Market Wrap 9-12-08

By Jason Fittler

Includes 8 Simple Rules of Investing in a Bear Market.

Click here to hear the audio of this article.

From the below chart you can see that our market is currently trading sideways even the 1% rate cut by the Reserve Bank this week did little to alleviate concerns about the economy. I expect that not even the Christmas period will improve attitudes towards the current slowdown.

November economic figures did little to improve the situation, below is a summary of what is happening;

1.    Retail sales are down 1.1%.
2.    Housing prices fell 1.8% in the third quarter, the largest fall since 1978.
3.    Car sales are down 22% on this time last year.
4.    Government has already used up most of the surplus.
5.    Reserve Bank cuts rates 1%; this will affect the future use of monetary policy.
6.    Job ads in decline which would indicate that unemployment is about to rise.

This week we also had Qantas and British Airways look to merge in a bid to save costs and RIO to continue to fall due to concerns about their debt level and ability to repay. RIO stock closed around $33 this week; eight months ago it was trading at $155. Has it really lost this much value in eight months?  Have their operations shut down?  Are they no longer selling product overseas?  Are they going broke?

My point!

The market will continue and the good quality companies will still be there 5 years from now, the world economies will not fail. People are scared at present and for good reason, their shares are worth less, their house is worth less, their super is worth less and their job is not as secure as it was 12 months ago. So why am I not worried?  Simple education.

Understanding what is happening and how it will affect you is the key to surviving any crisis. Next is knowing what to do and how to not only protect, but grow your wealth in these conditions. The final step is taking action.


8 Simple Rules of Investing in a Bear Market.

1.    Borrowing – a Bear market is not a good time to gear up as it may take some years before the market recovers. This will mean that the costs of borrowing will put your investments into a negative geared situation. Negative gearing is never good; there are better ways to save tax. If you have an investment loan in a Bear market look to secure it against a house to achieve a lower interest rate, alternatively you could look to borrow through Warrants. Try avoiding a margin loan as the interest rates are higher and there is always the threat of a margin call. If you have a margin loan keep the gearing level low.

2.    Cash – it is good to hold cash, but do not fall into the trap of putting all of your money in cash. Interest rates are low and once you allow for high inflation and tax your cash is actually losing money. It is much better to invest in high yielding growth assets such as bank stocks or bank preference shares, yes the value with fluctuate in the short term but over five years your will see growth greater than inflation while at the same time receiving a yield of around 8% pa.

3.    Dollar Cost average – slowly put your surplus cash into the market, allocate the money to the shares or managed funds you are interested in. When you see these good quality shares dip by some. This over a 1-2 year time frame. Over the term of the Bear market you will smooth out your overall cost of each investment.

4.    Education – take the time to learn about what is happening.  If this is your first bear market you need to learn about what is happening and what the traps and pitfalls are. Education always puts you in a better position to deal with the situation. A word of caution, the media is not a source of education, those of us in the industry know this but most people do not. The media frequently get things very wrong, educate yourself through the fundamentals, books, courses or speak with someone in the industry with the right qualifications. Before you turn on to the internet please remember anyone with a computer can post articles on a web site, check their information before believing.

5.    Recovering Losses – do not try to claw back your losses straight away. A sensible approach to investing in a poor market will recover losses faster than panicking and looking to recover these losses straight away. I see many investors try and force a trade in a bid to recover losses, this never works, much the same way as a gambler who doubles up to recover losses always goes home empty handed.

6.    Panic – we all know this is a pointless activity but most of us cannot help but panic. Ask yourself a question, have you ever heard a survivor of a horrific event say “I just panic and it all worked out”? The answer is no, simply because those who panic die. Keep your head; remember the focus in a Bear market is to make sure you are still around for the next Bull market.

7.    Live normally – sure cut back on the extra spending on things such as overseas holidays, new cars, boats and bigger house. But do not sit at home worried about spending, this will only make the Bear market seem longer. Get on with whatever you do, the market will recover at some point, live within your means and you will most likely not even notice when it is over.

8.    Ask for help – many people have made uneducated, ill informed decisions during a Bull market as we all think we are experts. Normally they are now too embarrassed to ask for help to get things fixed. Do not be, experts like ourselves have no magic fix but we normally can improve your position due to our understanding of the markets and products within.

When you need advice, we are always ready to listen and help.
Give us a call (07) 4771 457