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Wednesday, January 18, 2012

Smoother sailing on the investment high seas

There is no doubt that 2011 was a tough year with many investors finding volatility in the sharemarkets woefully challenging – the US debt debate, revolts in the Middle East, Greece’s near economic collapse, the European debt crisis, the threat of another recession in the US and fears of a Chinese slowdown all played a part in making the year a very bumpy ride.

So is 2012 a good year to invest? Choosing the best time to invest is notoriously difficult. Even the world's best economists don’t always know when markets are heading up or down.

There may be a way to safeguard yourself from investing your money at the worst possible time - it's called “dollar cost averaging.”

Dollar cost averaging is simple strategy with a lot of power - basically, all you have to do is invest a set amount of money at regular intervals, for example $100 at the start of each month.

This takes the stress out of trying to time the market by smoothing out your investment over time.

One month you may buy $100 worth of shares at $10 each, the next month the price could be $9.50, and the next month $9. This means you attempt to mitigate the risk of buying all your shares at an inopportune time.

With this strategy you can worry less about investment prices day-to-day and chopping and changing your plan based on investment tips from neighbours and taxi drivers.

While this may sound like a simple, almost intuitive concept, when left to their own devices most investors appear to have the seemingly bad habit of buying more shares when prices are high, and less when prices are low.

This might be human nature. When markets are booming and investors are happy, everyone wants a piece of the action. But when markets are falling, people panic and tend to want to put their money somewhere 'safe' while markets recover.

Unfortunately this “human nature” means many investors miss out on the opportunity to buy shares when they are effectively on sale, and even worse miss out on the big gains that can be made when markets recover.

Dollar cost averaging cuts out the emotional element to investing - replacing irrational spur of the moment decisions with a thoughtful long-term investment plan that will see you building wealth consistently over time.

With market volatility high and so much noise in the press about the state of the economy, now is the perfect time to take the emotional elements out of investing and get your investment plans back on track – whether that’s setting yourself up for your ideal retirement or lifestyle goals such as buying a new house.

For more information about dollar cost averaging and getting your financial wellbeing on track, call Hugh Kilpatrick* on 03 9471 0080 today.
*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429. This article does not consider your personal circumstances and is general advice only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances.

Financial markets in 2012 and a sound investment strategy

I trust you had an enjoyable Christmas break and wish you a very Happy New Year!

There is no doubt that 2011 was a tough year with many investors finding the heightened volatility challenging. Market volatility was driven by a number of events – the US debt debate, revolts in the Middle East, Greece’s near economic collapse, the European debt crisis, the threat of another recession in the US and fears of a Chinese slowdown. Or more correctly, the sensationalizing of these things.

This update is designed to highlight some of the important themes at play for financial markets in 2012 and emphasise the importance of retaining a sound investment strategy during uncertain times.

The market will continue to focus on economic news…
Volatility over the past year can be largely attributed to the market’s reaction to the daily economic news flow out of Europe, the US and China. While we expect 2012 to be no different, we do see tentative signs of improvement as we head into the New Year.

While the situation in Europe could indeed worsen, should policymakers be able to avoid the worst case scenario – that is, a complete collapse of the banking system – the rest of the world should be able to continue its recovery and/or growth trajectory.

Importantly, global growth has been less reliant on European economic growth over the last couple of decades.

Therefore, if the issues in Europe can be contained and avoid a full blown recession, the US should be able to resume its moderate recovery, and for emerging markets the process of urbanisation and the growth of the middle class consumer.

In Europe, policymakers also start the New Year with a greater willingness to acknowledge the core problems facing the region. This follows the appointment of more economically-disciplined leaders in Italy, Spain and Greece.

In Australia, while it is true that the economy has slowed – particularly in the non-resource side of the economy – policymakers have plenty of “ammunition” in the form of further cuts to interest rates and increased government spending.

The medium and long-term drivers for the Australian economy also remain firmly intact. These factors should see record levels of infrastructure spending over the next decade. Deloitte-Access Economics puts the amount of “mega-projects” at approximately $400bn as at October 2011 – equal to approximately a third of total GDP!

Sharemarkets: some attractive fundamental attributes
Global sharemarkets were mostly lower over the year – but what may come as a surprise is that the US was one of the best performing markets. The S&P500 ended the year flat, while the Dow Jones was up more than 5%.

This was despite the extreme levels of volatility and negative news flow from the media.

Over the same period, the Aussie market recorded a decline of almost 15%. The weak relative performance can be attributed to the poor performance of our two dominant sectors – resources and financials. Most of these concerns reflected the potential impact from a slowdown in the Chinese economy.

The divergence in performance between the Australian and US markets highlights the importance of geographical diversification in an investment portfolio.

Looking ahead, despite expectations for continued high levels of volatility, we are comforted by a number of attributes for the market both here and offshore – valuations, dividend yields and corporate balance sheets.

Valuations are at levels that are considered low on a historical basis, indicating that the market has factored in some of the worst possible eventualities. This is despite the continued moderate recovery in the US and recent European efforts to resolve the debt crisis.

Dividend yields are also attractive on many measures. The Australian market is trading on a grossed up dividend yield of approximately 7% to 8%, which is attractive on a relative basis to both cash and inflation.

Sustainability of these dividends should be well supported by generally strong corporate balance sheets, low debt, high cash levels, and for some sectors low historic percentage of earnings paid to shareholders in dividends.

Performance of best performing sectors unlikely to be repeated…
The best performing traditional asset class over the past 12 months was the fixed interest sector on a “flight to safety” as investors sold riskier assets such as equities (shares).

The extent of this risk aversion was no clearer than in sovereign bond markets where the US 10-year treasury yield sunk below 2.0%, while in Australia the equivalent touched 3.6% - a record low.

Looking ahead, we would caution against chasing last year’s winners. With treasury yields already at record low levels it is very difficult to repeat last year’s gains – interest rates cannot fall indefinitely!

Focus on your investment strategy and long-term investment goals
While dealing with market volatility is often difficult and investors with short term investment goals may need to consider how market changes will affect them, it is during these periods that the market provides a number of opportunities for patient and disciplined investors with long term investment goals.

Altering a long-term investment strategy should also be considered against the negative implications of frequent and undisciplined changes. Missing just a few of the best months in equity markets may substantially reduce your overall return.

Lastly, very few people have increased their wealth by selling low and buying high. Unfortunately, this is a typical response due to the psychology of investing. Markets reward those with patience and discipline.

Hugh Kilpatrick
RI Advice Adviser
*Authorised Representative

*Authorised Representative of RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238 429. This information does not consider your personal circumstances and is general advice only. You should not act on this information without first obtaining professional financial advice specific to your circumstances.