Investors urged to play it cool in the middle ground

INVESTORS who fiddle with asset-allocation strategies to protect their superannuation from the volatility stalking global financial markets could be sacrificing long-term gains for a short-term sense of security, a report from the investment services group Mercer warns.

By InvestSMART · 16 Nov 2011

By InvestSMART ·
16 Nov 2011

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The head of Mercer's asset-allocation team in Australia and New Zealand, David Stuart, said despite the recent turmoil and market volatility, it was too early to determine whether the debt crisis in Europe and the US could plunge the global economy back into recession.

"Now is not the time to be a hero - investors need to tread carefully and focus on the bigger picture," Mr Stuart said.

"Portfolios should be sitting in the middle at the moment - if investors choose to either underweight or overweight their asset allocations, they are making a bet on which way the European debt crisis will develop, when we just can't be certain yet."

Mr Stuart said although investors might be tempted to trade the peaks and troughs, this was risky. "In the current environment, we believe investors need to focus on their long-term investment targets," he said.

He said that during the economic and financial turmoil, rather than switching from growth-asset classes, such as foreign and Australian equities, to more defensive investment vehicles, such as cash and bonds, investors should maintain a neutral stance for their superannuation.

This meant, for example, if you were many decades away from retirement and the benchmark strategy for your age was a 70 per cent allocation of growth assets and only 30 per cent exposure to defensive investments, investors should cling to this benchmark. "Don't try to be clever by cutting your growth allocation or overweighting it," he said.

When it came to particular asset classes, the Mercer report, which provided a perspective on relative market valuation and a quarterly market analysis for institutional investors, did find one slightly brighter spot.

"Emerging market equities have a positive, longer-term structural story and recent underperformance has restored valuation opportunities," Mr Stuart said.

Both global and small capitalisation Australian companies retained an "unattractive" rating.

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Frequently Asked Questions about this Article…

What is Mercer's recommendation for superannuation asset allocation amid current market volatility?

Mercer advises everyday investors to keep a neutral, 'middle' position for their superannuation asset allocation rather than making big changes. The firm says now isn’t the time to underweight or overweight assets — sticking to your benchmark allocation avoids effectively betting on how the European debt crisis will unfold.

Why should I avoid 'trading the peaks and troughs' in volatile markets?

According to Mercer’s David Stuart, trying to time short-term market highs and lows is risky and can sacrifice long-term gains for short-term comfort. He recommends focusing on long-term investment targets instead of reacting to every market move.

Should I switch from growth assets to cash and bonds because of concerns about the European debt crisis?

Mercer suggests you shouldn’t switch automatically from growth assets (like foreign and Australian equities) into defensive investments (cash and bonds) purely because of current turmoil. Making that change is a bet on the crisis outcome; the report recommends maintaining a neutral stance until there’s greater clarity.

If I'm many decades from retirement, how should I balance growth and defensive assets?

The article uses a common example: if your benchmark calls for roughly 70% growth assets and 30% defensive assets, Mercer recommends sticking to that benchmark. Don’t reduce your growth allocation or overweight it in response to short-term volatility.

Is now a good time to be a market 'hero' and take big allocation risks?

No — Mercer’s view, echoed by David Stuart, is that now is not the time to be a hero. Investors should tread carefully, avoid big speculative allocation shifts, and focus on the bigger, long-term picture.

What does the Mercer report say about emerging market equities?

Mercer notes that emerging market equities have a positive longer-term structural story. Recent underperformance has improved valuation opportunities, making them a relatively brighter spot in the current analysis.

How does Mercer rate global and small-cap Australian companies right now?

The Mercer report found both global companies and small-cap Australian companies to be 'unattractive' in its relative market valuation assessment.

How can everyday investors balance short-term market turmoil with their long-term investment goals?

Mercer recommends focusing on long-term investment targets and maintaining the benchmark asset allocation appropriate for your age and goals. Avoid knee-jerk moves to defensive assets or heavy bets on one outcome of the European debt crisis — a neutral, disciplined approach helps protect long-term returns.