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Times like these

hen the stock market looks sick and higher interest rates threaten locally - while over in the US they worry about a recession - it’s times like these that wealth builders and investors should take a good look at themselves and remember who they are! The ups and downs

I know it sounds weird, but I reckon one of the greatest problems we all face as players of the stock market is that we change our strategy when news steals our attention.

For example, if you’re a day trader then all of the current volatility could be great for you. It could mean you could make money on shares falling in price and also make money out of the same shares when you think the sell off has been overdone.

On the other hand, if you’re a set-and-forget investor sitting on a pile of really good stocks, then this period where your shares could be copping a bit of a shellacking should be a “oh, bad luck” moment that will eventually be replaced by a phase where prices head north again.

Par for the course

For long-term investors, provided they hold great blue chip shares, these challenging times are simply all part of the ups and downs of investing.

As a variation on this theme, there are long-term holders of great stocks who actually love a down phase for the market, because they are dollar cost average investors. They see the spooked market phase and opportunity to buy good companies at bargain prices.

How it works

By way of example, a Macquarie Group share bought at $70 and then later at $60 means the average price of the shares bought would be $65, assuming the same quantities are bought each time.

For the investor who likes to be more an active player, then this current phase might see you taking on a more defensive position. I must admit, while I like this kind of investing role - as it is a bit like an active fund manager buying and selling shares according to where value seems to be - it’s hard work.

It is a tough job for a professional with a team of researchers and a long history in the game, so it can result in some really ordinary results for part-timers who work in a normal job and do their ‘funds management’ job for themselves on the side.

The important question

Right now, no matter who you might be as an investor, the next important question is, what is likely to happen and how will your investor personality respond?

I must confess that my negative views on the US and the likelihood of a recession have become firmer, though I think the official definition of two quarters of negative economic growth could be avoided. Being an election year in 2008, the US central bank and the Bush team will be throwing every positive stimuli imaginable at the troubled US economy.

The prelude to recession

My economics training has always noted that a building/housing slump generally brings an economic slowdown and even a recession. The pundits weren’t quick to see a big economic slump despite the depth of the sub-prime home loans housing mess, but it always had me scratching my head.

On the positive front

The good news is the US export-earnings abroad and the lower dollar that will help the economy recover. Also interest rates will be lowered to avoid a recession and that will eventually breathe life back into share prices. By the way, the latest economic growth figures from the US for the September quarter was 4.9% and that’s the strongest quarter since this growth period began in 2003.

The local outlook
Locally, the likes of Craig James, chief equity economist at CommSec, remains positive on the share market.
Just after the Rudd election victory James tipped the S&P/ASX 200 to reach 6800 by the year-end, and 7250 by June 2008.

“The year-end forecast may prove a touch too high given the recent correction and continued uncertainty about the outlook for the US economy and global credit markets,” he says. “But we expect that continued strength of both the domestic and global economies will drive the Aussie share market to fresh record highs during 2008.”

Other experts who I like to survey remain positive on our stock market with our links to China, India and the other developing countries, through our resources being a big plus for our market.

Keep a look out

This is a good time to be wary of businesses exposed to a rising Aussie dollar and heavily dependent on fuel costs. On the other hand, import-dependent businesses will be given a big leg up from the strong local dollar.

Whatever your personal bias when it comes to building your wealth, make sure you don’t change your personality, unless it is a permanent one for the long-term. Those who change who they are often lose on both the swings and the roundabouts.

As in life and so it is in investment, be true to yourself!

Published on: Wednesday, December 05, 2007

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