How To Invest - What Do We Do Now? - Free Financial Advice for Australians

With the world markets in meltdown, recession looming and credit markets in disarray, the questions on every investor's lips are: is it time to be in cash? Is it time to move to cash?

Let's have a closer look at these questions. If everyone could have made the decision last September to move their investments into cash then without a doubt you would be better off today. The truth is no-one really foresaw the catastrophic damage that would be inflicted on the markets over the last 12 months. It has truly been a category 7 financial hurricane, a 'once in a century' event, a 'tell your grandchildren' event. As one fund manager said last week: there are not enough superlatives in the English language to describe the current world wide economic malaise (I know, I've tried!).

Iceland has gone broke. Some of the biggest companies in the US are teetering on bankruptcy. Ordinary fund managers who have never achieved returns over 10% per annum are bragging that they have only lost 15% for the year.

Have a look at the chart below. The year is not finished and you can see we have already had the worst stockmarket returns on record; it is worse than the worst year of the Great Depression.

Over this 124 year period, Australian shares have had a median return of 11.8% p.a., which is well ahead of cash returns over that period.

I have talked to people who have been wiped out personally and have lost all their shares in the companies they own or work for, and who have no job prospects in the near future. If they have not already sold their family home they are about to. I hear of people who were about to retire but will now have to work for another four years if they can. I know of retirees whose income has been cut by 45%.

So what do we do about it? Turn to cash? With interest rates coming down I expect to see cash rates decreasing to 4% next year or even below. The UK now has its lowest interest rate since the 1950s and US has cut their rates to 1%.

If you are currently in cash you could probably achieve 6% return for the next 12 months. After you take off tax and inflation (currently running at nearly 5%) you would end up with diddly squat at the end of 2009. Given the current diversification of your portfolio do you think it will earn more than 6% in the coming 12 months with dividends and growth?

The fact that we have seen movements of more than 6% in the space of a week, up or down, over the course of the last few months means that we can lose a year's worth of growth in cash or gain a year's growth over the course of a month.

So will the market be up 6% by this time next year or down by 6% this time next year? We're starting to see signs of a market bottom but there is still a lot of volatility. With the worst returns ever, I am betting the market will be up over 6% this time next year, especially in well constructed diversified portfolios.

So now is not the time to run to cash. Now is not the time crystallise your paper losses. Now is the time to sit tight on this market rollercoaster and ride out the volatility. I don't expect the markets to soar to 25% plus returns in 2009 but I am confident they will beat cash or fixed interest over the next 12 months. If you can sit tight now you will have survived the biggest crash in history. Future equity investing will be easy by comparison. We all have the scars to prove it.

How To Invest - What Do We Do Now?

What do we do now?

Article originally published in November 2008.

Venn Williams - Halogen Pty Ltd