Market commentary: Jan 2024
Investment performance
Share markets started the new year on the front foot continuing the upward momentum from the end of 2023. This is reflected in our client portfolios as double digit returns on international shares for the year (largely driven by the US share market) and solid returns from fixed interest. Expectations that inflation is under control and therefore interest rates will fall is driving this upward momentum. The “magnificent 7” (Google, Microsoft, Apple, etc.) continue to generate excitement around the advances of AI, and older fashioned companies like Caterpillar, Mastercard and Visa have also seen their share prices rise to record levels.
What is diversification and why is it important?
Our client investment portfolios are made up of many different investments which, when combined, achieves diversification, and reduces volatility. We think of diversification as a pyramid with three levels. At the top-level diversification is looked at in two parts – Growth investments, and Income investments.
Growth investments include shares and property & infrastructure. The main purpose of these investments is capital gain. The price of these investments changes every day as buyers and sellers trade with each other.
Income investments are made up of Fixed Interest (or bonds) and Cash. We regard income investments as ‘the ballast’ of an investment portfolio as they are relatively stable in value and pay interest.
History shows that growth and income investments have an offsetting effect when combined. Generally, when share markets are rising in price (a bull market), growth investments perform well but prices of income investments fall. Conversely, when share markets are falling (a bear market), prices of income investments increase.
The second level of the pyramid breaks down each category. Growth investments include; Australasian shares, International shares, and Property & Infrastructure. Income investments include New Zealand fixed interest, International fixed interest, and cash. Diversification in this way benefits investors as different markets perform at different times thus smoothing ongoing returns.
The third level of the pyramid is individual investments. We use a range of specialist managed funds to achieve good diversification. A good example is Nikko Global Shares Fund that holds between 40 and 60 company shares in markets from all around the world. And another is Pengana Australian Equities Fund that specialises in the Australian market and holds between 30 and 40 company shares based in Australia.
Diversification is a cornerstone of our investment philosophy. Our client portfolios are invested in a diversified way to mitigate the inherent risks associated with investing in domestic and global markets. By mitigating risks, it is more likely you will achieve your investment goals and objectives.
Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFPCM), Director and Financial Adviser