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Jan 04

Investment Thoughts for 2012

Firstly I think its appropriate to suggest that I intend to make no return predictions for this year as I do believe its pretty much impossible with litte upside for me. However, what I would like to do is simply point out a few facts, rules, and current issues that need to be considered when building or reviewing the investment portfolio.

  • The big issue this year will once again be the Euro-sovereign crisis. This shold result in significant volatility for equity markets from time to time and daily movements exceeding 2% up or down will be relatively frequent. This type of volatility is the current norm for markets but whether those markets move up or down through to the end of 2012 is anyone’s guess.
  • Now whilst equity markets appear historically cheap on a PE basis, this is not necessarily a buy signal as PE ratios should be low in the face of high risk and lower than usual earnings growth, so be very very careful. Despite this warning, cash and bonds are hardly attractive on their own simple value metric, yield to maturity.
  • If you think you can pick stocks better than the professionals, I’m afraid you cannot. Even the professionals, backed by massive amounts of resources and always very very intelligent people, frequently fail to beat the market so if you are looking to accept any equity-like risk make sure you are very well diversified and use an index manager or an active manager who is not taking on too many risky bets (remember, noone really knows at this point in time how this European situation will ultimately impact markets)…just because your only stock Telstra outperformed the market this year does not mean you are a good investor…it actually suggests the opposite
  • The only free lunch in investing is diversification…this means don’t just invest in Australian equities (or Telstra), spread your investments across other investments such as Global equities, local and foreign fixed interest, local and global property, commodoties and if possible other alternative investments…but make sure the risk you accept is within your comfort zone
  • The sharemarket performance¬† of specific countries has very little to do with those countries economic growth. Two of the worst sharemarket performers this year were China, yes China, and India!!! Sharemarkets go up if information is more positive than expected and vice versa…this has nothing to do with economic growth…its expectations so if you can predict the future you’re looking good if you can’t, you’re possibly in trouble (unless you diversify)
  • If you are retired and want your money to last for the rest of your life…you can do this by either buying an annuity (lifetime or term certain which very long) or invest in a diversified portfolio of share, property, bonds, cash and don’t draw out too much each year (for example 5% or more linked to inflation). The financial services industry has talked many retirees into investing a very high proportion of their investment portfolio into shares (e.g. greater than 50%) and sold the concept of “over time the sharemarket outperforms”…whilst this is often the case in savings mode, it unfortunately doesn’t apply in drawdown (or pension) phase…you’ run a very big chance of running out of money before you know it!!!
  • You cannot get 10%pa return on your money without taking on a lot of investment risk. Cash and Bond interest rates paid by the Australian government are at most 4.25% (and that’s the cash rate)…so if you need to earn more than 4.25% you must take on more investment risk than the Australian government…so that will mean shares if you need to earn a lot more than 4.25% or may mean bank term deposits of you only need a little more than 4.25%.
  • Australian houses have dropped in price over the past 12 months…this is not an argument to suggest they are cheap. Interest rates may be reasonable but compared to our average household income we still have the most expensive housing in the world ( and don’t listen to what the banks say…they’re behind on their home loan budgets and need new business)
  • The best investment for anyone’s money will always be to pay off your non-tax deductible debt…so that includes your home loan, personal loan, and perhaps that loan that was taken out to contribute to superannuation (I know quite a few people did this in 2007 and they need to pay out those loans asap…but I’m sure they know that already). Non-deductible debt is a risk-free high return that compares to no other investment…if you don’t have non-deductible debt, fantastic and half your luck … and I’m happy for you to pay off my home loan!

I’m sure there’s many other little tidbits but I’m sure that’s more than enough to read for now and if I think of anything I’ll obviously let you know!

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