/ 15 April 2009

Is this the bottom?

With gurus talking about a bull rally within a bear market and others saying that the worst is behind us, the ordinary investor should just stick to basic investment rules, writes Maya Fisher-French

I have been to several economic presentations where asset managers have touted facts and figures that suggest we are close to the bottom of this bear market. A key argument is valuations. Locally valuations are looking exceptionally compelling. Even if dividends had to decline 25% (analysts are expecting only 15%), the All Share Index would yield a forward dividend of 4%. In historical terms that is very attractive.

Internationally US markets have just experienced the best four weeks since 1933 as investors believe that the government has done enough to stabilise the credit crisis. The latest US property figures show that some stability is tentatively returning to that market. Markets tend to predict economic recovery well before the economy actually turns, so shouldn’t we all be jumping in right now?

To temper the enthusiasm, the reality is that this is all guess work. We will only really know if this is the bottom of the market in about a year’s time when we can look back at the data. Until then it could be a false bottom, a breathing ledge before the markets fall further down the black hole.

The pessimists, and there are many, believe that this will be a short-lived rally, a temporary result of the trillions of dollars that have been thrown into the world’s economic and banking systems, but they say that it is not sustainable. The question we need to ask is whether this should matter if we are sticking to a financial plan.

Rather than second-guessing the market, we need to look at investment needs, market valuations and time horizons. If you have money in the market right now that you will have to draw on in the next six months, and you absolutely cannot afford to lose any more, it would make sense not to take any risks and even possibly cash out, knowing that you can at least meet that financial need.

But in the next three to five years, what are the chances that your money will be worth less than today considering current market valuations? And what do you need the money for? Is it something that can be postponed if markets fail to deliver? How much can you afford to lose and how much time do you have? Rather than listening to the daily market noise, these are the questions we should be asking.

Kritz Coetzee, business development manager: South at Glacier by Sanlam, says the market shake-out has reminded us to go back to our financial plan and to keep our emotions out of our investment decisions.

The one-year investment
No matter what market valuations are, there is always a chance that the market could fall over one year — it is simply the volatile nature of equities. Coetzee says one should reconsider investing in equities if you need a specific amount of money within a short period of time. Rather invest in cash and calculate your end value based on more predictable yields. Although it is tempting to try to time a strong rally in the market, this is virtually impossible and the risks of losing money are high.

Three years
Volatility still plays an important role. One good year can be negated by two bad years. Coetzee states that, even over a three-year period, if you have a specific need for a certain amount of money that is due on a specific date, lower-risk investments may be a better strategy. Coetzee says when investing it is important to understand the intervals at which you will need money and invest for those intervals. You can use asset allocation combining cash, bond and equities to meet those needs. It is also important to take your personal circumstances into account. For example, a 67-year-old who is still working can take on more risk than a 67-year-old retiree.

Five years
Coetzee says now is the time for longer-term investors to go back to their original plans. If you are upset about “losing” money in the past year, it may help to know that, although the markets are down over the past year, over five years the JSE has doubled. Coetzee says most of the panic comes from watching daily market moves rather than focusing on whether your investment strategy is on track for your needs. If your strategy is working for you then you should change tack only if circumstances change, such as divorce, retrenchment or death. Do be more realistic about returns in the future as markets return to more mediocre performances and if you are putting in new money, it is probably wise to phase it in over time rather than risk a lump sum. Debit orders are an excellent way to hedge against volatility.