Hang Tough

Sydney Morning Herald

Wednesday January 30, 2008

By Noel Whittaker

Despite the present short-term pain, the outlook for share-based investments is for long-term gain.

Thanks to the subprime crisis in the US, this year has started off with sharemarkets worldwide producing near-record falls. This makes for great headlines and, everywhere I go, people are asking whether they should be getting out of the sharemarket now in case things get worse.

It's one of those realities of life that the future is known to nobody and I certainly can't guarantee that things are not going to get worse before they get better. However, over the long term, shares have been the best performers of all and a long-term average return for them should be about 10 to 12 per cent a year.

The last bad year was the one that ended in December 2002, when the Australian sharemarket produced a 9 per cent loss. This was followed by a 17 per cent return for the year ended December 2003 and ever since it has been bounding along, giving us double-digit returns year in year out. After four straight years of returns at this level it would not be unreasonable for the market to take some of those gains back.

This is certainly not a recommendation to get out of the market, because capital gains tax will take a hefty proportion of your money if you do sell and it's highly likely the next bounce will catch you by surprise and leave you chasing a market that is rising again. A much better strategy is to accept that volatility is the price you pay for the flexibility and high potential of share-based investments and simply hang in there and wait for the inevitable recovery.

If you have money in superannuation and are still especially nervous, despite my advice to stay in, you can move to safe ground without leaving the low tax super environment - all you have to do is switch within super to the cash area. There should be no fees to do this.

You never want to put yourself in a position where you are forced to dump quality shares when the market is having one of its normal slumps. This is why we suggest you keep at least three years' planned expenditure in the cash area and never invest in share-based investments unless you are prepared to leave your money untouched for several years.

And what of the future?

The Prime Minister, Kevin Rudd, says we are engaged in a national war against inflation, which is political speak for we won't be stopping the Reserve Bank putting up interest rates.

Of course, the Reserve Bank itself has a real challenge on its hands because it has just been announced that consumer prices in the US are rising at their fastest rate in 17 years and yet all the talk there is about a succession of rate cuts that are thought to be near certainties.

Don't forget it's an election year and US presidential candidates have already promised stimulus packages of as much as $US100 billion ($113 billion).

You can make what you like of that heady mix but never forget that every year 9 per cent of the Australian payroll goes into super and the bulk of this money ends up in Aussie shares. This, in combination with our unique franked dividend system, will continue to create a strong demand for shares. Those who hang in for the long term will be well rewarded.

© 2008 Sydney Morning Herald

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