The sky is not falling

Foxy Loxy had moxy. He knew the sky was not falling and he uses the same moxy investing.

Chicken Licken (or depending on the version you read it could be Henny Penny or Chicken Little) is a cautionary tale about the panic created by the mistaken belief that disaster is imminent. Chicken Licken thought the sky was falling when an acorn fell on his head. He then persuaded other animals with rhyming eponyms such as Ducky Lucky, Goosey Loosey, and Turkey Lurkey that the sky was falling. Only Foxy Loxy had the moxy not to believe everything he is told. Foxy Loxy used the hysteria to his advantage. The sky did not fall and like most foxes in children’s tales he was no vegetarian and enjoyed a poultry buffet.

Foxy Loxy brings the same moxy to his investing. Foxy Loxy has built his portfolio to withstand shocks and deviations. A cunning fox, Foxy Loxy’s portfolio is well diversified by stock and by sector. A diversified portfolio allows investors to share in the upside while limiting the downside.

Chicken Licken’s reaction to a falling acorn was disproportionate to the actual threat faced. Foxy Loxy, like any prudent investor did not panic when one single issue occurred. Rather he did quite well out of it.

For each data piece that is not favourable to markets someone writes a story that is equivalent to "the sky is falling". Each day another so-called 'bubble' is identified or commentators anticipate a 'correction,' usually pointing to a single piece of data. If you invest like Foxy Loxy and are well diversified, you are not concerned by a single acorn falling.

The fall of the iron ore price has been well documented by the press. Iron ore represents around 30% of BHP’s profit. BHP represents around 10% of the S&P/ASX 200 Index. “The sky is falling, the sky is falling”. Prediction of BHP’s imminent price fall has littered financial press and investment blogs. In portfolios managed to the S&P/ASX 200 Index, the acorn may have been big as BHP does represent a large portion of its holdings. Foxy Loxy is invested in the Market Vectors Australian Equal Weight ETF (ASX code: MVW), which is a portfolio of 74 equally weighted securities and which is three times better diversified than the S&P/ASX200 Index (as measured by the Herfindahl Index). As a result Foxy Loxy had no such concerns as a fall in BHP only impacts 1.35% of its portfolio.

Foxy Loxy's investment rationale is reinforced by a large body of academic and commercial research supporting the performance of equal weight investing. The CSIRO/Monash Superannuation Research Cluster, University of London's Cass Business School, S&P Dow Jones and Market Vectors Index Solutions have all conducted research that has found that equal weight indexing provides superior returns over the long term.

Bank dividends during the recent reporting period didn’t surprise the markets on the upside and banks share prices have been said to be fully valued (this has been said since around 2012). The future performance of the banking sector has been predicted to be soft. Four of the top 10 stocks of the S&P/ASX 200 Index are banks. “The sky is falling, the sky is falling.” In portfolios managed to the S&P/ASX 200 Index, the sky may have been falling as financials make up 40% of that index. Foxy Loxy, invested in MVW has less to be concerned about, his exposure to financials is half that.

By having a well-diversified portfolio by stock and by sector Foxy Loxy was confident to look up at the sky and see that it was not falling, in fact there were opportunities. Foxy Loxy enjoyed a buffet at the end of the story. Over the long term MVW Index has outperformed the S&P/ASX 200 Index.

Source: Market Vectors, FactSet, as at 31 August, 2014. Results are calculated to the last business day of the month and assume immediate reinvestment of all dividends and exclude costs associated with investing in the ETF. You cannot invest directly in an index. The above performance information is not a reliable indicator of current or future performance of the MVW Index or the ETF, which may be lower or higher.

MVW is a one-of-a-kind Exchange Traded Fund (ETF) that weights the securities in the portfolio based on the purpose built Market Vectors Australia Equal Weight Index. It offers true diversification across securities and market sectors reducing concentration risk. It is liquid and cost effective and gives you instant diversification to a portfolio of 74 of the largest and most liquid Australian companies via a single trade on the ASX.

If you would like to speak to one of our ETF specialists email us at info@marketvectors.com.au or call 02 8038 3300.

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