The days of the abnormal returns from cash are gone | The Finn Review
How is everyone feeling?
I can’t speak for everyone but I know that I am feeling a lot better about a lot of things!
We have had a great couple of months on the markets with the ASX 200 rallying to year highs which I know caught a lot of people out, however this time it wasn’t just the mum and dad investors, institutional investors (Insto’s) also missed out. I did a bit as well!
Why have we had this rally?
It was the classic case of there being so much pessimism in the market that when there wasn’t the usual case of bad news coming out, a lot of people realised that a lot of investments had been sold off too much and they were looking pretty attractive.
In our investor education sessions we talk about the investor psychology curve and when people are depressed and there has been a lot of selling, eventually there becomes a point where there is no more sellers left so naturally buyers start pushing the price up again.
This is the point of maximum opportunity!
Another reason is that with cash rates coming down and bond yields at record lows, it is starting to become quite hard to find investments which will pay descent levels of income. Naturally the high dividends that are being paid out by a lot of the companies start looking pretty attractive relative to the risk.
There are still a lot of problems around the world which give risks to your investments. But with a well-constructed portfolio you should help to mitigate this.
I looked at my notes from the start of the year which helped me to focus on the bigger picture. Doing this stops me getting caught up in short term news.
If you look at history, the months of November and December are usually quite strong. This gives us the much loved “Santa Rally.”
There is a another factor which could be supportive of this: the next President of USA will be decided. Once again historically this is supportive for markets as Americans feel very patriotic and have confidence that new political policies will come in that support the economy and markets.
Although we have had quite a good rally recently it has been done on very low volume as most investors were sitting on the sidelines waiting for some certainty.
What does this mean? There is a whole lot of cash not invested and there will be a lot of people who will be scared that they are going to miss out on further gains. This means that any sell-offs are likely to be less viscous and shorter as people will be buying the dips.
We are also likely to see another rate cut as the Reserve Bank has finally recognised that a lot of Australia is hurting due to the rising costs of doing business is Australia and the declining international competitiveness due to the stubbornly high Australian dollar.
Where to invest
Although we have had a good rally it hasn’t been easy investing everywhere.
We have seen market darlings, the mining service companies, get absolutely smashed due to the fall in commodity prices and the cancelation of a lot of projects.
We have also seen the high yield paying defensives gaining a lot in price which now makes them look fully valued.
I am still comfortable holding NAB and ANZ due to the upcoming fully-franked dividends which get more attractive by the day with falling cash rates. I also like stocks which are leveraged to a pickup in M&A activity like Computershare or possible takeover opportunities like Beach Energy.
I’m also still comfortable with the energy theme. Surprisingly, I’m comfortable buying some mining stocks (especially copper). I think there is a lot of bad news priced in currently.
The most important thing to remember is that you need to be focused on achieving returns which will enable you to reach your goals. Don’t get caught up missing some of the returns in the market if you don’t need that return. It means you’re not taking on that risk.
The days of the abnormal returns from cash are gone.
Term deposit rates have dropped significantly. They’ll potentially get to the point of negative real returns after taking into account the effects of tax and inflation. This means that although you may like the comfort of sitting in cash it is time to start looking elsewhere.
It is also very important to take an active approach to managing your cash positions.
Banks are constantly changing their rates depending on their own funding requirements. They bank (pun intended) on the fact that most people are lazy and will not move their cash around. It may not be very exciting but it is worth the hassle of doing this!
Please also ensure that you hold any cash in the person’s name or entity with the lowest tax rate.
Word on the street
It is my favourite time of the year again – Spring Racing!
If anyone has any good tips out there please feel free to send them to me. There are a number of things I love about horse racing. But there is one thing which I think is very similar to investment markets.
It is not how you start but how you finish the race which is the most important.
Did you know?
Swan fixes Budget Deficit by taking our Super!
From January, super accounts with less than $2,000 (it used to be $200) in them will be transferred to the ATO if the owner cannot be contacted. This change will give a boost of $900 million to the budget.
Now I am the first to criticise the actions of Swan and his quick fixes rather than adding any value. I also think it is important that individuals start taking responsibility for looking after their finances and this includes super!
If you have more than one super account please organise to consolidate them.
And to all the parents out there, start educating your kids about the importance of super. They should learn to take control of it from the first moment they start earning money.
Want to chat to Finn and the WE coaches about your money? Book in a time for a Free Strategy Session.