You often read in the financial press, or hear in the media, that investors should do something….  Buy shares, sell shares, buy gold, sell gold, buy property, sell property….  It’s enough to make your head spin.

Alright, but let’s acknowledge reality – markets haven’t been going well, especially international markets.  Does that mean you give up and sell out?  Should investors with new investable assets avoid down markets altogether and, for example, only buy growth assets (like shares and property) in Australia, where it feels “safe” to invest?

These ideas and some others are put forward as rational solutions during distressing times.  Our simple conclusion is that selling out of distressed markets and avoiding them altogether with your new investable assets has been, and will continue to be, a losing strategy.

So try it if you like, but don’t expect much success.

The Looooooong Term
Not another discussion about investing for the long term!  The vast majority of investors have long term (not short term) objectives for their money.  Chances are, you do as well.  Whether your goals are:

• Achieving or maintaining a comfortable retirement

• Helping the children or grandchildren

• Assisting with charitable causes

• Buying a holiday home

• Regular overseas holidays…

Success is measured in years.  Really, 20 years from now, in early 2032, will it really matter what markets did in 2011?  In 1991, Apple thought they were better off without Steve Jobs, Microsoft was still selling DOS and was working on a prototype of Windows, cell phones were the size of bricks and Australia’s Prime Minister was Malcolm Fraser.

The point is that as a long term investor you should invest based on your long term needs and you should own some growth assets in a diversified and low-cost way.

Okay, so with that logic in mind the next sentence I hear regularly around the BBQ is; “that may be true but I’m sure not investing in distressed markets in Europe or anywhere else overseas."

At this point we should look at history to help guide our investment decisions.

See the chart below, which documents bull and bear market periods in the MSCI EAFE Index from January 1970 through December 2010. The rising trend lines in blue designate bull (rising) markets occurring since 1970, and the falling trend lines in red document bear (falling) markets.  The numbers above or below the bars indicate the duration (in months) and cumulative return percentage of the bull or bear market.

Some of those bear markets include the oil embargo, the fall of Eastern Europe, the tech wreck and the Global Financial Crisis. There are a few very important lessons to take from this graph.

First, since 1970, bull markets (where shares increase) in the MSCI EAFE Index have lasted longer than bear markets (where shares decrease) and delivered gains that are disproportionately greater than the bear market losses.

Second, fluctuating performance within each trend illustrates that volatility and uncertainty occur even within established market cycles – bull markets may have short-term dips, and bear markets may have short-term advances.  The immediate trend is not readily apparent to market observers and, in fact, may become clear only in hindsight.  This illustrates the difficulty of accurately predicting and timing market cycles.

Third, the graph suggests the importance of maintaining a disciplined investment approach that views market events and trends from a long term perspective.  Investors who react emotionally to short term movements are at risk of making ill-timed decisions that compromise long term performance.
Last, we’re in the midst of a very long bear market for international investments….

What’s the big picture?  Bear markets don’t last forever.  They are followed by bull markets that tend to more than make up for the bears and the perception of market risk in international investments is very high right now.

That last point is important because the more dangerous the market feels, the more likely it is to produce generous returns in the years ahead.  In other words, the business cycle and return premium for investing in volatile assets is inversely related.

What does “inversely related” mean?  It simply means this – historically, you achieve the highest investment returns for taking risk during the worst business cycles.

So what’s the point?  It’s simply to gain perspective.  If you feel like you’d rather not buy growth assets right now, it probably means the return premium for buying them is high (you’re surely not the only one that feels that way).  If you don’t feel like buying growth assets in distressed markets, it means the return premium for investing in them is probably higher still.

Every bear market is followed by a bull market that is typically stronger and lasts longer than the bear.  While this is the lesson from history, we can never say for sure that we know what the future holds.  But if you’re making critical investment decisions based on fear and your financial goals are long enough away to justify buying growth assets, you may be doing yourself a major disservice by letting emotion guide your investment allocation decisions and avoiding distressed overseas markets.

Stephen Lowry CFP, DFP, AIMM, is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.

Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.