Historic evidence suggests that our investment process will provide a measure of security whilst achieving worthwhile returns.
As we know however, times continually change, and no one ever predicted the Global Financial Crisis.
Todays global economy coupled with the incredible speed of the world wide communication network, coupled with the abandonment of financial controls between different countries, has made it even more important to have a well constructed investment portfolio.
While the traditional investment process seeks to avoid future forecasting by maintaining an exposure to each of the core asset types at all times, an alternative process does exist. It involves the assessment, using sophisticated computer software, of the trend of a particular asset.
How does the System Work?
The system uses economic fundamentals, statistical data combined with an enormous data base, and specifically designed software, to generate simple graphs that can tell you at a glance the implied trend of your investments performance. It can be used to indicate a time during which an investment will underperform the benchmark (interest bearing cash investments) and therefore indicate a sale and reinvestment to cash.
Conversely, it can indicate that a buying opportunity is evolving through an asset seemingly increasing in value, so that cash can be better applied to owning that investment rather than accepting the cash rate. The two main modules for assessing risk and return for each asset class and recommending portfolio asset weighting. A long term valuation module values assets against long term pricing fundamentals and a short term model that identifies short-medium term asset price movements by examining the short-term asset price history.
The long term module compares the current price of the asset with long term asset price averages. For bonds this is long term real interest rates. Equities use conventional valuation metrics such as price to earnings (P/E) ratio, price to book, equity risk premium and dividend yield. Property yields are compared to their long term averages against bond yields. Finally, cash is valued by predicting future Reserve Bank policy.
The weakness of a long term valuation model is that while there is a strong expectation that asset valuations will revert to long term valuation averages, in the short to medium term, significant market opportunities may appear in asset classes contrary to long term valuation signals. A powerful example of this has been the Dow Jones, which although overvalued on long term valuation fundamentals, has had substantial positive short and medium performance. Any fund manager that underweights this asset class because of long term valuation