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Is the time right to buy shares?

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by Peter Switzer

Local doomsday merchants got a statistical kick in the pants this week when the OECD gave the Aussie economy a big tick, claiming that our economy will contract by only 0.3% this year but will roar back to solid growth next year, with a 2.4% figure tipped.

But the even better news from the Paris-based think tank is that unemployment in Australia will peak at 7.9% next year, rather than the 8.5% predicted in the Budget.
All up, recent economic and business news is telling me that long-term investors should be thinking about having a look at shares as a way to build their wealth bottom lines.

Update on America

Let’s have a look at the latest revelations from the place where most of our economic and market problems began — America.
In the USA, the big news was that the Federal Reserve is not jumping to raise interest rates too soon. Despite the fact that the world’s biggest economy is starting to free itself from recession, the central bank thinks there is still some time to go before the Yanks are out of the woods, and that means interest rate rises will have to wait.

The power of ‘can do’

That’s great news, however, an old carpet watcher says the US recovery will happen and warns everyone not to underestimate this country of ‘can do’ merchants. He also warns that inflation will come, which always forces up interest rates and hurts economic recoveries, but he thinks this unwanted development could be some time off.

Buffet’s predictions

Typically, most news outlets preferred to run hard with Warren Buffett’s prediction that the US will have to face inflation down the track, but if you go to his interview on Fox Business, you’ll find he suggests this could happen in three years’ time. He thinks the US is on the mend and that the Obama Administration is doing the right thing by the economy but the housing sector, which is crucial for the recovery, has not yet turned the corner.

The Dunny Index!
Buffett says he is a big watcher of carpet sales as this is a great indicator of how housing is going — a new house needs new carpet.
(In Australia, I look at my own creation — the Dunny Index — and this looks at the orders for Porta-loos — which builders need on site at the start of a project.)

Not a big US slide
Back to America, and while it is expected that a pullback will happen for the stock market on Wall Street after the latest 30% plus rally, few think the market index will fall by anything more than 10-15%. By the way, this could be overdone negativity.

In case you are wondering, Wall Street is bound to keep leading the local market, though I think over time our shares will do better than our US counterparts because of our link to China, and Asia generally.

Short term and long term

For the short-term investor jumping into shares, now is a gamble after such a big rally, though I do think the market will be higher by Christmas. On the other hand, the long-term investor, who has a three- to five-year horizon, has a great opportunity to buy stocks that are bound to do well from these still beaten-up levels. Remember, shares fell over 50% during the crash and have since risen about 30%, however that doesn’t mean we’re only down 20% on the market.

Free lesson

Let me give you a little lesson, which surprises novices to stocks.

When the market started to slump, the All Ords index was around 6,700. If this lost 50%, it fell to 3,350. If we have risen 30%, that takes us to 4,355 but this is still 35% short of 6,700. This means someone’s portfolio of shares could still be 35% lower than it was before the crash.

How come?

The 50% fall was from a bigger amount — 6,700 — while the rise of 30% was off a smaller amount of 3,350.
My favourite stocks are those in the top 30 or 40 in terms of market value. These are some of the best business names in Australia. Some great miners will be good value and so are those with a history of paying dividends.

The beauty of the dividend

You know, some experts say that shares average returns of around 10-12%, but history shows that half of the returns from shares comes from dividends. That’s why I look for good dividend payers.

Switzer on TV

Over the next few months, I’m going to create my favourite portfolio of stocks using some of the country’s best stockbrokers. These people are coming on my new TV show called SWITZER on Sky Business — from Monday to Thursday at 7-8 pm and repeated at 9-10pm.

Hope you can join us to see how we build the portfolio, but I’ll make sure it will also be here on my website.

Good luck with your money life ahead!

For advice you can trust contact Switzer Financial Services.

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.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Monday, June 29, 2009