Is this the correct question to ask? Should we be looking at the short term or should we be focussing on the longer term, say 5 years? Fact is if one does not achieve a decent return over the short term, we will have to catch up over the next couple of years. In order to do this you will have to take on more risk than one would have liked.
Essentially, we need to know what return we desire over the next few years (to retirement or over a fixed period such as 5 years). Then we need to decide from our own research what we expect is the most likely global and local asset pricing scenario over the short term, keep updating this scenario using circumstances as they unfold, and then allocate towards the mix of assets which we feel will offer the most appropriate risk adjusted return based on one’s current financial situation and therefore appetite for risk and need for return.
Hopefully in this way we will not be likely to have to catch up for lost time because we will have avoided those large drawdowns. Sounds easy, doesn’t it.
So, where to for 2011? Emerging markets or developed markets? East or West? A crippled but cheap Europe or an attractive but expensive China? Will the US remain the driving force behind the world economy? Will gold climb much further due to a weakening US$ and concern over sovereign debt or is it about to peak? We need to get at least half of these answers right in order to be able to achieve a large degree of success.
Is it possible to predict the answers to these questions scientifically and accurately? Probably not. We do have to build models which give us a fairly accurate idea of what we think will happen based on existing data and our knowledge of economics and human behaviour, but we cannot be sure how accurate our predictions will prove.
We then need to build a portfolio of assets which we feel will be able to withstand all types of markets without experiencing those large drawdowns. This means that we cannot rely on one or two big bets getting us the returns we desire. (Predictions per se do not form the basis for good returns). We also need to be able to value assets so that we ensure that we purchase at cheap levels and sell at higher levels…quite a challenge!
Can we do all this on our own? Probably not, this is where one needs a professional financial advisor who understands our personal circumstances and who then matches our objectives to portfolios managed by experienced and outperformaing fund managers. Our chance of success will have been increased.