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Not over ‘til the fat banker sings

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by Peter Switzer

Stop press — another bad day on Wall Street and our market will be down today, but don’t panic! It might take a little time but eventually the market will be on song.

The Dow was down 519.83 points, or 4.62 per cent, to 10,719.94 and the S&P 500 was off 51.77 points, or 4.42 per cent, to 1120.76. The Oz dollar is down to the 102-US-cents region and fears over European banks and rumours of a downgrade for French sovereign debt was used by short-sellers and hedge funds to rock the market and retail investors would have gone along for the ride.

But stop for a minute and consider what I will call a Switzer Fabulous Financial Fact — imagine that all of this terrible news on the stock market can actually be good for stocks! Well it won’t be in the short-term but history says it is, even over the course of one year!

For the long-term

Here’s why and it underlines the reason why you need to be a long-term investor in quality stocks and/or funds.

Sean Heron, a US portfolio manager at Glenmede, says when the VIX or fear index is above 30, the S&P 500 return for the ensuing year is 16.3 per cent and is positive 86 per cent of the time.

He told CNBC when stocks are oversold like now and 90 per cent of stocks are under their 200-day moving average, the subsequent return on the S&P 500 for the following 12 months averages around 30 per cent!

He says it’s a good time for avoiding both very low risk and very high risk investments.

Very low risk investments such as cash is an overreaction while high risk or beta stocks will take longer to win investors back. Consider this. When the media asks me how someone should be investing now, I always say if they are long-term investors, go for good dividend paying, solid companies such as the banks, BHP Billiton and Rio Tinto. And while the latter are not great dividend payers they are positioned brilliantly for the China growth story.

So Heron’s advice points the finger at balanced-type funds and blue chip, big cap, good dividend paying stocks.

This is the exact strategy that dominates the way we do business at Switzer Financial Planning and it’s the best strategy when you can’t control the markets but you can control what you invest in.

Market outlook

As I predicted yesterday, we’re not out of the woods yet but I think we will escape this panic and irrational selling period but it will take some better decision-making in Europe and some improved economic data out of the US.

By the way, Cisco and News Corp reported overnight and both companies beat expectations, showing that US companies are doing a lot better than what the stock market is saying about them.

If those fat bankers in Europe can sing the right song and twist their respective politicians to lift their debt bail out game, then this rough patch could be put behind us.

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.

Watch more from Peter on SWITZER TV.

Published on: Thursday, August 11, 2011

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