Sharemarket stripped of $124bn – Do you buy or sell?

ASX steadies after markets’ multi billion blood bath

Bad news sells better than good news, right? Newspapers have to be sold, and the age old tactic to create a commotion, get the punters worried, and then an increase in newspapers follows, and websites get tonnes more traffic. And sure, a market fall of 7% since the start of the year isn’t anyone’s idea of a comfortable ride. Though, remember when markets did rally….where were the big headlines then?

So, let’s look deeply into the index and explain what is happening.

Above is the Share Price index, which shows the ups and downs of the daily share prices.

What is missing from this visual is one critical component of the investment return: the dividends. Dividends don’t often make the highlights when Tom Piotrowski from CommSec is reading his nightly bulletin, and that’s because such news snippets are there for the average person who has a passing interest in speculating on the market. Most investors aren’t speculators (i.e. those who trade regularly with an aim to sell in the near future for a profit). The average investor is interested in shares as an investment (i.e. those who buy and hold for the long term with a view to reaping the full benefits of owning a portion of a company).

Dividends can have a major impact to the bottom line of a share return. Have a look at this graph below:

The blue line is the total net return for the All Ordinaries Index (which includes share price and reinvested dividends), whilst the black line is the All Ordinaries Index (showing share prices only). Over 5 years there’s a total difference of about 23% in investment return. So back to the issue at hand, should we be hitting the “sell” button based on recent performance of the market?

As international investment guru Warren Buffett says, “be greedy when others are fearful, and fearful when others are greedy”. Now is likely to be the time when others are starting to get fearful, selling their holdings so they don’t see their portfolio diminish any further.

There’s a few hot topics in the markets that are contributing to the current malaise:

  • Falling oil prices – this is obviously not great news for oil companies and the profit they can generate, but is actually good news for everyone else in the world who uses a vehicle or machine that relies on fuel, including companies who need to transport their goods over distances in order to sell them. This can then translate to cheaper prices for those goods as it costs less to get them to market.
  • US manufacturing is on the slide – weak demand for manufactured goods, a rising US dollar (hurting exports) and high inventory levels have combined to produce a scenario where US manufacturing is slowing. However, this sector accounts for less than 10% of the US economy, and once the current inventory gets moved the manufacturing sector is set to pick up again.
  • How will central banks respond to the current conditions? – Central banks (such as the RBA here, the Fed in the US or the ECB in Europe) like to step in to control the direction of the economy, putting a lid on things when the economy is running hot. For example they may intervene by raising rates in order to reduce spending. Or they me step in to improve the economy when it is sluggish (such as printing more money in order to have more cash available for spending, or reducing rates to put more money in the pockets of individuals for spending). There’s the potential likelihood that these banks look to ease monetary policy in the coming weeks in the wake of the early part of the year, as the market struggles. These interventions can provide some positive sentiment for the markets to respond in kind.

In conclusion, before making any buy or sell decisions it is critical to understand all the elements of your investment portfolio, and consider the objectives and goals of your investment strategy ie: long term returns, or capital growth, etc.

In essence, the current situation isn’t likely to be the second coming of the GFC, as the economy isn’t experiencing the catastrophic conditions like it was in 2008.

Our role as your financial planner is to help you keep your cool when others about you may be losing theirs, and to provide some clarity to see the bigger picture. Your longer term goals (financial or otherwise) shouldn’t be shaped by some volatility in investment markets along the way. It is important to keep your eye on the end prize.

If you would like some discussion around what is happening and how it affects your current standing, then our team are eager to assist.

It’s my job to work as my client’s financial ‘lifesaver’ to ensure that they swim between the flags and that they don’t get in over their heads.