Important Investor Update from Peter Spann
Volatile Times
5 August, 2011
When people wake up and see that the US Market has fallen 4.3% overnight with all the accompanying hype and headlines it’s natural to be concerned.
And the economic events of the last few months in the US and Europe are very concerning.
On the 7th June I wrote saying “the positive sentiment that accompanied the market in March and April seems to have evaporated and the Australian markets are following the US down.”
Nothing has changed at this point, in fact the situation, arguably has gotten worse.
Yesterday the XAO (All Ordinaries) closed at 4352 which is around the support levels I talked about in June. It is now apparent that this support will not hold today and if our market falls at a similar rate to the US we will hit and end up around the next strong support of 4200.
Unfortunately if the market doesn’t hold at 4200 there is no support until around 3700.
As I said in June “Retracements of 10% to 15% every now and again (taking us down to around 4300) are healthy for the market and good for investors who can take advantage of bargains. Anything stronger may indicate a more protracted bear market.”
And that’s where I believe we are now.
Downside sentiment to prevail in the short term
Sentiment in the US and Europe has gotten so bad it’s hard to imagine their markets recovering in the short term.
The good news is that the market will settle down and when I say “a protracted bear market” that doesn’t mean a market that is necessarily continuously falling, just one that has more momentum to the downside than the upside.
Again I said in June “This type of oscillation is normal after such a huge fall in the market that we experienced during the GFC and it will take a number of years for the market to go back to stable upwards trends. ”
So it’s important to consider these types of falls as “normal” in the market environment we are in.
4.3% in one day is a little less normal than we’d like normal to be, so it still bears respect but even still falls to the downside are to be expected.
When it bounces back it will do so quickly – so stay in
What goes up must come down they say but at this time in the market it’s probably more important to say what goes down will go back up, and quickly!
The reason why it’s important, as an investor, to ride these market conditions through, is that the market will bounce back, sooner or later.
And when it does it will do so VERY quickly. By panicking and selling during the initial downward turn in the market investors miss this upwards bust and therefore make considerable losses when profits were there for the taking.
The fact is it’s almost impossible to time these entries and exits so for the investor you are far better to sit it out. It can be disastrous to miss upswings when they occur.
So what do you do?
Long term investors should do what long term investors do – hold. It’s called buy and hold for a reason.
Let’s face it, as much as people don’t want to admit it, property in most of Australia fell between 10% and 30% during the last few years and most people didn’t rush to get out. Prices stabilised and in some markets have been going up. It’s exactly the same in the share market. You don’t make a profit day to day, you make a profit when you sell. If you sell now you will be minimising your profit. If you hold and wait the 5 to 7 years you anticipated would be your minimum investment window there is every chance you will maximise your profit.
Regardless, smart investors take advantage of dips in the market by continuing to invest to “average down” their cost.
If you bought a share (or a managed fund) at $1 per unit and it falls to 60c per unit and you buy again your average price of investing is 80c.
When the market returns to $1 you have made a profit of 20c.
If you just held your investment you were at break even. So you can see averaging down can work over time.
Worse still if you sold your investment at 60c you would have locking in a loss of 40c for no reason.
The buy write strategy, as used in the Accelerator fund, has potential to out perform in this type of market. Even though the underlying investment can fall, by writing call options you are gaining income in the form of premium which helps offset those falls. So again, investors in the buy-write or the Accelerator fund should stay put and keep writing their calls.
Of course this type of market is ideal for traders
The Excela Equities brokers have been having a lot of success with clients who are prepared to take greater risks and speculate with a small amount of their portfolio.
Options trading can produce good profits (if you know what you are doing) in markets like this because you can trade options both up and down.
If you have a broking account and want to consider some trades in this environment please call Excela Equities on 1800 110 808.
It’s important to remember during times of market volatility our brokers are flat out and so please keep your calls to trades or open positions during market hours. They will be happy to talk to you about strategy after the market has closed.
Another thing to consider is getting some Trader Training by attending our very popular TradeUp and/or SuperTrader seminars conducted by me (Peter Spann) and our Professional Brokers. To get everything you need to know click here.
As always it is the investor with fortitude that wins. Now is not the time to panic. Now is not the time to sell. Now is the time to sit back, intelligently weigh your options, and consider your strategy.
As an investor we weather these storms and if we are smart and have available funds we take advantage of them.
As a trader we jump on each and every wave, positive or negative and profit as we go. You might be surprised how easy it is to learn how to trade – seriously check out Trader Training – who knows we might make a trader out of you yet!
Important Information
Peter Spann is a representative of Excela Equities Ltd (ABN 17 010 763 041) and Freeman Fox Pty Ltd (ABN 47 062 481 378), holders of an Australian Financial Services licences (AFSLN 246510 and 220622 respectively). This general information is provided by Excela Equities Ltd. It does not take into account your investment objectives, financial situation, or needs.
Information contained in this update is obtained from various sources. The changing character of markets requires constant analysis and may result in changes. Past performance is not a reliable indicator of future performance. All investments contain an element of risk. Actual performance will be different and returns are not guaranteed. While information in this update is given in good faith and is believed to be reliable and accurate Excela gives no warranty as to the reliability of accuracy of the information, nor accepts responsibility for any errors or omissions of third parties. Opinions expressed are subject to change.
If you require assistance in relation to your Equities position, please contact a representative of Excela Equities Ltd on 1800 110 808. For a copy of our Financial Services Guide, please go to www.excela.com.au
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