How To Invest - What Do We Do Now?
2008 Investment Review and Outlook for 2009
The Pain of 2008 is Almost Over....
This year will go down as one of the worst years for world-wide stock markets ever. Never have we seen the unprecedented drop in world markets. The questions now are when will it stop, and what happens when it does?
They say a bear market ends with the final capitulation… the last margin call, the last intake of breath as we finally give up with a 'never again' gasp. I do think we have seen the bottom of the market now. In fact, I think we hit the bottom on November 21 when the All Ords hit 3,215 points (from the high of 6,873 on November 1, 2007).
As I write this today RIO has cut 14,000 jobs. All the newspaper headlines are calling the end of the resource boom. If we have hit the bottom of the market then we only have one place to go. Whether we go into recession in Australia next year or not (that is, two quarters of negative growth), there will still be some pain to come in the economy.
Currently we are being driven by two main factors. The first one relates to corporate profitability: as we head for a global recession we're seeing corporate profitability falling. As we don't know how bad it will be, the uncertainty is adding to the drop in markets.
The second issue is that when markets fall people are forced to sell. As fund managers and retail investors are forced to sell they inevitably push prices lower again. This is exactly what happened with Citibank in the US: when its share price fell some fund managers and investors had no choice but to sell. Some institutions have a mandate that they cannot own shares once the share hits a particular price. When that price is reached they must sell down, which by consequence pushes the price down even further. It's a self-perpetuating circle.
As financial planners we are often asked about superannuation and what we should all be doing with it in the current markets. As most of us won't be accessing our super for quite a few years this market crash will do little to our payouts in 10 to 15 years time. Remember dollar cost averaging? You'll certainly be acquiring a few cheap units in your super fund over the coming months, which is good news for your long-term retirement plans.
If you are retiring today it's a different story. Many people who are looking to retire now or next year will have seen their capital sum diminished by around 35% or even more. This is really not good news as it means they may have to stay on at work for a few years or live on a lower income than they anticipated.
Looking ahead to 2009 we will see interest rates come down further. This will stimulate the economy in a few ways. Mortgage rates will decrease, which is good news for home owners. We're also seeing oil prices coming down to a more reasonable level recently (I managed to fill my car for $60 this week rather than the $100 I was finding very hard to get used to). With these decreases people will have more money in their pockets which will stimulate spending.
The cash rate will only be about 60% of what you can achieve from dividends in the equity market so people looking for yield will return to the market for a better rate than cash. Longer term this market drop will mean poorer quality companies will close or be taken over, and the well run companies with strong balance sheets and proven franchises will out-perform.
History shows us that the stock market has performed on average at around 12% per annum for the last 100 years or so. Right now we find the market extremely undervalued so we do expect a better year in 2009 (it couldn't be worse). The stock market is the first to recover in any economic downturn. After bear markets we usually have a better than average return on the stock market.
As many of you are aware I am not a fan of residential property as an investment for all the reasons I won't go into here again, but I do see an opportunity looming.
For home owners looking to upgrade and first home buyers looking to get into the market, 2009 may be the time to reassess your position. I think home values will deteriorate next year not by the 25% some have predicted but I do think the residential market will go nowhere in 2009. As interest rates will be a historic low next year it may be an opportunity to buy. If you are currently renting you would be paying around 4-5% of the property value as rent. The argument has always been you can rent a better place than you can afford to buy. With interest rates low it may be worth considering buying and locking in a fixed rate of 5% for 3-5 years if you can. The low interest rate and drop in house prices means you can buy as good as you can rent. When this happens it's an opportunity to buy… but more on that next year, if and when that time approaches.
As this will be my last contribution for the year I would like to wish all our readers and clients a wonderful Christmas and a prosperous new year. We will be back next year ready to help you in your quest for wealth creation and financial freedom.
This year will go down as one of the worst years for world-wide stock markets ever. Never have we seen the unprecedented drop in world markets. The questions now are when will it stop, and what happens when it does?
