Don’t Head for the Stock Market Parking Lot Mid-Game

The Australian share market had a wild ride last month. And most all of it was downhill. The final numbers for September showed a drop of 5.9%, negating all the gains made during the rest of the calendar year. In total, September saw $90 billion wiped off the books.

Over in the US, the S&P500 didn’t fare quite so badly. Yet it was still down 1.6% in September.

October hasn’t been much kinder. At close yesterday the S&P/ASX 200 had shed almost 2% this month — though a rebound is likely this morning following on a bounce in US markets.

Not even rose coloured glasses can brighten recent results. And, not surprisingly, this has more than a few investors rushing for the exits. Which of course drives down share prices more, causing more shares to be offloaded, and…

Well, you get the idea.

But before joining in that rush, you need to remember that these are short term moves. As Chairman of the Albert Park Investors Guild I routinely remind our members to keep their eyes on their investment horizon.

If you’re not planning to retire (or access your savings for other reasons) for 10 or 20 years, you are certain to see a number of downturns alongside the upswings.

Think of it this way. You’re enjoying a game of footy with your mates. Your team — in my case the Crows — does well in the first 10 minutes. They’re already up 12 points. (Go Crows!) You’re on the edge of your seat waiting for the next big score, but then things take a turn for the worse.

The Power (let’s say) make a strong comeback. 10 minutes later your team has given up its 12 point lead and is now down by 18 points.

Is it game over? Is it time to down the remainder of your overpriced, lukewarm beer and head for the parking lot? Looking around you see a lot of other fans doing just that. The temptation to join in the rush for the exits can be quite strong. What do they know that you don’t?

The answer…is nothing.

If you’ve invested in the right, high quality companies — the sort of businesses that the Guild’s Investment Director, Meagan Evans, spends her days seeking out — you shouldn’t leave mid-game.

These aren’t the types of businesses to simply crumble, even if they may give up a few points on the scoreboard. These are the types of stocks that should recover faster than the rest of the pack following any market corrections. And their share prices should outperform as well.

That is to say, don’t be shocked into selling your investments at the first sign of trouble. That’s what trailing stop losses are for.

On the flip side — tempting as this may be — don’t overload your portfolio with stocks when the market is at record highs. I’m not going to make any predictions on when this might happen again. But if Jason Stevenson, the Guild’s Resources Analyst, is correct with his latest bullish predictions in Diggers and Drillers, look for a major bounce in November running through 2015.

Excuse the financial jargon
My apologies for going from a footy analogy into ‘financialese’. But when markets take a downturn, the value of having the right investment strategy in place becomes crystal clear. And the right strategy is all about diversification and asset allocation. And of course investing in the right, high quality companies with a proven track record.

The Albert Park Investors Guild only opened its doors to new members on August 4th. That hardly qualifies as long term, but it’s worth having a look at how the Guild’s portfolios are performing in a falling market.

Broad strokes first: 10 out of the 14 stocks are showing a gain — once you take exchange rates into account.

I’ve written before that I don’t march in lockstep with RBA governor Glenn Stevens when it comes to deflating the Australian dollar. A lower exchange rate is a mixed bag for you and me. We pay more for imports. And our day to day living expenses, like fuel for example, rise. It’s certainly not the panacea Stevens and his gang would have you believe.

But I won’t get back on that soapbox today. The point is that the Aussie is down against the US dollar, and that gives you a better return on any US investments you may have made.

Now back to the portfolio. For this analysis, I’m assuming that our members have spread their investments in line with our recommended asset allocation for an investor, say, 20 years from retirement.

In the table above, you can see that total portfolio returns with this allocation strategy are 1.65%. In this time the ASX 200 is down 4.63%, while the S&P 500 in the US is down 0.20%.

With a portfolio that’s only two months old — and on the tail end of the worst month the ASX has experienced since May 2012 — this is an excellent confirmation of the Guild’s core investment principles.

To bring this back to footy, if you’re confident in your team, and it’s not even halftime yet, sit back and enjoy the game. And of course your overpriced, lukewarm beer.


Bernd Struben
For The Markets and Money Australia

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Bernd Struben is a contribution Editor of Markets & Money. He holds a degree in Economics and is a published novelist. Bernd’s career spans multiple countries on four continents. With his diverse background, he brings unique business insight and a libertarian twist to his columns and analysis in Markets & Money.

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