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Beware the Dominant Narrative

The last 20 years was a period of low inflation, falling interest rates and what was known as quantitative easing ie where central banks buy bonds in the market place to keep the supply of money (liquidity) plentiful. During this time and particularly in the last two to three tears, asset values – shares and property – have ballooned upwards on the back of very low interest rates.

A lot has changed this year.

Inflation has reared its ugly head hitting the highest level since the early-1980s and the real threat going forward is how to avoid losing real purchasing power as prices go up everywhere. Inflation destroys value, and higher inflation requires a higher return to avoid the loss of purchasing power.

This is a particular issue for retirees who may have to fund their livelihood for 20, 25 or 30 years. The longer we need the money to last, the more it is likely to be eaten away by inflation. To protect yourself from the loss of purchasing power it is important to invest a solid portion of your portfolio in “growth assets”. The question is when to do this given rising interest rates have an adverse effect on share values and how to do it.

The value of International shares and Australian shares have been driven down to prices we have not seen in many years. Over the coming months we may well be entering the time of maximum gloom and pessimism, where investors believe inflation will go higher and equity values will fall further. This seems to be the dominant narrative and the consensus view. There are times when it makes sense to go with this view and times when it does not. Interest rates have risen quickly and the consensus view is that these rises will continue to occur. We are of the view that the consensus view or dominant narrative may well be overplayed.

To that end, we are now looking at increasing our holdings of growth assets and particularly sold down International and Australian shares. We are using a combination of dollar cost averaging strategies and placing lump sums.

We may not pick the bottom of the market, however experience tells us it is during recessions and the threat of recessions, when there is maximum gloom and pessimism and when investors are capitulating and selling out, that the greatest opportunities are to be had.

If today’s article provokes some questions or thoughts, feel free to reach out to us. Please be advised that these views are that of the Author and should not be intended as retail advice.

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