15
Sep

Investors need to prepare for further currency falls

The following is an article from Marcus Padley author of the popular Marcus Today investment newsletter, and one of Australia’s leading stockbrokers and investment commentators.

Between February 2001 and July 2011 the Australian dollar rose from 47.73 US cents to 110.8 US cents, a 132 per cent rise. Since the peak in 2011 it has fallen over 30 per cent to levels around 71.00 US cents and has done something similar against the British pound and most European currencies.

To understand why our dollar boomed and why it has fallen, think of a currency as a reflection of the relative strength of two economies. Australia is a commodities-based economy and the rise in our dollar in the 10 years to 2011 was because of a boom in our economy triggered by a boom in commodity prices, on the back of a huge lift in demand, particularly from China, for coal and iron ore.

But just as the main driver of the Australian dollar was the resources boom, the main driver for the fall in the dollar since 2011 has been a peak in iron ore and coal demand, and in iron ore and coal prices, which have more than halved if not quartered. That flop follows a peak in Chinese demand and a huge increase in supply, which is programmed to continue despite the commodity price falls.

The unfortunate reality for Australia is that the economy, currency and investment markets were transformed by the resources boom from a relative backwater to a position of international relevance, with the Australian dollar the representation of that new status. But the whole resources boom along with the Australian dollar boom, suddenly begins to look like a rather transitory, once-in-a-lifetime event rather than a new norm. And with iron ore, oil and coal prices still falling, the trend in commodity prices and the Australian dollar seems set to continue.

Before the resources boom in 2002, when the Australian dollar was trading at 50 US cents the Australian economy was less relevant for global investors. We risk a return to this irrelevance if
commodity prices do not rebound and the industrial manufacturing and services base remains globally irrelevant, which seems likely.

The relevance of all this is that if the Australian dollar continues to fall, any Australian who wants to buy offshore goods on the internet, drive a European car or travel abroad ever again, needs to do something to hedge (insure) themselves against global financial irrelevance and isolation. For retirees and people living from investment income or growing assets for the future, the options include getting your assets out of the Australian dollar, investing them overseas, and hedging the Australian economic malaise.

Asset-poor Australians have choices (1) accept that you are not going to drive a Mercedes, travel abroad or shop on the internet, and be happy with that, (2) go and work in a nation with a strong currency or (3) plan on investing so much in your education, career and business that you are going to end up so rich that it really doesn’t matter.

The latter option is probably the best

Important Information:  The information in this document is of a general nature only. Before you make an investment decision you should assess for yourself or obtain professional advice on whether the information is appropriate for your particular investment objectives, financial situation and particular needs.

9
Sep

What are the guarantees when investing

The only guarantee is Cash

Cash however only provides should term comfort – the rate of return is no greater than inflation.

What about Growth Investments ?

Growth investments provide the capacity for long term growth and ”inflation-proofing” of assets, growth investments however come with a level of short to medium term risk.

Within your risk profile our suggested overall strategy is to:

  1. Retain 3 to 5 years of your likely expenditure in a Cash/Fixed Interest/Bond investment options.
  2. Hold of the balance of investments in growth investment options – shares both Australian, Global and Property with your preferences and understanding being a factor to the weighting of investments in each sector.
  3. Specifically select investment areas for both your short term and long term investment allocation. While continuing to diversify hold an over-weight position in investment sectors that are expected to out-perform.
  4. Ensure you fully understand your investments and investment structure and only hold quality main stream investments.
    Review on a structured basis – don’t panic!

Important Information:  The information in this document is of a general nature only. Before you make an investment decision you should assess for yourself or obtain professional advice on whether the information is appropriate for your particular investment objectives, financial situation and particular needs.

9
Sep

Market Volatility is Normal

Since June of 2015 we have seen declines in equity markets one day and recovery the next.These movements have been sharply down and up over this time frame otherwise referred to as volatility. The reality is that this is nothing new and equity markets will go through periods of volatility for a variety of reasons.

If we look beyond the dramatic headlines, designed predominately to sell newspapers I believe there are some essential realities that are worth reminding ourselves of.

Volatility is normal

Volatility has and always will occur and as a consequence, as investors we need to be prepared for this eventuality. In this way we are prepared when volatility occurs and can take an unemotional view, remaining focused on long term objectives.

Market corrections may create a “Buying Opportunity”

Corrections occur and when they do, can often provide a good time to invest where the value of stocks become well priced and attractive buying opportunities. History shows that some of the worst short term market losses were followed by stock market recovery beyond the original market high point.

Time in, not “Timing” the market

Attempting to sell one day, remain in cash and invest the following week has the potential to damage a portfolio. Analysis has shown (noted below) that missing the 5 best performing days in the market can significantly reduce investor returns.

volatility-graph

Diversification & Risk

It is not possible to precisely determine the outlook of individual asset classes over a future time period with precision and the best performing asset class can rotate from one to the next quite rapidly. Accordingly we advocate that it is important to maintain a diverse asset allocation across all asset classes consistent with your risk profile. Diversity will help you to manage risk by not “having all your eggs in the one basket”. Equally it is important to have sufficient orientation within your portfolio allocated to Defensive assets (like cash and fixed interest securities) and Growth assets (domestic and international equities), which will be determined based on an individual’s circumstances and attitude to risk.

It is important that we not allow sentiment and emotion, both in the form of euphoria and also pessimism dictate our investment strategies when markets become volatile. In the words of Warren Buffet, “The stock market is a mechanism for transferring wealth from the impatient to the patient” and this is typically the case when market volatility occurs causing investors to make knee jerk reactions. It is times like these that a written financial plan tailored to your circumstances is essential to ensure you remain focused on your long term objectives irrespective of the market noise.

signature_xan

Alexander(Xan) Kitchin CPA, BBus(Acc), BEcon

Director | Authorised Representative

Important Information:  The information in this document is of a general nature only. Before you make an investment decision you should assess for yourself or obtain professional advice on whether the information is appropriate for your particular investment objectives, financial situation and particular needs.