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* MSCI World ex Australia Index $A Economists are saying that we are in a bear market [2] or maybe even approaching stagflation [3]. It is a tough question but where, in what and with whom should we be investing our money? Would you feel comfortable about investing today in this market that seems to be gyrating so wildly? The Psychology of “fear and greed”! The psychological phenomenon which we always see raising its ugly head regardless of whether the market is “bullish” or “bearish” is that of "fear and greed" When people see certain investment sectors making significant returns in bull markets [4] they rush in; usually buying at the top. This is the greed factor! Investors in this cycle intuitively believe it is not dangerous to invest and that they can't lose as the sector is clearly doing well. Conversely when these same people see sectors crashing around their ears they leave them in droves because they think they will lose even more of their money if they wait any longer. This of course is the fear factor! So they sell down, turning their "book" loss into a "real" loss and then up and buy into another sector which is doing well (again at the top of its market!). In the current turbulent cycle this way of thinking suggests there is no point buying a bargain. These trends see people buying at the top and selling at the bottom of investment cycles. Intrinsically we know that without risk there is no reward, but where do you think is the most appropriate place to take the risk; at the top of the market or at the bottom? Time in the market .. History has shown that sticking with your investment strategy when times are difficult as opposed to panic selling when markets are falling can pay off handsomely over the long term. Look at these returns for the different sectors over the last 20 years:
A patient investor who maintained their investment in the Australian share market over the last 20 years could have posted annualized returns above 12% pa to the end of June 2008. This figure includes some of the negative impact of the last 12 months in addition to other market shocks ... October 19th 1987 (a drop of 22%); the tech wreck of 2000; 9/11 in 2001; and SARS in 2003. These have all been and gone now, though each had a big impact on the markets at the time. We understand that it is tough to hang in there and not succumb to the "sell sell sell" mentality, but with good quality investments that stand the test of time there is no need to panic. Please feel free to contact us if you have any queries. LBW Financial Services Pty Limited
[1] Source: Lonsec Sep Qtr review. [2] Please refer to information sheet attached. [3] Please refer to information sheet attached. [4] Please refer to information sheet attached. [5] Source: Russell Investments comparison of various sectors for the 20 years to 31 December 2007.
Definitions:
Bear market A bear market is described as being accompanied by widespread pessimism. Investors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history was after the Wall Street Crash of 1929 and lasted from 1930 to 1932, marking the start of the Great Depression. A milder, low-level long-term bear market occurred from about 1973 to 1982, encompassing the stagflation economy, energy crises in the 1970s, and high unemployment in the early 1980s. Prices fluctuate constantly on the open market; a bear market is not a simple decline, but a substantial drop in the prices of a range of issues over a defined period of time. According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period." However, no consensual definition of a bear market exists to differentiate clearly a primary market trend from a secondary market trend. The markets most recently entered a Bear Market in July 2008 when the S&P 500 Index, Dow Jones Industrial Average and NASDAQ Composite were all down 20% from their October 2007 highs. Investors frequently confuse bear markets with corrections. Corrections are much shorter lived, whereas bear markets occur over a longer period with typically greater magnitudes of loss from top to bottom. Bull market A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future capital gains. A notable recent bull market was in the 1990s when the U.S. and many other global financial markets rose rapidly. In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also described as a bull run. Dow Theory attempts to describe the character of these market movements. India's BSE SENSEX increased from 14000 points to 21000 points in a period of 1 year from Jan 2007 to Jan 2008. The United States was described as being in a long-term bull market from about 1983 to late 2007, with brief upsets including the Panic of 1987 and the NASDAQ crash of 2000-2002. Stagflation Stagflation is an economic illness wherein inflation combined with stagnation lock a society into slow-to-negative economic growth and rising unemployment, invariably including recession. When combined, the presence of both these factors is more than sufficient to launch an era of stagflation. For example, policies which promote growth in the money supply to allow consumers to afford higher priced oil contribute as a cause for runaway inflation, even if implemented to fight stagnation or recessions. The global stagflation of the 1970s is often blamed on both causes: it was started by a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to try to avoid the resulting recession and stagnation, causing a runaway wage-price spiral. The above definitions were taken from the Wikipedia free online encyclopaedia. Home | Services | About Us | Online payments & purchases | Careers Software solutions for accountants by Acclipse | Copyright 2003– © LBW & Partners |
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