Note to Readers: You can listen to the audio of this report by clicking on the video at the bottom of this post.
The past 12 months have been a tough time on market we’d all have to agree, but the big question is; what is going on now? We are now in a period in the market when complete confusion and fear has taken hold, and there is no rhyme or reason for the current market swings we’re seeing.
To understand, listen to the market reports on all channels or read the Financial Review each day to see what their reason is for the market falling. It’s always a vague response like:- “The market fell over night due to concerns over future economic recession and how deep it might go”. Translation:- “I have no idea what’s going on but my ego won’t allow me to tell you that, so I’ll make up something generic so I sound intelligent, and most likely you’ll have no idea either so you’ll just agree with me”.
This sort of media only serves to heighten the already anxious investor and does little to help.
So what is going to happen? Short term I have no idea, last Thursday night the US market had a huge swing with a trading range of 12% during the inter day trading. The truth is no one knows why. As such I have stopped looking at the short term trend and started to focus on the longer term. Why? Because you need to know where you’re going before you make a map.
So first, long term we can see a number of issues;
1. Higher Unemployment.
2. Lower interest rates, but harder credit terms.
3. Higher inflation
4. Slowing economy.
5. Lower growth in the share market, higher income yields.
6. Fall in the property sector.
7. Australian Government will start stimulus packages.
8. China will continue to grow and is working hard on their stimulus package.
9. The recession will last until 2011.
When we take into consideration the above issue we have the ability to form a picture of the economic environment we will be working in over the coming 3 years. As such we can start to formulate a plan or map out what we need to do now to get us to where we want to be in the coming years.
The plan – achieve an average return of 8% pa.
How we do this!
1. Higher unemployment means we need to reduce our debt levels; gearing to invest needs to be done on reasonable bases. No more than 30%.
2. Lower interest rates – see above, use the lower rates to pay down loans, use surplus income. Look at it this way, if you are paying 8% in interest on your loan and you use the surplus cash to pay down your loan. Those funds are earning 8%.
3. Do not hold cash, short term ok, but longer than 6 months you will start losing money. The reserve banks expect inflation to be high until 2011 around the 5% mark. Cash is earning 6%. After you pay tax on the interest you return will be negative return on 1%. Fear will direct you towards cash; common sense tells you invest in shares.
4. Slowing economy means that companies earnings will drop, in turn so will their dividends. As such it is important to buy now while prices are low to maintain your income. Even if NAB cuts their dividend in half you will be receiving 7% return so you only need 1% growth.
5. Chase higher income yields through Preference shares, in the big blue chip companies these are paying between 9-11% pa yields to maturity.
6. Stay out of property for now, high inflation, higher unemployment and the credit crisis has not hit property yet. There will be a time to enter this sector but not now.
7. The government will go into deficit; they need to if they are going to reduce unemployment. This is a good thing, look for stocks which will benefit, my favourite is Cardno. Buy and hold if they have a good yield.
8. China is also stimulating their economy, so this should increase demand for resources, believe the long term resources stocks, and accumulate these stocks as a small part of your portfolio for future 10 year growth.
9. 2011 is not a long way off, it won’t all be bad. Focus on income and the growth will come. Curb you’re spending over the coming years and you will be fine.
So now we have a plan for the longer term, time to put it into action.
Stop listening to all of the hype, stop listening to the media and get back to basics.
This down turn will pass with time whether or not you benefit will depend on how you act now.
When you need advice, we are always ready to listen and help.
Give us a call (07) 4771 4577.