The Sunday Mail (Queensland)
Take a deep breath and hang in there
WHAT a week it’s been – the Dow Jones had its eighth biggest decline in history, markets all over the world tumbled, and of course the Australian market crashed as well. For the nervous it was a time to wonder if this is the start of another global financial crisis, for the experienced investor the big decision was whether to sit tight or jump in and buy.
This is definitely not the start of another global financial crisis.
That was a credit event caused by billions of bad debts that resulted from irresponsible lending.
The catalyst for the big falls this week was Chinese investors punting on the stock market using margin loans. As the market fell, shares were forcibly dumped to cover margin calls.
Naturally, the turbulence of the week has resulted in a string of emails asking whether to get out of the market, and if superannuation is still worthwhile.
For starters, it would be extremely risky to exit the market after the huge falls we have just experienced – all you would be doing is converting a paper loss into a real one. In any event, unless you have a direct shareholding, it is not possible to make a fast exit. Redeeming all or part of your portfolio requires forms to be completed and processing time to occur. Allow a week at the least.
And don’t confuse superannuation with assets like property or shares. Superannuation is simply a vehicle that allows you to hold assets in a low tax environment. Anybody whose superannuation is invested in shares would have suffered a loss of value this week, but so would anybody who held shares in their own name.
Let’s look at the situation objectively.
The only realistic investment options are cash, property and shares. In my view the Australian economy is flat, with jobs continuing to be cut, and action by Green groups stopping infrastructure development.
The current fall in the sharemarkets tends to make people feel poorer and less confident of spending, which will make economic conditions even worse. If this is true, the only direction for interest rates is down.
It is really up to each individual to decide where they want to invest, but do you really think savvy investors will choose to move their money to term deposits paying 2 per cent when they can get better than 6 per cent franked from shares like the banks and Telstra? If stocks like this are held in a superannuation fund in pension mode the franking credits will take the effective yield to close to 10 per cent. That’s five times what you can get in term deposits.
The Aussie dollar got hammered too, but this has an upside as well as a downside. It will be great for exporters and the tourism industry, and will cushion any falls in shares held by international managed funds.
Think about it: if the international share values fall 4 per cent and the Aussie dollar falls 4 per cent, you will not have lost any value at all. I think falling rates will push our dollar down further, which should make international equity trusts great performers for the rest of the year. So don’t be concerned about the current turbulence; hang in there and think about adding to your portfolio if you can. Don’t forget there is now over a trillion dollars in superannuation, and employers are contributing 9.5 per cent of payroll all the time. Much of this money will find its way into the sharemarket and this will provide tremendous buying pressure year in year out.
Over the long term, share-based investments will still give great returns.