Market Investment - Is the Market Too High? Free Financial Advice for Australians

The Australian Share Market has had a spectacular performance over the last 2years and clients' portfolios have done extremely well. As I write this we are at record highs.

But what can we expect from the next twelve months?

Let's say that there is no real reason on the horizon why the current market situation should not continue albeit a little slower, apart from an international event. We have low inflation, we have strong global economies and we have strong bond yields. However this doesn't stop people from getting nervous. With the strong global economy and also industrial and resource stocks performing extremely well the market may be concerned with inflation.

A number of investors will also be thinking of taking profits, and there is probably a lot of pent up profit taking to be done in Australian equities. Investors in retail, hedge and also institutional funds have probably not taken any profits at this point.

Who will blink first?

So what will happen to the market from here? All markets have corrections.

Some sound profit taking may lead to a reduction in the market. And if the market then sees this drop it might continue to drop. And as we all suffer from a herd mentality and the market is very subject to emotion we may be in the situation where the market is deemed to be too high.

I was reminded the other day of one of the greatest pieces of stock market advice ever handed out by Charlie Merrill, the head of Merrill Lynch, in the lead up to the 1929 crash. (I am not advocating in any way that we are leading up to a crash!)

But he wrote the following "Now is the time to get out of debt. We do not urge that you sell securities indiscriminately but we do advise that you take advantage of present high stock prices and put your own financial house in order." Now what does he mean by putting your house in order? What we are looking at is making sure that you now can consolidate your investment portfolio. And just remember as the saying goes a rising tide lifts all ships.

So even some of your rubbish stocks (we all have a few) could now be in a better position. So now is the time to get out of your rubbish, consolidate it, or sell it. And if you do have a slight capital loss on some of your rubbishy stocks then that obviously will offset some of the capital gain on your better stocks. And if your rubbish stocks have not appreciated in this market why are you holding them.

There a number a strategies you can use and now (before the end of the financial year) is a good time to get your house in order. The following is a sample.

Diversifying portfolios using Rolling Instalment Warrants

Instalment Warrants allow investors to expand and diversify their existing shareholdings without outlaying additional capital. Tax deductible interest costs can also help investors manage their tax liabilities more effectively. Let me explain.

All investors know that diversification is the key to successful investing in the share market.

However, if investors are short of cash, they may have to sell existing shares in order to invest elsewhere. There are two potential problems to consider with this.
First, investors who sit on any capital gain in relation to those share sales may have to pay Capital Gains Tax (CGT).

Second, if the investor is looking to increase exposure to cash and fixed income at a time of unfavourable market conditions, they may have to sell their shares into a weakening market.

The first problem is obvious and needs little explanation. None of us enjoy paying tax.

However, the second problem is symptomatic of the psychology of many investors when markets are failing. During equity market downturns, many investors sell their shares in order to lower their exposure to the market and divert their funds into "less risky" assets, such as cash or fixed income products, which in a low interest rate environment, generate low returns.

These investors forgo the growth opportunities driven by the market's recovery.

This "flight to cash" strategy can result in sub-optimal returns for investors. A preferable outcome would be to maintain exposure to the share market while allowing funds to be released from existing holdings for investment in less risky assets.

Solution

By converting existing shares into Instalment Warrants, investors can maintain their current exposure and release capital for further investment without triggering a CGT event.

Example

An investor holds 1,000 ANZ shares and decides to roll them into 1,000 ANZ rolling Instalment Warrants (ANZIZZ) and receive a cash back amount, without incurring CGT.

With ANZ trading at $26.50 on 11 April 2006, the investor can roll ANZ shares into ANZIZZ at an effective price of $15.40. Following transfer of shares to a sponsored trust, the investor, who remains the beneficial owner of ANZ shares, is issued with 1,000 ANZIZZs and receives $15.40 per Instalment Warrant in cash. This cash-back amount reflects the difference between the price of ANZ and the price of ANZIZZ.

The investor has now released $15,400 in capital, which can be used for investment elsewhere, without incurring any CGT.

Also the funding cost for this strategy (in the form of interest expenses) may be eligible for tax deductions, depending on individual circumstances.

Please note this strategy is not available to Self Managed Super Funds. These funds could be used to pay down bad (ie non-functioning) debt, credit cards, and home loans.

The above is a good reason to rely on professional advice. Its also a good example of how complex the market has become and how many strategies are now available in the investors tool box. How many would try this strategy without help?

Are We Now Immune to New Financial Ideas?

I noticed this week that my subscription to Choice, Magazine supplement Money and Rights has been cancelled and the magazine will no longer be published. "Declining subscription numbers have meant the magazine is no longer financially viable". I suspect a few other "investment publications" are suffering also. I think most of them are read by the advisers. At least I hope they are.

Investing money and wealth creation has become a very specialized process over the past 10 years. As advisers we have to keep up with new products coming into the market every week. Some are innovative, some confusing, some designed simply to increase the fees to the Product provider. How the DIY investors keep up is beyond me.

As the market has become very confusing and competitive are more people outsourcing their wealth creation to their adviser?

I think the short answer is yes. We see far more individuals now who talk to us about effective saving strategies, who want to utilise their cash flow as they have no capital sum to invest. As people are becoming comfortable with the idea of using with an adviser, more and more are using them than ever before. The reason simply, is they don't have the time or interest to do it themselves. They certainly don't have the knowledge but they do have a desire to maximize their financial strategies and create wealth for themselves and their family.

Remember wealth creation is not the end game. It's just a necessary process to achieve financial freedom which will allow you to more choices, opportunity and enjoyment in the future.

Once you go through the gruelling experience of finding an adviser who makes sense, that you understand and trust to look after your wealth creation, the last thing you want to do is start reading investment magazines. As the expression goes "you don't own a dog and bark yourself". (Or something like that)

It would also seem now that if we don't have an adviser to help us through the maze, life can be very stressful. No matter how much information comes on to the market we can suffer from overload. Overload causes stress and stress is not good for your health or your wealth creation.

So why doesn't everyone have an adviser? Well the answer is very easy. They should... but the main stumbling blocks to finding and using an adviser are.

Firstly, I don't have any money (poor me syndrome) This will never change we never have enough money it's about utilizing what you have.

Secondly, I don't know who to talk to (trust). Well 99% of advisers are honest.... unfortunately that doesn't make them good advisers. Get a referral.

Thirdly, I don't know if I would get value for money. Hello! The first meeting is usually free so why don't you find out?

The role of the adviser is to increase your wealth and reduce your stress. The only people we can't help are the apathetic! So It's your first move.

Market Investment - Is the Market Too High?