The world’s in a mess! Oil’s tanked. Greece and the European Union are fighting over debt (again). Australia has a Prime Minister hanging on by the fingernails (again). The Australian dollar has cratered against the US. Madmen are running riot through the Middle East (again). Interest rates have been slashed in Australia and all over the world because economies are shaky.
In summary, things have never seemed so uncertain – as usual.
If you’re worried about this mess, remember, despite the endless headlines, those with a balanced and liquid portfolio continue to do quite well.
Some rules to remember for the year ahead (and always).
1. Prepare to be surprised. Rarely do we make it through a year without a calamity that will have an effect on markets somewhere. So don’t exit an asset class. This year, like last year (and the last hundred or so), was meant to be end of days, but the recent interest rate cut put a fire under local shares.
The dollar drop also improved returns on unhedged international shares. Who knows what comes next? The point of having a well-constructed portfolio is having various asset classes weighted in line with your risk profile because the future is a guess and you prepare your portfolio for it now.
2. Don’t try to time the market. For the past few years experts have told us why various markets and asset classes will crumble. If you listened, you left those freely available gains on the table for someone else. It’s better to be invested for the long term than paralysed each day by the latest headline.
Markets will eventually take some time off, but no one knows when. And even when they do, most asset classes will continue to pay you to hold them with ongoing distributions.
3. Don’t buy individual shares. While the local market has raged upwards to its highest point in years, anyone who had filled their portfolio with individual energy or commodity companies was still licking their wounds. It’s an amateur mistake.
Looking for hot tips is time consuming and haphazard. And waiting for great news on one company to fire up your portfolio is true risk. Especially if the market leaves you behind as you twiddle your thumbs waiting for a big announcement.
4. Understand what good returns are. Red hot real estate has been a media go to. Stories of baby boomers piling in with their SMSFs and Chinese buyers flooding auctions are regularly reported in the media as the market heated up, but how hot is the real estate market?
Real estate stats firm RP Data released Australian real estate returns from the beginning of 2009 until the end of 2014 and they ranged from impressive – Sydney up 57% and Melbourne up 50% to more pedestrian – Brisbane up 9% and to Hobart, where prices haven’t moved in six years.
Yet the return on Australian shares over the same period was 90%. Australian listed property returned 93% and unhedged global shares returned 79%. As listed assets experience a minute by minute test of their valuation we get to read headlines like “$50 billion wiped off the market” twenty times a year. This spooks some investors and you’ll find them swearing their investment property can’t be beaten for growth.
5. The economy isn’t the share market. Interest rate cuts signal things aren’t so rosy. When it comes to private debt – a real drag on consumer spending, only in Canada and that other bastion of great financial management, Greece, do households carry more debt than Australia. Yet studies have shown a low correlation between GDP growth and market performance.
Quality companies will make money in good times and bad. And many companies listed on the ASX conduct their business overseas or are US dollar exposed. A falling dollar is better for their returns. There are winners and losers from every economic reality. And the true winners stay diversified and liquid.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
