Decide where you stand in this volatile sharemarket and then take action says David Koch

INVESTORS are having a pretty tough time of it at the moment, as markets around the world stage huge swings on just about any bit of news. And unfortunately, most of the recent swings have been lower.

The big question is whether this could be the start of a dive worse than the one that kicked off the GFC, or the typical September/October rollercoaster which will settle back into a traditional Christmas rally and subsequent rebound.

We have a slow economic recovery in Europe, fears the US is about to increase its official interest rates because its economy is improving, and concerns about a slowing Chinese economy.

The last of those is a particularly sharp thorn in the Aussie market as China remains our largest trading partner and our sharemarket is seen as a China and commodities play. So if they slow further, they won’t need as many of our exports which could suck some life out of corporate profits and government tax revenues.

So there’s plenty resting on the shoulders of China and, until we see some better data out of the economy there, commodities will continue to wear the brunt of the pain and Aussie shares will suffer.

That’s where we’re at. The question for investors is what to do, which depends if you think this is the start of a bigger bear market or a great buying opportunity. It also depends on your stage of life and appetite for risk. Most importantly, you need to do your homework and seek out good personal advice.

Once you’ve decided where you stand, here are a couple of ideas for how to act.

For buyers wanting to get in

The worst time to sell is when markets are gripped by fear and, for those with iron guts, these fluctuations present an opportunity to buy good stocks at lower prices.

Resource stocks, for example, have been crunched. BHP at seven year lows, Rio at two year lows, Glencore hammered. The question is, have they been overdone?

While there’s no point trying to time the market and pick the bottom — people have tried for decades and failed — it pays to be patient and ensure you don’t make a big trade just before another big dip.

A great way to do this is by dollar cost averaging. This involves buying a fixed dollar amount of shares over a set time frame, regardless of the share price. For example, you may buy in thirds … investing a third of your planned investment in a company in three trades over the course of six weeks or six months.

This takes a lot of the emotion out of the investment, reduces the impact of big changes in prices and is a strategy that can work in rising markets too. If the market is low, you get more shares for your money and the reverse if the market is high.

Of course you still need to complete the usual checks for valuation, sustainability of earnings, management quality and competitive advantages, but this is the case for any purchase in any market.

For sellers looking to offload

Any significant fall in a share price should prompt you to go back and check the fundamentals just mentioned to make sure nothing’s changed in your investment theory. Often, it’s just market sentiment driving the price down.

If things have deteriorated for a company, or the big picture has become a little too cloudy, the best thing you can do is check with your adviser who may recommend you sell out. In our experience, once a share has fallen significantly for a legitimate reason, you’re likely to rack up more losses holding on for that slightly higher price to sell at.

There are some more complicated orders (trailing-sell orders) people use to track a share price higher and sell when it falls next, but unless you know what you’re doing, these are best left for more sophisticated investors.

So unfortunately there’s no saving grace when it comes to selling a share in the red, but you can learn a lesson and move on as a better investor for the experience.

Regardless of which side of the fence you’re on, make sure you take some time to assess your portfolio with a long-term perspective, look at each company objectively and come to a decision that you have conviction in.

Unusual Ways To Save Money

As most of you know I have a part time job teaching social workers about money so they can then help their clients. It is a fantastic job for someone like me who loves talking and writing about money! I love teaching the course because every time without fail I learn something new from my class that I can then think about using in my life or share with you all. What I find fascinating about personal finance is that there is not a ‘one size fits all’ answer or only one way to achieve a goal, there are different ways that suit different people. Believe it or not some of the most diverse answers come when we talk about different ways to save money….. so here are some of the most unusual ones I have heard lately.

Cold Hard!

Yep – you read it correctly when I asked one of my classes the other day how they saved money one lady piped up and said “I have cold hard!”…. “er pardon” was my reply. I certainly hadn’t heard that one before and my mind boggled as to what that could be! As she went on to explain that she saves her money as soon as she gets paid putting a set amount of cash in a plastic zip lock bag and putting it in her freezer!!!! Between the meat and the peas apparently!!!! She also went on to explain that putting the money into her freezer means that she won’t touch it, whereas if it is in a bank account she will. She has used this strategy to save for a solar hot water system and is currently saving for a cruise!!! Obviously this one is not great if you get robbed and the robbers are hungry!!! But still, I was impressed with her ingenuity!

Coke bottle anyone?

Apparently an empty 600ml bottle of Coke can hold close to $800 worth of coins, according to one guy from my class. It is often touted on the internet to be $1,000 but my participants claim that is not true and it is more like $800 (what?! something on the internet that is not true!!!). Being a closet Coke drinker I am keen to give this one a go myself. I think it is a great way to save for Christmas!!!

Don’t claim the tax free threshold

When you get a job, you fill in a form which asks whether you want to claim the tax free threshold. Australian residents for tax purposes are entitled to an $18,200 tax free threshold If you select ‘no’ on the ATO form and don’t claim the tax free threshold, you are taxed on that first $18,200. It means you are paying tax on a sum of money, at your regular tax rate, even though you don’t need to. As a result you will overpay tax and get a tax refund at the end of the financial year.

