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Meltdown mode

A 24 per cent slide in shares – wiping off the value of the gain of last financial year – is enough to worry you into the poor house, but in all reality, this is typical media hype. Sorry, but at times I have an internal battle between my old columnist inclination to go for a big hook to get readers in and what I should say as a financial adviser.
Reality check
The last thing I want to do is trivialise such a massive market collapse. It would be hurting the leveraged market players and day traders. It would have stressed out many margin loan stock buyers who have tried to fast-track their wealth building, but it should not have spooked long-term investors.
And despite what newspapers and media experts are saying about worried retirees, this is a market reality and if you don’t like it, lob your money into fixed interest deposits with banks. Right now these are 7 per cent or more and for many nervous nellies these are pretty good products.
Self preservation
Retirees can’t be treated like old fogies who, when they retire, will shut up shop and not do anything adventurous with the stock market. Sure they should be more defensive, but if they live a long time and run out of money they will hate their latter parts of their lives.
Playing the game
Anyone who wants to get 8 per cent or more to permit a good lifestyle in retirement and to keep the nest egg still growing while you draw down on it will have to have some exposure to the stock market. And why not, if you have a decent super sum and you understand that bad years do come, but mainly they are fair to pretty damn good?
Diamond in the rough
Look at a super fund like Australian Super – an industry fund that old Bernie Fraser used to advertise. You might remember he would end the ad by saying: “It the super of the future.”
This fund cracked about 17 per cent last financial year and while that is impressive, it should be seen as a one-off – much like this year’s results – which more than likely will be at the other end of performances, following the recent collapse.
However, the reality you need to focus on is it’s longer-term results, which have been around 12-13 per cent region.
Boom years mix in with bad years and fair to better than OK to produce great average outcomes, and that’s what we all should be aspiring to achieve with our investments.
Peace of mind
Use this sobering lesson about markets to recognise that you have to commit to quality assets – shares, funds, property – and save regularly to ensure you increase your exposure to these good income-earning assets. Then you can sleep easy at nights while the magic of compound interest works in your favour and if the assets are great they will compound in the right direction, most of the time.
The gift that keeps on giving
I was thinking about a great present for a young person from a parent. Imagine you could give a 21-year old a birthday present of $25,000 but you put it into their super fund. If the fund averaged 8 per cent it would double every nine years. If the kid did not retire until 65 years of age, that would be 54 years or six doublings of the $25,000. That means on a small return such as 8 per cent it would end up as $1.6m.
And then they would have the compulsory super also taking them to a million dollars or so! Such a person would not worry about these bad weeks, months or odd years, because the quality assets would be working their way to a beautiful result in the future.
Tried and trusted
People who neglect an early start to investing often take dangerous short cuts and really get hurt when markets do what they always do. I prefer to stick the old and trusted way, but just put more money in to make up for past mistakes. That’s why salary sacrifice is a great idea – you get more money into super and it’s a tax-effective strategy.
On the horizon
So, what do I think is going to happen over the next few weeks? Anna Corren on Today Tonight asked me this exact question and this is what I said: “There will be ups and downs until the stock market believes the US cuts in interest rates and the Bush-generated stimulus package will work.”
Weather the storm 
This trouble started in the financial system and has spread to businesses, which have borrowed and now is affecting all manner of businesses – good and not so good – because fear has the whip hand. Smart Alec speculators are adding to the trouble to make money out of a bear market.

Sit tight and good times will eventually reappear and hope the rescue shortens a US recession and averts a global one. 

Published on: Thursday, January 24, 2008

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