Picking up pennies in front of a steamroller

It was a while back when I first came across the investing analogy of people picking up pennies in front of an approaching steamroller, and didn’t fully appreciate the lesson until the market conditions of this year. 

In essence, it refers to investors opting for small gains (like interest from a low-risk money market fund) while ignoring the ever-approaching risks of inflation and tax.

2019 has been just that – a year where the now long-bruised and frustrated-with-low-returns investor largely decided that enough was enough, and escaped the emotions of volatility and below-inflation returns by moving their money into cash.

A mere 12-months ago, world markets saw their biggest one-month decline since the Great Depression, as November 2018 wiped more than 10% of values from the world’s stock markets, further sending investors into the perceived safe haven and hiding place offered by cash. 

This, only to witness an unexpected turnaround in December 2018 that laid the foundation for what has now been an impressive year of returns for those who remained calm, collected – and invested.

The 2019 calendar year has brought welcome (albeit interesting) relief for investors as asset classes recovered off the strenuous returns of the previous year. Investors across all of our strategies received healthy returns in the year to date. In addition, with CPI falling to multi-year lows, these returns have comfortably exceeded inflation benchmarks.

Despite this, many investors still hold record amounts of cash in their portfolios and have missed out on the strong returns of 2019. Essentially, they have been picking up their pennies with the risks of increasing taxes and inflation threatening to wipe out these gains.

The risks of the last few periods undoubtedly persist, and will likely continue to impact markets and asset prices into 2020. However, the strategies implemented by Octagon Financial, and the positions held in the Octagon portfolios, have ensured that your investments have navigated these risks and threats, without missing out on the opportunities.

It is well documented that over a 20-year period, investors who miss out on the 10 best days on the market in each year, lose around half of the overall, total returns. The factors driving success are not – and never have been – found within the realm of those blessed with luck. Rather, they are born out of making sound decisions and educated judgements, sticking to the plan, and refraining from trying to time the market. These are the hallmarks of the successful investor. 

On the other hand, those opting to pick up pennies – even in the low-inflation environment we’re seeing – are still only a few basis points above inflation, and still face the risk of tax eating into their gains.

Looking ahead, we remain firmly focused on the risks of escalating trade wars, debt-spirals, Moody’s, the IMF, low growth, rising inflation, Brexit, the US elections, oil prices and interest rates. Having said that, we cannot ignore the opportunities of entrepreneurial CEOs, globalisation and growing urban populations, emerging markets, low global interest rates, potential trade war solutions, and markets trading well below their long-term fair valuations, and have our eyes firmly on all of these developing scenarios too.

We have long cautioned against betting on a binary outcome. Like putting your money on red or black at the roulette table – the payoff may be great but the risks are equally as great! Our sole objective remains to create a middle-space between the myriad of binary outcomes, and navigating the risks that will persist through 2020 and beyond. That is the essence of what we do. While we cannot manage performance, we can manage risk. And more often than not, that is all that is needed!

Wishing you and your dear families a relaxing and safe December break. We look forward to reconnecting in 2020!