After a strong start to the year, we’re right back where we started. The FTSE 100 is at levels not seen since the Merrill Lynch collapse last year.
And what’s worse is that the recent rallies ‘suckered’ a lot of investors back into the market. They are now nursing fresh losses and shattered confidence.
But don’t beat yourself up! Volatility is a reality of the credit crunch and if you picked your investments wisely, today’s low prices will mean nothing in the long term.
No. 1 - Don’t buy “lottery stocks”
Desperate times call for desperate measures.
WRONG.
It’s that type of backward thinking that could send reckless investors to the poor house. Desperate times actually call for the most careful measures, especially in a credit crunch. Don’t fall into the temptation of buying “lottery stocks”.
This is the trend of investors down on their luck actively punting away what remains of their portfolios. “The propensity to gamble increases during bad economic times,” said Alok Kumar, a finance professor at the University of Texas at Austin.
Investments that are high-risk but offer potentially higher returns become more attractive when investors are down on their luck. A sense of desperation kicks in and investors go after stocks that cost almost nothing and offer a high chance of losing, but that still leaves them with a glimmer of hope. The logic being that if they do ever win, they could win big. Much more likely though, they won’t.
The best way to recover is to play it slow and steady. You aren't likely to rebuild your wealth through a lucky desperate turn; recovery is a process, not an event. Invest for the long run to avoid racking up losses and high commission costs buying and selling stocks on a whim.
And remember, the obsession with short-term, high-risk investments will create an opportunity. If everyone else is thinking short term, then they are likely to misjudge those investments for the longer term – that’s your opportunity.
No. 2 – Do buy defensive stocks
So with “lottery stocks” out of the question, you can choose either cyclicals or defensive stocks.
Cyclicals, sometimes known as growth stocks, are tied to the health of the overall economy. Right now, they are bound to struggle. When the economic growth falls away, the potential for cyclical, or ‘growth’ stocks diminishes. While there may be hope for a slim minority of cyclicals, the smart money right now is in defensives.
Defensive stocks are typically high income, cash rich companies that continue to make money even in the downturn. Investing in defensives is a way of minimizing the risk of losing your investment.
Among the best defensives rank pharmaceuticals. Indeed, sector big shots, AstraZeneca and GlaxoSmithKline, have outperformed the FTSE 100 by 52% and 38% respectively. With so little clarity on when the upturn might come, the defensives’ case is as strong as it was at the break of the credit crunch.
No. 3 – Skip the stock market altogether!
We must recognise the changing face of private investment and plan our portfolios accordingly.
There is no such thing as a fully diversified all-stock portfolio. You need to combine stocks with other ‘uncorrelated’ assets like property, bonds and cash. Asset allocation is more important today than ever before.
That means hedging your bets in case the big picture outlook turns even uglier. Currently investors and policymakers are fretting over a return of deflation. But while this will be an issue in the short term, we believe inflation is the bigger worry as the government floods the economy with money. In this event, index-linked investments are your best bet.
These are real economic events that will impact on your portfolio whether you like it or not. If you’re looking for a simple low-risk way to play these trends, look at the ever-growing exchange traded fund market. These funds, like those provided by Barclays iShares, can be bought and sold just like shares with no long-term contracts and very low management fees.
If you confine yourself to just the stock market, your returns are likely to suffer for the foreseeable future. Instead, look beyond and tap into the investment trends happening all over the investment world.
Best wishes,
Theo Casey
For The Right Side
Editor’s note: Theo Casey is the Investment Director of The Fleet Street Letter. To discover their specific recommendations for surviving the downturn in the markets, please read this report.
Equities find safety net in long-term holdings
BY SHIVVY ARORA
Day-to-day volatility of the stock market is driving away investors in droves.
However, amidst all the panic, it’s worth remembering that investments in equities conventionally perform better than bank accounts. Equities may be fickle in the short-term, but they trump other asset classes to reap the best returns in the long run.
The chart below shows the possibilities of annual returns for stocks, cash and gilts over 5, 10 and 20 year periods. The range of risk is widespread over one year, and you could stand to gain or lose significantly. But the longer you stay invested, the better your chances of seeing some profits and moving away from negative territory.
You can see that, of the three asset classes, the theory works best for equities. Shares held for the 20-year period return more and lose less than gilts and cash.
Stock markets have suffered a disastrous year worldwide, but history shows that over the long term, they’ve been the best grower of wealth.
The Daily Reckoning – Let the banks fail
BY BILL BONNER
A plea to lawmakers... give liquidation a chance!
US stock owners got a break yesterday... the Dow rose 236 points. News reports tell us that investors were listening to Ben Bernanke. He’s speaking to Congress... intending to boost investor confidence. But we can’t find anything in Bernanke’s remarks that would give us much confidence.
In fact, consumer confidence is at a record low. And investors couldn’t have taken much comfort from the Fed chief. Bernanke said the economy would start to grow again in 2010... and then, only if the banking system is stabilized. Of course, Bernanke is talking nonsense. He doesn’t know when the economy will begin to grow in earnest again, and if it does begin to grow it won’t be because the banking system is stabilized. You can stabilize a comatose person. You can stabilize a battlefield. You can stabilize a ladder. But stabilizing a crummy bank won’t help the economy grow. For that you need a healthy bank. And the only way a bank can be a healthy bank is if it holds healthy assets and can earn decent money when it makes a loan.
Banks aren’t making loans now because they don’t know who will be able to pay them back... and don’t know what the collateral is worth. They’ll have to wait until this period of price discovery settles down. And that won’t happen until deflation has done its work... until prices have been knocked down to their lowest level. That could happen quickly... or it could take years.
AIG now says it is facing a $60 billion loss. How much is its stock worth? Citigroup is nearing bankruptcy, say the papers, with the US government getting ready to up its stake to 40%. What will the shares be worth when the operation is over? GE finance says it will get by – maybe. Micro Tech is laying off 2,000 more people in Idaho. And Italy is officially in recession.
One by one, company by company, country by country... the whole world slips into depression.
Oil traded at $39 yesterday. And gold lost $25.
What’s ahead?
To read the Daily Reckoning in full, click here.
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