So says The Wall Street Journal.
“Investors have grown increasingly confident in the global economic recovery, despite a series of market-rattling events that has tested investors’ nerves. The gains have defied skeptics, who have for months been declaring a correction is nigh.”
It’s pretty easy to get excited when the market gains 1.5%. And the Aussie market is looking pretty good in early trade too.
But before we start hanging up the bunting royal-wedding style, you’ll forgive us if we bring the bulls back down to earth a little.
Here’s a chart for the US S&P500 going back to 2007:
Source: Google Finance
And here’s a chart for the Aussie S&P/ASX 200 for the same period:
Source: Google Finance
Look, it’s fair enough if the experts want to get excited about the market now. But look at the performance of the Aussie market since late 2009. That’s right, it’s gone almost nowhere.
The time to get excited about the market was late 2008 and early 2009. That’s when we took the bold move of telling Australian Small-Cap Investigator subscribers to buy into a high-risk market.
The easy gains are behind you
By late 2009, after the market had piled on 50% quick-smart, we became more cautious.
We suggested punters lock in gains. We also warned that due to investor psychology, future returns would be harder. Why?
Simply because of the fund manager mentality.
From late 2007 to early 2009, most fund managers had lost their clients a lot of money – mostly from being invested in so-called safe and secure blue-chip stocks.
But here’s the thing. Not only did they lose money for their clients, but they missed out on something more important to them – a big fat bonus.
So, by the time the market had turned around and gained 50% in just a few short months, fund managers could see the numbers on their bonus cheque adding up.
If you’ve just gone through a period without a bonus, the last thing you’ll want to do is give back the big gains you’ve just made. So, just as we told Australian Small-Cap Investigator subscribers to take money off the table, Australia’s fund managers were starting to wind back their exposure to the market.
That’s why for the past eighteen months, stocks have flat-lined.
But what it also means is that for every month the market doesn’t go up, the cumulative return since early 2009 is getting worse. Let me show you what I mean…
Good returns getting worse
If you bought into the market in March 2009, by October 2009 you’d have made a 50% gain. If you annualise that figure it works out as an 85% gain.
Roll forward three months to January 2010 and the market was up 53% from the low. That’s still good. But annualised, the return has fallen to 64%. Still pretty good.
Moving forward to the next high in April 2010, the market was 56% higher than the March 2009 low. However, on an annualised basis the return was just 52%.
Do you see a pattern here?
Let’s keep going…
By July 2010 the market had fallen. The return from the March 2009 low had dropped to 34%, and the annualised return was just 25%.
And finally, today. Over two years since the March 2009 low, the market has gained 52% (see what I mean about it going nowhere in eighteen months?), but annualised since the March 2009 low it’s just 25%.
Now, don’t get me wrong. That’s still a good return. The point is, for most investors, you would have been better off selling your stocks in late 2009 and holding cash.
And of course, cash is a protected investment whereas stocks can fall as well as rise.
That’s why since late 2009 we’ve maintained our asset allocation of holding cash, gold and silver, a small number of dividend-paying stocks, and a small number of high-risk small-cap stocks for explosive growth.
Looking ahead, personally I see no reason to change that allocation.
You should have some exposure to the stock market. But if you’re investing in blue-chip growth stocks it should only be trading stock – in other words, not buying and holding. Trade in, bag some gains and then trade out again.
Buying and holding should only be for dividend payers and precious metals.
The most important thing with all this is to remember that the global economy hasn’t been fixed by governments and central bankers. To use an analogy, they’ve merely used sticky tape to patch up a wrecked car. It may work like a car for a while, but at some point the sticky tape will give way and the car will fall apart.
When that happens, you don’t want to be fully invested in stocks… or property.
So, play along with the excitement while it lasts, but as we’ve warned investors since late 2009, make sure you’ve got an exit plan.
Source
No comments:
Post a Comment