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Do you feel lucky?

With the Australian stock market tumbling 43 per cent last year and this week’s disappointing run of down days on most equity markets coupled with worrying job-shedding headlines, many investors should answer the famous Dirty Harry question.

When it comes to whether you want to increase your exposure to the stock market in 2009, hopefully to benefit from a possible bounce in share prices, the question comes down to: “Do I feel lucky?”

The last thing anyone wants is to see their already reduced financial wealth shrink further. CommSec says Aussie households lost 25 per cent in 2008.

If you don’t feel lucky, you have to stick with a cash or fixed interest option but these seldom promise magical returns to offset the losses of 2008.

The money and banking monitoring websites show the likes of NAB will give 4.5 per cent on one-year term deposits. The team at Fixed Income Investments Group (FIIG) say there are government guaranteed credit union deposits that promise better returns such as 5.7 per cent for 30 days and even 5.5 per cent for 90 days, which are miles better than the banks.

Brad Newcombe from FIIG says you can twist banks’ arms to pay better than their advertised rates if you are a good customer. But some financial advisers I have talked to say the banks aren’t as accommodating to less well-heeled customers.

Anyone who wants to walk on the wild side can find one-year rates at 8.9 per cent but these groups are unrated and could go broke on you. When it comes to comparative returns, always remember if the return is higher, then so is the risk.

There are funds that deal in cash and bonds — government and private companies — and these can produce impressive results.

For example, the Vanguard Index Cash Plus Fund last year returned 8.53 per cent and over three years annually produced 6.38 per cent. However, last year was a high interest rate year, which has bumped up their longer returns.

Over five years this fund returned 5.83 per cent. History shows it’s hard to do much better than 5 per cent and remain pretty safe. So should you try your luck with shares this year?

Personally, I think there will be a bounce this year but I am still a bit toey. That’s why I like great Aussie companies that have a history of paying good dividends.

Companies such as QBE, Westpac, NAB, CBA, Woolworths, ANZ, IAG and ASX all currently have dividend yields ranging from 3.5 per cent to 9 per cent.

In fact, most are closer to 8 per cent and even if these were halved because of the tough year ahead, you still would be close to matching the 4 per cent on offer for fixed deposits at banks.

And of course, you have the chance of capital gain if that bounce happens.

Smart investors would have between 10 and 20 of these sorts of stocks to reduce exposure to any surprise bad performer. And the beauty of this play is that even if 2009 brings bad market luck, you still would be holding companies that you would want for the long-term.

Published on: Friday, January 16, 2009

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