They say a bear market ends with the final capitulation… the last margin call, the last intake of breath as we finally give up with a 'never again' gasp. I do think we have seen the bottom of the market now. In fact, I think we hit the bottom on November 21 when the All Ords hit 3,215 points (from the high of 6,873 on November 1, 2007).
As I write this today RIO has cut 14,000 jobs. All the newspaper headlines are calling the end of the resource boom. If we have hit the bottom of the market then we only have one place to go. Whether we go into recession in Australia next year or not (that is, two quarters of negative growth), there will still be some pain to come in the economy.
Currently we are being driven by two main factors. The first one relates to corporate profitability: as we head for a global recession we're seeing corporate profitability falling. As we don't know how bad it will be, the uncertainty is adding to the drop in markets.
The second issue is that when markets fall people are forced to sell. As fund managers and retail investors are forced to sell they inevitably push prices lower again. This is exactly what happened with Citibank in the US: when its share price fell some fund managers and investors had no choice but to sell. Some institutions have a mandate that they cannot own shares once the share hits a particular price. When that price is reached they must sell down, which by consequence pushes the price down even further. It's a self-perpetuating circle.
As financial planners we are often asked about superannuation and what we should all be doing with it in the current markets. As most of us won't be accessing our super for quite a few years this market crash will do little to our payouts in 10 to 15 years time. Remember dollar cost averaging? You'll certainly be acquiring a few cheap units in your super fund over the coming months, which is good news for your long-term retirement plans.
If you are retiring today it's a different story. Many people who are looking to retire now or next year will have seen their capital sum diminished by around 35% or even more. This is really not good news as it means they may have to stay on at work for a few years or live on a lower income than they anticipated.
Looking ahead to 2009 we will see interest rates come down further. This will stimulate the economy in a few ways. Mortgage rates will decrease, which is good news for home owners. We're also seeing oil prices coming down to a more reasonable level recently (I managed to fill my car for $60 this week rather than the $100 I was finding very hard to get used to). With these decreases people will have more money in their pockets which will stimulate spending.
The cash rate will only be about 60% of what you can achieve from dividends in the equity market so people looking for yield will return to the market for a better rate than cash. Longer term this market drop will mean poorer quality companies will close or be taken over, and the well run companies with strong balance sheets and proven franchises will out-perform.
History shows us that the stock market has performed on average at around 12% per annum for the last 100 years or so. Right now we find the market extremely undervalued so we do expect a better year in 2009 (it couldn't be worse). The stock market is the first to recover in any economic downturn. After bear markets we usually have a better than average return on the stock market.
As many of you are aware I am not a fan of residential property as an investment for all the reasons I won't go into here again, but I do see an opportunity looming.
For home owners looking to upgrade and first home buyers looking to get into the market, 2009 may be the time to reassess your position. I think home values will deteriorate next year not by the 25% some have predicted but I do think the residential market will go nowhere in 2009. As interest rates will be a historic low next year it may be an opportunity to buy. If you are currently renting you would be paying around 4-5% of the property value as rent. The argument has always been you can rent a better place than you can afford to buy. With interest rates low it may be worth considering buying and locking in a fixed rate of 5% for 3-5 years if you can. The low interest rate and drop in house prices means you can buy as good as you can rent. When this happens it's an opportunity to buy… but more on that next year, if and when that time approaches.
As this will be my last contribution for the year I would like to wish all our readers and clients a wonderful Christmas and a prosperous new year. We will be back next year ready to help you in your quest for wealth creation and financial freedom.
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Margin Lending | Stock Trading | Stock Market Crash | Tips | Quotes | Property Boom | Baby Boomers | Mortgage Trust
Reduce Tax | Buying Shares | How To Invest | Investment Scams | End Of Financial Year | Building Wealth
Oulook 2006 | Investment Types | Property Trust | Market Investment