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16 days later…

It’s been more than two weeks since the stock market started having convulsions that had a similar effect on investors and wealth builders and so two important questions should be asked.

The first is what’s likely to happen going forward? And more importantly, what’s the take-home lesson from the experience?

Coincidentally, two weeks ago I started a Super Show on radio station 2GB, which runs between 9pm and 10pm Monday to Thursday and it basically is a question-and-answer show. I like to think of it as super and Switzer meets Frasier, as we do late-night calls not on your life problems but on your super challenges.

And the experience has shown me how reactive many of us can be to the bad news that the media carries, especially when it deals with our shares and super.

Quick reaction

One caller had gone to cash on the Monday after the Friday market slump, which was made worse by S&P’s downgrade of the US credit rating from AAA to AA+. However, after the amazing rebound on the Tuesday from 5.5 per cent down to end up 1.2 per cent, the poor caller was wondering if she had done the right thing!

Of course the answer was probably yes. She had stuffed up, but who knows because I don’t know her exact goals, her circumstances and her appetite for risk. Her biggest mistake might have been being exposed to a growth option in her super fund in the first place. 

Don’t ignore super

Unfortunately, because of the disinterest in and the complexity of super, too many people are flying blind on an asset, which has the potential to be a party boy’s or party girl’s greatest friend.

These sorts of people if they do it too long and never embrace the responsibility of marriage, kids and mortgages in their 30s, will at least have an untouchable super fund growing and waiting for them after 45 years of work and partying!

And if these unusual sorts of people get into salary sacrifice early, there could be millions waiting for them at age 65. In addition, because they have played up for most of their lives, they will probably avoid the great super anxiety outcome — outliving the balances in their super! 

What’s ahead?

So, with this on board, let’s address the two post-mini-crash key questions.

Firstly, on what will happen going forward, I expect more volatility is likely and provided there’s no really bad news from Europe on debts and bonds and the US economy, then the market will trade sideways with ups and downs in a reasonably tight range.

The leaders of France and Germany had a chance to impress markets on Tuesday but failed to come up with a strong commitment for Eurobonds, which disappointed traders. They thought there were enough funds for bond bailout strategies, which again annoyed market experts and they came up with a financial transactions tax.

Taxes never excite the investment community. Out of 10, these guys managed a four when an eight or nine was needed. A 10 would have been great but that’s expecting too much of Europeans attempting to do what history has shown is generally beyond them — agreement. 

Good news out of the US

On the flipside, the US came up with a better-than-expected industrial output figure for July and that was the best result in seven months and retailers such as Walmart reported much better than expected. This gives me hope that the US will dodge a double dip recession, which helped the stock market sell-off big time.

By the way, the credit ratings agency, Fitch, kept the AAA-rating on the US and all of this positive US news weighs against the negatives of Europe and this battle — positives versus negatives — will go for most of the year. 

Investment strategies

I know positives will eventually KO negatives but it’s a question of when? And this brings me to the take home message and the answer to the second question.

I will answer it with another question — did you buy CBA at $43 or so last week? If you didn’t, the market probably spooked you, yet a lot of professionals did — they couldn’t resist it. These people have an investment strategy to buy great companies when they’re cheap and hang onto them until they’re not cheap.

Others buy in a similar way and just hold and that can work too, but both groups have a set strategy, which history says will work over time. The choppers and the changers are the panicky punters and they make too many mistakes. 

Buying opportunity

In 2008 the guys at Vanguard showed me a graph of what happened to $10,000 between 1970 and 2007 if it was fully invested in the stock market and the proceeds were re-invested. The end-result was $601,747 for US shares and $453,155 for Aussie shares, while cash brought $310,485.

By the way, that happened despite many crashes, corrections and worrying days where the newspapers carried chilling headlines such as ‘Shares Bloodbath’ and ‘Super Crushed’.

In the short-term we worry but in the long-term, provided you have a good strategy, you should be confident.

On my SWITZER program on Sky News Business Channel, I asked what’s the opposite of a shares bloodbath? I eventually worked out the answer when we saw the stock market rebound — it’s a buying opportunity!

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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.

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Published on: Monday, August 22, 2011

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