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Don’t sweat the short term!

Published: 7/2/2008

Financial Health Authority Warning: Watching the markets 24/7 at the moment is not good for your health...

It would have been very hard for anyone who has watched the news or read a paper over the past couple of months to have missed reports on the recent volatility in world markets. No-one has been able to avoid the short term impacts on the balances and returns of most investment accounts.

It has not been pleasant to watch the values of our accounts go the ‘wrong way’. However, now may not be the time to start following the market on a minute by minute basis. Markets go up and down, therefore it’s important to remember the nature of investment cycles. They need to be viewed over the longer term, not judged by what has occurred in the past few months.

Arguably the only ones who have received a boom from the recent bust - pardon the pun - have been the media which has been dominated by the overuse of emotive words such as ‘crash’, ‘dive’ and ‘freefall’ because they make great headlines. There have been some sensational and sometimes scary news headlines over the past few days, our favourites include - Markets in Freefall and Fear Triggers Investor Scramble. So, if you are terrified by turmoil, cautious about corrections, or just totally bamboozled by whether to buy, sell, hold, diversify or rebalance - read on!

Why is this happening?

Corporate greed and inadequate risk management in the US is the primary cause of the problem. As the sub-prime mortgage lending debacle went global, further weaknesses in the American and European economies were highlighted.

Thanks to the dodgy lending and securitisation practices of some American banks in pursuit of bigger profits, the cost of money around the world has gone up. This ‘virus of uncertainty’ has now spread as everyone speculates on the slowdown in the US and how this may impact the world economy.

Unfortunately, in the global economy, when the world’s largest financial market gets a cold, everybody else, at a minimum, gets a sniffle.

All you need at the moment is patience and perspective, remember:

1. The Australian economy continues to perform strongly. While any slowdown in world demand may have some impact on us, there seems to be every reason to be confident that 2008 will be our 17th consecutive year of economic growth.

2. When your assets (shares, managed funds, and property) rise in value, this is referred to as ‘paper profit’ as it isn’t actually realised unless you sell and the profit is in your hands. It is the same when the asset falls in value: You haven’t lost money unless you sell at the lower price.

3. Historically, share markets have always recovered from periods of economic uncertainty - it is not a question of if, but when. 

Taking the Bull by its Horns

Some of the most commonly overused jargon at the moment*:

Bull market: When share prices generally are rising (this is the market we all prefer!).

Bear Market: When share prices are falling and experts expect further falls.

Blue Chip (stock): The shares of a major company known for its ability to perform strongly in good and bad economic climates. While no stock is guaranteed, ‘blue chip’ stock is normally considered to be lower risk.

Recession: The dreaded ‘R’ word. A slowdown in a country’s economy. When economists use this term they are technically referring to a period in which a nation’s gross domestic product (GDP) has declined over two consecutive quarters.

Risk: The chance or probability that an investment will result in a loss. Usually, the higher the potential returns, the higher the risk.

Subprime (lending): Lending money to borrowers who do not qualify for standard home loans, usually because of low incomes or credit problems. Basically, poor lending practices.

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* Original versions of definitions sourced from asx.com.au and invesco.com.au.

This text is intended to provide information of a general nature only. It has been prepared by Industry Fund Financial Planning (a division of Industry Fund Services Pty Ltd, ABN 54 007 016 195, AFSL 232514) without taking into account your personal objectives, financial situation or needs. We take every care to ensure the accuracy of the information provided, however, this does not form a guarantee or represent a forecast of future performance.