Call us on 1300 794 893

Your Money

Build your wealth to last

January has been a month to remember for a whole lot of the wrong reasons, but times like these serve as reminders to make you understand what you are really trying to do when you want to build your wealth.

Before a bit of analysis of where we are now, let’s recap on what has happened lately. Since January the S&P/ASX 200 has fallen 10.9 per cent. And since the 1 November 2007 high, it is down 13.9 per cent.

This is significant and is a substantial correction, but let me remind you that the sub-prime problems are bigger than expected. There are two reasons for this.

The first is that financial institutions have been plain silly punting on mortgage-related products that were high risk. Loans called NINJA (no income, no job and no assets) loans underline the stupidity of the US and freewheeling capitalism that permits loans to people in the above category!

The second reason the sub-prime mess created a credit crunch was that CEOs of many financial institutions allowed misrepresentation of the risks to be disseminated to the market. This has robbed the money markets of confidence in borrowers and also robbed many a CEO of their job.

The US rescue operation of a 75 basis points cut in interest rates followed by a 50 basis points cut all in two weeks will help either avert a recession or shorten one if it does eventuate. The problem started as a financial one and so a financial solution is needed.

The US Congress will also throw a $150bn package at the problem to get Americans confident and spending again. I don’t know if we are out of the woods, in fact I believe there will be some trying times between now and the middle of the year, but I still remain in the optimists' camp for the 2008 bottom line.

Nervous Nellies should unload positions they don’t like and look at being long in cash. Current rates of more than seven per cent are attractive. But for most of us, we are long-term investors not traders. We should look to make our stocks and property great assets to hold for the long haul.

I recently ran the following in my Saturday column in Sydney’s Daily Telegraph. I think it explains what we should learn from this recent experience.

“With the stock market’s slide pushing the correction to 13 per cent since November, my lack of concern could be summed up as – ‘what, me worry’?

Fans of Mad comics might recall this was the famous one-liner of Alfred E Neuman and it came to mind this week when one client found it all too much.

The impact of the price falls and the media’s headlines made him press the panic button and ask to sell out of his shares. The frenzy had caused a change of investor personality and he forgot who he was.

You see financial planning is meant to assist long-term investors build wealth over time. That time will have numerous cycles where share prices rise and fall.

Luckily, history shows that good days and years outnumber the bad ones provided you buy great assets – be they shares, properties or funds.

When it comes to shares, my personal preference is to target great companies – often the top 20 or so – and it is great when you can buy into these top businesses at low prices.

This is why I am not too concerned about the current sell-off. In fact, it makes it easier for me to access good companies I want to hold in my self-managed super fund until I retire when the tax treatment is very lenient – even non-existent.

But why aren’t I concerned about a US recession?
Well, I am but I am also concerned about cancer. Bad news happens, but we can’t get too stressed about it.

Economically speaking Australia is in good shape and our close links to China and other fast-growing economies will give us some insurance against a US economic wipe out.

The Yanks will throw more interest rate cuts and tax cuts at trying to turn around the recession and this should help.

American banks are swallowing some tough medicine having to surrender equity to sovereign funds out of Asia and the Middle East, but their balance sheets will eventually improve.

The US slowdown will actually help China go off the economic boil and should reduce inflationary pressure, which could extend its growth phase.

Undoubtedly, we will see share price volatility for a few more months where the dives could outweigh the price climbs. But eventually value will be seen by share players and better times will roll in.

If you are day trader and heavily in debt, these could be strained days indeed.
However, time is on the side of long-term investors. All they need is nerve.
To misquote Beatle John Lennon: “somebody did tell you there would be days like these” – me.”

I wrote that a couple of weeks ago, but its lesson stands for all time. Our job is to invest in great diversified assets and over the long-term they will deliver. The people who are really suffering now are those who took risks in trying to shoot the lights out to get richer quick.

I love get rich schemes – get rich slowly schemes.

Published on: Tuesday, February 05, 2008

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300