SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
One year later
Firstly, I would like to apologize for not writing many new posts in the past two weeks as I have been focusing on writing an e-book on how to preparing an SMSF investment strategy, which I hope to publish on this site by April 1, 2010. Once again, many thanks to Dean Greacen from SMSF Investor for his guest posts on hybrid securities. I think hybrid securities are a good alternative to buying high dividend shares for investors who are seeking higher yield from their portfolio. As I don’t personally have any investments in hybrid securities yet, I do not feel qualified to write about them so I asked Dean for his help. He will also be providing us with some information on debt securities in the future. SMSF Investor has a training program suitable for new SMSF Trustees so do check out the SMSF Investor website if you are a new trustee who might need a little help.
Yesterday March 9, 2010 marked the anniversary for one of the most spectacular stock market rally in history. In fact this article in BusinessDay said that Wall Street has posted the best gains since the Depression in the 1930s. Below is an excerpt from the article:
The Australian market has also notched up strong gains since last March, with the benchmark S&P/ASX200 – which contains the nation’s 200 biggest listed companies – closing yesterday at 4820.1 points. That is an increase over the 12-month period of 1635.6 points, or 51 per cent.
“There’s one word that describes the past 52 weeks and that’s recovery,” said Bell Direct equities analyst Julia Lee.”Still for our market to reach the previous high seen in November 2007, there needs to be a rise of 40 per cent and that still represents opportunity for investors.” she said.
When you read the above, it sounds like it should be a breeze for us to get back to the November 2007 high of 6750. If we can rally 51% last year, 40% this year should be no problem, right? Not quite. The 51% rally was from the March 2009 low of 3185, but the 40% rally needed is from the current level of 4820. In absolute terms, we will need to gain another 1930 points (which is more than the 1635.6 points in this 12 month rally) just to get back to 2007 highs. Technical analysts prefer to use retracement levels i.e. how much of the fall have we retraced or recovered. The ASX200 fell from 6750 to 3185, a total of 3565 points. In this rally, we have gained 1635 points which is only a 46% retracement of the total move down. From the chart below of the ASX200 for the last 10 years, we are roughly at the same level as where we were at the start of 2006, four years ago.
Think back to 2006. The economic climate then was quite different from what it is today. Those were boom times globally – there was no banking crisis, high unemployment or sovereign debt problems then. What do you think is the likelihood that we will have another stock market rally, similar to the one we had in 2006 today? Since the article compared the rally to the one in 1930, below is the chart of the Dow Jones Industrial average from 1929-1933.
The 1920s were boom times, similar to what we enjoyed from 2003 to 2007. The DOW peaked in August 1929 at 380 and there was a big crash which saw the DOW fall to 200. This was followed by a sharp 50% retracement rally in 1930. The rally that we have seen on the Dow Jones Industrial index and most major market indices in the past 12 months appears to be very similar to this rally. After the rally ended, the DOW continued to fall even further for the next two years and finally bottomed at 44 in 1932. Although the market started rising after that, the DOW did not manage to recover to the highs of Aug 1929 until 25 years later in November 1954. The book “This time is different” by Carmen Reinhart and Kenneth Rogoff gives a really comprehensive analysis of financial crises. The authors show us what happened in over 250 historical crises in 66 countries. An unsustainable rise in asset prices and credit precede banking crises. Banking crises tend to be followed by sovereign debt crises and it could take ten years or more to get back to pre-crisis level. At a forum in Tokyo in February 2010, Rogoff, a Havard professor and former chief economist at the International Monetary Fund said he expects history to repeat itself again. We have had our banking crisis in 2007-08 and he expects sovereign debt crises to follow a few years later.
I believe the financial crisis that started in Oct 2007 is still playing out and it will be quite a few years more before we see the end of it. So my dear reader, I will leave it up to you to decide if you agree with the analyst from Bell Direct equities that today’s market still represents opportunity for investors or do you think it is time to thank Mr Market for letting you recoup some of your losses from 2008 and allocate your funds to more defensive assets?
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