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.