds. If you keep all your money in Australian assets, you are totally exposed to the value of the Australian dollar, which has dropped 40% versus the USD in the last few years.
By investing in assets like pink diamonds, you internationalise your portfolio, build in some currency protection, and indeed will benefit should there be further weakness in our local currency.
Focus on growth
This dovetails in with the point above. There is no rule that you should just focus on income for a portfolio, and indeed for most people, a capital gain tends to be more preferable on a post-tax basis if an asset has been held long-term.
Pink diamonds have offered market leading growth over the past 15 years. With the closure of the Argyle Diamond Mine, there is a good chance we’ll see strong future growth too.
Avoid trading. Take a long-term approach
This last point is critical. The best investors hold assets for the long-term, minimising trading costs and taxes, and the potential to buy and sell at the wrong time, when financial market volatility scares people into poor decisions.
Pink diamonds work best as long-term investments, with the market forces that are driving prices higher likely to take years to play out.
The RBA isn’t done yet
Two weeks ago it would have seemed crazy, but by yesterday it was a foregone conclusion, with the Reserve Bank of Australia (RBA) cutting interest rates to a new all-time low of just 0.50%.
Responding to the growing financial market concern regarding the spread of coronavirus, the RBA decided to give the economy a little stimulus jolt, in the hope it would stave off further economic or financial market weakness.
The Federal Reserve (The Fed) in the United States will likely follow suit this month, with banks like Goldman Sachs predicting The Fed will cut rates by 0.50% in March, with another 0.50% in cuts to be seen at some point in 2020.
Back to Australia, and it is unlikely the RBA is done. At present, the market is pricing in at least one more interest rate cut by August of this year at the latest. Given how fragile financial markets and the economy remain, we expect the next rate cut may happen this side of the financial year, and possibly as soon as next month, with helicopter money, or quantitative easing to be used by the RBA in H2 of this year.
Make no mistake, Australia is well and truly part of the currency war now. All we can do is prepare, and there is no better way of doing that than by making sure your portfolio has adequate exposure to hard tangible assets like pink diamonds.
As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.