Why is the smartest investor in the world ... selling?

Strap yourself in … the Trump trade is on, and everything is going up.
 
The day after Donald won the election, the US stock market surged 1,500 points – the biggest post-election gain in 128 years.
 
Even better, Trump says we should be preparing for a ‘golden age’ of investing returns as he slashes corporate taxes and loosens up those annoying rules and regulations for his billionaire buddies.
 
MAGA!
 
However, there’s another billionaire who’s been doing the exact opposite … he’s been selling down his holdings as share prices climb.
 
Even worse, that billionaire just so happens to be none other than Warren Buffett, the greatest investor in history.
 
What’s going on?
 
Well, Buffett famously doesn’t try to time the market, and he pokes fun at anyone who believes they can. However, he does have a valuation yardstick that lets him know when the market is out of whack.
 
It’s called the ‘Buffett Indicator’, and it takes the total capitalisation of US stocks and divides it by US gross domestic product (GDP). The idea being that if stock prices rise faster than the economy grows then it may be a sign of a bubble.
 
The Buffett Indicator flashes warning signs to investors when it surpasses 100%.
 
As it did at the height of the Dot.Com bubble.
 
… and before the Global Financial Crisis.
 
… and at the beginning of the Covid crash.
 
So where is it sitting today?
 
208%.
 
That’s the highest it’s ever been (“HUGGGE” in Donald Trump language).
 
In other words, the Buffett Indicator is screaming “SELL”.
 
And that’s what Buffett has been doing. He’s been stockpiling record amounts of cash, presumably to allow him to once again be “greedy when other people are fearful” (which is how you become one of the richest people on the planet).
 
Okay, so by now I’ve probably thoroughly confused you.
 
Which billionaire should you believe?
 
Well, I’m inclined to believe both of them … though I think Buffett will win out in the end, if for no other reason than he generally does.
 
Let me be clear: stocks could (and probably will) rise from here.
 
However, in the long run share prices always revert to their long-term averages, which means there’s a possibility that returns over the next 10 years are not as likely to be as good as those of the last decade.
 
Right now, few investors are thinking about what may be lurking around the corner.
 
 Case in point: The share market is not only at record highs, but the latest US Consumer Confidence figures show that investors strongly believe that stocks will continue powering ahead. In fact, investors haven’t been this confident that stocks are a no-brainer since (checks notes) …
 
 … since 1987, when stocks savagely plummeted 25% in a single day.
 
Still, as I said a few weeks ago, history has proven that it doesn’t matter who is in the White House. What matters is that you hold through both the good ride (like today) and the inevitable crash.
 
 Buckle up!
 
 Tread Your Own Path!

A warning to all investors

Last week I watched my share portfolio get hammered as markets plunged across the globe.
 
And in response I’m doing something I rarely do …  I’m issuing a warning to all investors:  
 
It’s time to play dead.
 
Seriously.
 
I’ll have more on the how and the why in a moment, but for now let’s dip our hat to the headline writers, who well and truly earned their peanuts last week. Take this one for example:
 
“Bloodbath strikes Australia’s sharemarket … $102 billion wipeout!”
 
Scary stuff.
 
However, you could rewrite that headline as:
 
“Shares fall to levels not seen since January.”
 
Not so scary.
 
However, if I was allowed to write the headline last week, here’s what I’d have written:
 
“Investors rejoice: shares go on sale!”
 
Most people are still working and are therefore still adding to their superannuation, so they should be cheering on the chance to buy at lower prices.
 
No one ever does, of course. Instead, they totally freak out!
 
And that’s why, many years ago, I made the decision to put my investing plan on autopilot. Each month I automatically buy the same index funds.
 
It’s what I call a ‘one and done’ decision, and it works in my favour: you see, the truth is that, on average, the share market has a drop of 10% or more almost every year. And it’s also true that shares have never failed to recover and hit new highs.
 
So, finally, why do I think it’s time for investors to play dead?
 
Well, Fidelity, one of the biggest asset managers on the planet, did a study on their top-performing client accounts. Guess what they found? Over 10 years, the best returns came from clients who had either forgotten about their investments, or were dead!
 
Tread Your Own Path!

2024 Will Bring The Biggest Crash of Our Lifetime

Hi Scott
 
A question for you if you wouldn’t mind commenting – is there any truth to economist Harry Dent’s latest dire warning of doom for shares and property in Australia? 
 
Jenny
 
Hi Jenny,
 
So I watched Harry on the Today show. He predicted that “2024 will bring the biggest crash of our lifetimes”, and suggested that the value of both Aussie shares and property could more than halve this year.
 
It was frankly … weird.
 
 The folks on Today are supposed to be journalists, but the hardest hitting question they asked wasn’t even a question. All the interviewer said (with a giggle) was, “Geez, that’s a bit depressing”.
 
So here’s a question I would have asked Harry:
 
“Harry, you’ve been incorrectly predicting that Australian property prices will crash for years.
 
“You said they’d be down by … 55% in 2009, 65% in 2011, 55% in 2014, 50% in 2016, 40% in 2018, and 40% in 2020. You have been ball-tearingly wrong for so long, why should we believe you today?”
 
