FYI | Aug 13 2014
By Peter Switzer, Switzer Super Report
Last Friday at a cake ceremony for a number of my staff I received some great advice that I’d like to share with you. It came from one of my financial advisors and the best bit was he gave my own advice back to me!
You see, in writing for all of our subscribers I sometimes have to do a Russell Crowe – become a method actor – and put myself into the shoes of our many varied readers. And many are not like me.
Ultimately it depends on who you think you are that will determine how you play the market right now. To explain my point, let’s profile two different types of readers.
The first is in accumulation mode, while the second is in pension mode and doesn’t pay capital gains tax if he or she sells stocks.
Let’s look at the latter investor and contemplate possible short-term strategies. Why short term? Well, I’m certain that stocks will continue to rise over 2015 but it's the time between now and December I’m most worried about and this is primarily for geopolitical reasons.
A black swan, or X-factor event, could come along and create the overdue correction. If you want proof of how events can move markets, just look at the 185-point gain on the Dow on Friday, when it was reported that Russian troops wound up their war games near the Ukraine border.
If Russia rolls into Ukraine, stocks will sink. I know exactly who I am so I’ll be a buyer of stocks, not a seller. The only problem will be when I buy but history suggests that earlier is usually better with geopolitical spook events.
Anyway, that might be analysis for another day. I truly hope that day never comes. Putin could not be that stupid. Surely?
For pension phase
So, how could our pension person play the market? One, do nothing and maybe buy on the dips. Two, he/she could totally cash up and wait for the correction and get back in again but there are timing risks, the risk of no correction and the risk of selling stocks, such as CBA-type stocks, which might have been bought at $45 and are yielding over 10%.
This suggests that if you are going to cash up, then just do it on stocks that you’re sorry you hold and then gamble that a correction will give you a chance to buy the good ones you hold at lower prices.
But as you can see, this is a very tricky play and rests on so many ‘ifs’ and ‘buts’. There’s an old financial planning saying that it’s time in the market, not timing the market, that counts.
I always add that if you can time the get-in well, such as February 2009 (when I was telling my TV audience and we were telling our financial planning clients it was the right time to get in), then you can get the best of both worlds.
Of course, we are further into the bull market cycle so the upside windfall years are reducing the longer we go on. But I’m bullish at least for one year, though I suspect I’ll add another year on to my positivity as 2015 unfolds.
For accumulation phase
And what about the reader who’s in accumulation mode?
Well, you’re basically stuck unless you want to play trader, which is a tough game to always get right and you will pay capital gains tax when you sell previous winners. Analysis of those who try to time the market shows that good sense keeps you out of the market. For example, last Friday on Wall Street, after stock markets like ours lost 73 points, many American investors could have missed out on the 185-point gain, which was not expected.
Timers often miss the big comeback days and are often caught in the huge surprise sell-off days. That’s why I like to go back to my favourite chart, which I’ll force down your throats in case you need to work out exactly who you are. Here it is:
It shows what happens to $10,000 from 1970 to 2009 and the fact that it rolls over into $453,166 tells you that all you need is a good collection of income-paying stocks held over a long time, which will defy five market crashes and countless corrections over 30 years.
For everyone
Thinking through how we should play the next few months Stuart, one of our financial planners, said “really given your advice to be holding quality income-paying stocks, even in a crash, the dividends will come through and time will repair the capital, so why do anything?”
He is right if your portfolio of stocks is good and you don’t have to eat into your capital. That’s the benefit of a good strategy – it can stand the test of time and the ups and downs of markets.
It also shows the need to build a cash buffer in good market times to withstand those times when markets slide, which is about three years in ten.
The only real challenge is for you to work out who you are and invest accordingly.
By the way, a recent Goldman Sachs report says stocks are set to outperform bonds in coming years! I like the word “years”, which adds to my optimism that being placed for a rising stock market in 2015, and probably 2016, is not pie in the sky stuff.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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