Bennelong Australian Equity Partners’ investment director, Julian Beaumont, has advised investors that they are risking potential returns by worrying about future economic uncertainty.

He cited studies into the psychology of loss aversion which show investors feel losses twice as much as gains, and indicated that while speculation of either a recession or equity market crash is rife, investors are doing themselves a disservice by focusing too much on the unknown.

“Being fixated on risk is resulting in investors missing out on market opportunities,” he said.

Conceding that the GFC has left investors with deep psychological scars “that are yet to fully heal”, he noted that in the decade since, investors have mostly targeted low-risk and low-volatility investments.

The obvious example of this being a preference for bonds and real estate, Mr Beaumont said.

“When it comes to equities, investors have sought out the safety of defensives, yield and the momentum of whatever has most recently been working, such as AREITs, gold stocks and ‘expensive defensives’, even though not necessarily justified by the fundamentals,” he continued.

“The Australian market is currently at its normal, orderly self, and with investors speculating about a potential recession and corrections, the sentiment is invariably making its way into share prices.

“Ironically, where there seems to be the most risk is where it is perceived to be the least. The rush into safety – bond proxies, for example – might prove to be not so defensive given their popularity and stretched valuations.

“At the very least, the current uncertainty in markets is good reason for investors to ensure they are genuinely diversified.”

He pointed to research which shows very little correlation between economic growth, specifically GDP, and equity market returns.

While volatility presents risk of loss in the short term, the risk reduces further out and becomes almost irrelevant over the long term – as shown by the All Ords time horizon. 

In practical terms, this is evidenced by the fact that worrisome economic data post-GFC was beneficial for bonds and equities despite signs of a weakening economy.

“The bad news effectively delivered a greater probability that central banks would come to the rescue with further monetary stimulus, so why did we fear what didn’t bring us any harm?” he questioned.

“Does all the worrying and speculation make us better investors? No.

“Having some defensive strategies in place in case of a downturn is one thing, but continually anticipating the worst is another.

“Amid all the doom and gloom, we’ve actually had it pretty good.”