And because he’s a savvy sausage, Harry would no doubt have a well-rehearsed rebuttal that would sow enough doubt in the minds of viewers eating their cornflakes to let him wriggle out of that question. So then I’d then follow it up with my final question:
 
“Harry, if you have all the answers, why don’t you set up an investment fund and make billions profiting from your predictions?”
 
Because, once upon a time he did. Except it was a dud, reportedly losing 80% of its assets before it was merged and closed down.

We are terrified

Scott,

My husband is retiring this week. We are not sure if we should withdraw his super or leave it in his fund. We would place it in a high interest account if that is the better choice. We are terrified the market is going to keep going down. What should we do?

Linda & Steve

Hi Guys,

It’s been a rough time. I can understand how stressful it must be for you.

First up, you should not panic and take your money out of super. When you are in the retirement pension phase, your income is tax free and protected in the case of bankruptcy. Besides, you can put some of your super into a high interest cash and fixed interest account within your super.

And that’s exactly what you should be considering doing. In my book I suggest people a few years out of retirement to start building up a cash buffer of a few years’ living expenses (minus any pension payments), so that you have enough money to ride out downturns like we’re experiencing.

Many people in your boat are taking on a lot of otherwise ‘hidden’ risk in their super funds because of large unlisted assets, and overly aggressive one-size-fits all portfolios. So you should definitely call your super fund and tell them you’re freaking out about the market, and sit down with one of their financial advisors.

Scott.

We're overdue for a stock market crash ...

Hi Scott,

We are well overdue for a stock market crash.

They happen, after all, on average every 10 years, and the last one (discounting the Covid-induced flash-crash) was 14 years ago.

And I still have PTSD from the GFC. People on the verge of retirement wrote to me in tears as they watched the value of their super dissolve in front of their eyes. They had no idea how much risk their super fund was taking … until the market crashed.

So now is a very good time to talk about what’s going on with your super fund. And a word of warning: it’s not good news if you’re in one of the large, top-performing funds …

New research from SuperRatings has found there is a “high risk at retirement” for many of the current top-returning super funds.

Huh?!

Aren’t we supposed to pick a super fund with high returns?

So what makes these funds so risky for older workers?

Well, it’s generally because they are invested more aggressively than the funds they’re competing against. That is, after all, how they get to the top of the performance tables: by taking more risks. There is no free lunch in finance, so tattoo this on your arm: “The higher the returns, the higher the risks!” Of course, taking on more risk is fine for a 17-year-old apprentice … but it’s not so sweet for a 64-year-old chef.

Still, that’s how most of our biggest super funds roll: they throw everyone – young and old – into a one-size-fits-all investment pot.

However, there is another type of super fund. It’s called a ‘target date super fund’.

These super funds invest based on your age. In simple terms, they automatically reduce the amount of riskier assets, like shares, in your portfolio as you get older and closer to retirement.

It works like this: our 17-year-old apprentice would start out aggressively invested in shares to build her nest egg, and then throughout her working life the fund would gradually – and automatically – become more conservative to protect her nest egg by beefing up her defensive assets like cash and fixed interest as she nears retirement.

It’s a simple, elegant and almost set-and-forget solution.

I say ‘almost’ because most of the current funds have their target date set at age 65, when you retire. (If I was a cynic I’d say it’s set at that age so you go see a financial planner.)

Enter Vanguard Investments.

Last month they received regulatory approval to launch a super fund. They're still fine tuning things, but later in the year they expect to launch a target date index super fund that will automatically adjust your portfolio all the way through to your 85th birthday.

The older I get, the more I value simplicity in my life – especially when it comes to investing.

I don’t like my returns being eroded by high fees, so I invest my super solely in low-cost index funds.

And I really like the idea of not having to meddle with my super as I get older.

So let’s hope the top-performing funds – who collectively invest for millions of Aussies both young and old – take heed of this new type of offering and build something even better for their members.

Tread Your Own Path!

Disclosure: I invest in some Vanguard index funds but not their super fund (because it doesn’t exist yet!).

The Coming Property Crash

Hi Scott,

With all the craziness of Russia invading Ukraine and China looming in the background, I had a sudden worrying thought today. What would happen financially in Australia if there was a third world war? My partner and I are in our early forties and are about to purchase a third property. It is a significant spend, so is the possibility of a world war something we should add into the equation? I guess I expect the usual stock market crash, but should we also be concerned about a possible crash in the housing market?

Tania

Hi Tania,

Well, I am.

However, it’s got nothing to do with Russia or China or any other geopolitical risk — which I know very little about, and cannot predict.

Instead, what I am focused on is the impact of rising interest rates. The last time the Reserve Bank increased rates was November 2010 … and at that time the cash rate was 4.75%. Today it’s at 0.10%.

The housing market has gone a little crazy since Covid (as has the share market), as a result of basically zero interest rates. Nationally, house prices jumped by 22% over the past year, according to CoreLogic. I’m certainly not predicting it, but it wouldn’t surprise me if house prices (and the share market) came off a bit from here. That said, I have no plans to sell any of my own property. And if you can afford the investment, and you plan on holding it for decades, you should be fine.

Scott.