Over-pay your rent

This is another popular one especially to pay for Christmas. Often paying more on your rent means you can have a month off at the end of the year to pay for Christmas.

Saving is a really individual thing, but when you get something that works for you – stick with it.

The no. 1 budgeting mistake people make that means they never get ahead

It’s easy to do.

You might have good intentions about saving money, you may even have specific goals in mind. But…

Even before you get your pay cheque, there is rent or the mortgage to pay, bills to pay, and the groceries to buy.

You need to put petrol in the car. The kids come home and tell you of a school excursion that needs to be paid… like, tomorrow mum! A friend calls and asks you out for a catch up, and quite frankly, by the time Friday comes you could really use that drink. Or two. Heck, while we’re here, I may as well have another one. The kids will have to have pizza for dinner.

Saturday comes and you see a top on sale. You could do with a new work shirt. And the kids really need new shoes for Summer, they’ve already knocked the tops off their big toes, which are hanging over the end of their sandals.

Before you know it, there’s no money left, and you’re hanging out for your next pay. That savings goal? It will have to wait until next week.

And next week never comes.

Can you relate to this? I can. Sometimes it feels like it’s impossible to get ahead. And just when you do finally have a windfall (maybe a tax return) the hot water heater blows up or the car needs a new radiator and you’re back to square one.

Again.
The golden rule of managing your money

You may have already heard the golden rule dozens of times.

You know it, it makes sense.

Pay yourself first.

Before you pay the bills or the rent or anything else, put some money aside for your savings. That’s right, your savings should take priority over landlord’s savings or the shareholder’s savings of your Telco.

Just like exercising first thing in the morning means you’re more likely to get fit (before the motivation runs dry and all the busyness of the day takes over), paying yourself before everyone else, means you’re more likely to build a healthy savings account.

But most of us don’t do it.

Why?

We’re too busy treading water. Those bills aren’t going to pay themselves and the landlord might not understand it when we tell him our savings come first.

But here’s the most AMAZING thing about paying yourself first.

You step off the treadmill.

You’re no longer living from pay to pay, trying to scramble to pay the bills and meet expenses.

You’re no longer relying on the vicious cycle of debt to get you by.
Why paying yourself first will result in golden sunsets, fields of daisies and strawberry daiquiris

Dreaming of a new home? A trip overseas? An easy retirement?

If you pay yourself last, you may or may not reach your saving goals. If you pay yourself first, you’re well and truly on track for success.

When you consistently deduct a regular savings amount from your pay, before you pay anything else, you won’t even notice it’s gone. Your spending will adjust accordingly, as long as you’re not making up the deficit with debt.

With a little help from our good old friend compounding interest, it’s amazing how quickly your savings will add up. And seeing your success will motivate you to keep going, or even increase your savings amount and reach your goal sooner!

Your savings will not only help you reach your financial goals, they will also act as an emergency fund and create a buffer against the unexpected.

The sooner you start paying yourself first, the bigger your savings will grow and the sooner you will meet your savings goals. You can’t start saving too early, but at the same time, it’s never too late. Start now.
Common mistakes people make about paying themselves first

1. Thinking you need to earn more money before you can start saving

You might be thinking, yeah, well, that’s all well and good, but I’m barely making ends meet as it is. There’s no denying that the smaller your income the harder it is to save. It IS hard!

But it’s not impossible.

Don’t wait until you’ve got more money to start saving, because there will always be more expenses to match your income. The longer you wait, the less likely you will be to start and the less you benefit from the compounding power of time.

Even if it’s only $5 each pay, even if it’s only $2 each pay, start saving now. Get in the habit and when you do earn more income, the habit is already established and you will be more likely to prioritise increasing your savings amount rather than spending your pay rise.

2. Not saving consistently

Consistency is the secret sauce to achievement.

To lose weight, you need to exercise regularly and consistently; to learn to play the guitar, you need to practice regularly and consistently.

To save money, you need to put aside a regular amount each and every pay.

3. Robbing your savings

It’s hard when you’ve got immediate expenses that need paying, not to look at the money you have sitting in your savings account and not use it.

Sometimes we soften the blow by promising ourselves we’ll make it up later. I can guarantee, you won’t make those savings back up later.

Unless it’s an emergency, do everything you can not to rob your savings for day to day expenses.

4. Not automating your savings

The key to successful savings is to automate it. Have your set savings amount automatically deducted each time you get paid, on the day you get paid.

If you stop and think about it, there will always be more pressing expenses. There will always be a reason not to save. By not automating your savings, you have to find the motivation to save each and every time you get paid.

That’s way too much pressure.

Use psychology to your advantage and know that too many decisions makes it more likely for us to make poor decisions as the day wears on. Automate your savings and it’s one less decision to make each week and you will always make the right move.

You’ve heard it a thousand times before: pay yourself first. But do you? If you don’t, take 5 minutes now to set up an automatic payment from your pay. Even if it’s just a couple of dollars, that will start you on a life-long habit that will always see you get ahead and stay there.