Do we have a plan?
November 27th, 2008
Markets continue to fall… and did we expect them too, No!
These are hard times and somewhat unprecedented in modern history, so our plans for you, our clients, are always changing. Our pension clients are suffering with the balance of their accounts reducing and our margin lending clients are worrying about margin calls and what is the right thing for them to do
To make our position clear – it is our advice to stay in the market and do NOT consider moving to cash.
This would be disastrous and would definitely effect your financial position. I cannot express in words the detriment you would do to your long term financial position by making this decision.
We recently ran an information night to outline what is happening in the market, for which we have had some very positive feedback. The theme of this night was to outline what drives the market. And surprisingly, its not economic factors its the emotional factors of FEAR and GREED. And its not going to take a NASA scientist to work out fear has its hands on the market right now.
So, I hear you say, what is your plan?
I have to start off by saying these plans are going to be different for every client, but as a broad statement let me break this down into two categories. Pension clients and Margin Lending clients
Pensioners
You should always maintain at least three years worth of Pension payments in cash, and only pay your pension from this balance. Because of the extreme times we are in now I have no problems with taking this out to 5 years worth of cash cover. What this does mean though. is the majority of your funds will still be market linked. Is this is a problem, and should you worry – NO! The average return in the Australian market over any 5 year rolling period in since 1960 is positive except for once in 1973. And taking a 10 year stance NEVER. The positive returns will again give the expected returns on your funds.
This will suit all our pension clients, but if you would like to discuss this, please contact you adviser.
Margin Loan Clients
This has been a rough ride. This is the first time that North West clients have endured Margin calls, and we have been through the 2001 downturn.
This, however, is rhetoric and I can hear you say, So what happens now?
This Plan is again based on history, when a market responds to a downturn it does so with gusto. “Greed” will at some time take control of the market and we will see a steep incline in the markets curve. Using statistics presented by BT at our information evening, we can assume an increase after the downturn to not only make up what we have lost, but to overshoot this high substantially.
When do we expect this to happen? We just don’t know, but when it happens we need to be prepared.
If you have had to sell down stock, or put funds into the cash account for our calls here is our simple plan to take advantage of the rising market. NB. This is only our advice in the rebound – and this is NOT our ongoing advice.
As the market climbs, we BUY more stock (using cash, equity or margin loans) this effectively buys the stock at their lower price.
Lets say the stock is down 50%, when it is down only 40% we buy some stock, when it goes to 30% down we buy some more and then at 20% etc until it reaches or nears its high. We will then let the stock do what history dictates and ride through its peak. What you have achieved is buying stock at lower prices and taking advantage of the price increase. You therefore own more of the investment than you did when you started. Even if the market doesn’t rebound above its last high (Which it will – the markets will always beat their previous highs) you will have made money!
What we are doing is allowing ourselves to make money from the depressed market turning a negative into a positive
Warning: This may not suit your personal circumstances, and we advise NOT to undertake this yourself and to seek the advice from us..
In summary, Yes we have a Plan! And yes we believe that good can come of these downturns. We invite you all to meet with us one on one to discuss these matters.
Further to this, it is our advice to start buying shares now. Yes this is against the trend of a down market, but right now everything is cheap, and you will make money in the long term.
I hope to see you all at our Christmas party where we can wash away the bad from 2008 and welcome in a prosperous and financially rewarding 2009
Graeme