FYI | Oct 19 2012
By Peter Switzer, Switzer Super Report
There are two big issues super trustees should be tossing over. The first is whether interest rates come down again, which will be of particular interest to those who are playing it safe. The second is whether there will be an expected pull-back in stocks?
Both these issues tie in nicely with a reader’s question about my article on Monday, where I warned “beware negative experts”. I will get to that later because it’s an important consideration for anyone making decisions about investing super monies.
Cup Day cut?
On interest rates, the general collection of economic data lately has been up and down, which is consistent with the economy being at a turning point. I think one more rate cut, preferably on Melbourne Cup Day, would lower the currency and help a lot of companies in the S&P/ASX200 index because it would push up business and consumer confidence as well as business investment along with consumer spending.
BankWest’s chief economist, Alan Langford has looked at the jobs market and has come up with a similar conclusion. He says the data “supports the case for at least one more cash rate cut this year – most likely on the day of ‘the race that stops the nation’.”
However, he does take issue with the professional money markets, which have priced in two cuts before New Year! He argues a lot would have to go wrong for that to happen and I reckon he is spot on. Of course, the RBA could move in December and not Cup Day, but I think that would be a mistake if you want to pump up confidence and economic activity, which is essential if Treasurer Wayne Swan is to achieve his budget surplus. Going early is better.
Stock correction
On a pull-back in stocks, I expect something before December with the US election and the ‘fiscal cliff’ likely to spook the market, but there are some better-than-expected signs coming out of Europe.
As Langford noted: “Trade in Europe on Wednesday has gathered momentum – ahead of yet another EU summit on Thursday and Friday – with yields on 10-year Spanish government bonds tumbling.”
Lower yields on these bonds are a sign of less fear about the Spanish Government and its economic programs and so it’s good news for stock markets. I think the ‘fiscal cliff’ of automatic tax hikes and spending cuts in the US is the biggest issue for stocks this year given I believe China is doing better than expected.
My game plan
My trading approach is to wait for a pull-back and buy in again for a late December rally, which I reckon will roll over into early 2013. After that, we will have to assess whether there will be another ‘sell in May and go away’ challenge to deal with.
Negative vs Safe
Now to the reader question about that potential client with $6 billion who played it safe and probably took a 6% term deposit, missing out on the 17% gain he could have got on an income portfolio we recommended.
The reader asked: “What’s the difference between ‘negative’ and being ‘safe’? Your short story example to me could be seen as someone playing it safe as well as reacting to “too much” negative noise. A 6% return from cash takes no risk, no thought and is, for what it’ worth, guaranteed; whereas the near 17% gain from dividends is fraught with danger and the whims of the market, is it not? So how do you know if the glass is half empty or full?”
I don’t take issue with much of this analysis and it makes more sense when term deposits are paying 6%, but they soon might be down into the 4% region.
Given how long we’re likely to live and how we have to keep our capital growing, I think most of us need a dividend strategy.
Previously, I told a story of a colleague who retired with $5 million in a strong dividend portfolio where he averages around 10% after no tax and franked dividends. Even when his capital dropped in the Global Financial Crisis, his $500,000-a-year dropped to something like $460,000, but after one year, it pretty well rebounded back to the 10% kind of return. In fact, he constructed the dividends to ensure he received a designated dollar amount.
Term deposits are really safe, but a great dividend portfolio is a good, more rewarding alternative with a lot less danger than many investors think, and I reckon it will be more rewarding, albeit with a few more worrying night’s sleep.
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.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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