Financial Markets 2008: some reflection

Commentary on financial markets 2008 is called for after a year that has been described as disastrous for investors. Now that the very volatile year has closed off, most investors are looking over the results and considering their short-term approach to where their investments sit and what to expect into the future.

When considering your investment portfolio it may be helpful to understand the following data as it may apply to your situation. These asset allocation parameters and performance indicators will vary over time, but are a reasonable guide as to what might be expected from the different portfolio allocations.

On the above basis, a Balanced Investor should anticipate at least one negative year in every nine years of investing.

A Balanced Investor who has been fully invested since 2004, will still likely by showing a return up to 30 June 2008, in excess of the 8.3% p.a. cumulative performance showing above.

Investors working to a carefully considered – and rigorously implemented, long- term strategy – should ‘stick to their guns’ and hold fast with their current asset allocation (even if they choose to change fund managers) at this time.

“Investors need to remember that markets will fully price in all of the bad news out there and, once this happens, value will begin to build. This value is released when sentiment or confidence returns. There are headwinds out there but forward PEs down to 12 times Australian Shares reflect that. The chances of the Australian economy slipping into a recession are very low, given the amount of public and private sector investment spending in the pipeline and the boost the country is getting from higher commodity prices. A period of more modest growth is exactly what the Reserve Bank of Australia is after, this will allow inflationary pressure to moderate and ultimately create room for an easing in tight monetary conditions, resulting in a more bullish market.” (Brian Thomas: Perennial Investment Partners Ltd – July 2008)

Investor sentiment and the psychology of investing

The following chart shows the investment cycle of undisciplined investors: and these people more often end up with less than 40% of the final outcome achieved by disciplined investors working to a well-structured strategic plan appropriate to their circumstances.

Investor Emotion RollerCoasterAnother table (shown below) recently provided by Bloomberg/AMP Capital Investors shows the historic performance of the market following significant downturns over the past 30 years: as can be seen significant growth has typically occurred during the 12 months following the market ‘bottoming out’.

Whilst we do not have the ‘magic crystal ball’ available to us, the statistical and fundamental data available, sugggests that we are either near, or at a significant buying opportunity.  (We can also make a good case as to why now is NOT the time to either convert asset back to cash, or to hold excessive reserves of cash).

Please contact us if you have any questions or concerns regarding the above matter as they relate to your situation.

Please also feel free to forward this message to your contacts, subject to our ‘general advice’ disclaimer of course.

 General Advice Disclaimer

This is not advice. Readers should not act solely on the basis of material contained in this publication.  Items herein are general comments only and do not constitute or convey comprehensive advice. Changes in legislation and economic circumstances sometimes occur quickly, therefore we recommend that our formal advice be sought before acting in any of these areas.  This publication is issued as a helpful guide to clients and for their private information.