Investing in Tough Times

With the turmoil in investment markets over the course of 2008, many investors will be asking “when will it all end?” of “when will we see the return to more stable markets?”

Back in November 2007, the Australian All Ordinaries Index peaked at 6873 points. At the time of writing this article, it is at 5091 points, almost the lowest point in the current cycle. Many headlines will be screaming out the news that the share-market has “crashed” or “plummeted” by 26% since last November! Very emotive sentiments.

If you had invested in the All Ordinaries Index back in November 2007 and sold your investment now, you would certainly have lost money. You would receive back around 74% of what you had invested (before taking into account any fees and charges). But that loss will only occur if you actually sold your investment. If you are still holding the investment you made back in November, then you haven’t lost anything in real terms. You may have a “paper loss”, but an actual loss does not arise until such time as you actually sell your investment.

Let’s look at a simple example: If you bought a house 5 years ago for $300,000 and you now believe is worth $500,000, and you put it on the market, how much money have you made? You will probably say $200,000. Actually, you have not made anything until such time as a buyer comes along and purchases the property. If you believe the house is worth $500,000, but the best offer you receive is $450,000, would you sell? Perhaps you will, in which case you have still made a profit of $150,000. But you may decide to reject the offer and hold out for more. It is your decision. The point is, you haven’t made or lost money until you accept the offer and have the money in your hands.

For those who believe they are smart investors, perhaps it is now time to be counter cyclical. That is, to go against the trend and do what everyone else is not doing. With the share market being at a relatively low point, perhaps now is the time to consider going back into the market. The share market is having a “sale”. Shares are cheaper than they have been. We don’t know how long the “sale” will last, or if prices will fall further but perhaps this is time for the astute investor with some cash available to start re-entering the market. Perhaps it is time to start an orderly approach to investing by “dollar-cost averaging”, making smaller investments at regular intervals (say each month).

Remember, investing in the share market is a long-term investment. Know your investment time horizon and invest accordingly.

But most importantly, before embarking on any investment strategy, take professional advice and ensure that the steps you take are relevant for your overall situation.

A counter-cyclical investment approach is perhaps best summed up in the words of Rudyard Kipling “If you can keep your head when all about you are loosing theirs……”

Source: Peter Kelly – Professional Investment Advisory Services – July 2008