How to invest: Proven rules of wealth
21.05.2010 23:44
TURN off the TV. Put away the Valium and don't take calls from your broker.
It's easy to get caught up in the scary headlines that the market is crashing. But remember that most of the predictions are pure financial porn - and should not be substituted for financial advice.
The world's best investor, Warren Buffett, says: "Stop trying to predict the direction of the stock market, the economy, interest rates or elections. The stock market has never, ever affected my investment decisions."
I know, easy for him to say - he's a multi-billionaire - but what are some practical things you can do to sleep soundly through these rocky times?
Well, in uncertain times the only way to gain certainty is to focus on the fundamentals. Unlike the gyrations of the market, the time-tested rules of wealth never change:
HAVE a buffer of savings you can easily access: You don't want to be a forced seller in this market. Having cash on hand buys you time - and peace of mind.
MAKE sure you're fully diversified: The only effective way to manage risk is by ensuring your mix of investments is properly diversified across a range of asset classes - cash, fixed interest, property and shares.
PAY down your debts: We are in uncharted territory. The Greeks, the Yanks, the Poms and possibly your neighbours have never been in more debt..
Back to Buffett, who rarely makes predictions. He has continually warned investors that all the money printing that was supposed to break the back of the GFC may yet come back to haunt us in the form of higher inflation - which will eventually lead to higher interest rates.
The only way to be certain is to focus on what you can control.
The GFC's back (a bit like Whispering Jack)
THE Global Financial Crisis (Part One) stopped the party because it came on top of a 20-year build-up of debt - and, like most parties, at the latter stages of the evening people did all sorts of silly things, such as invest in houses they couldn't afford.
The Government's response to this financial catastrophe was swift. It shifted debt from private banks to the public taxpayer, slashed interest rates and printed trillions of dollars.
Not surprisingly, the markets recovered. It was only six weeks ago that the share market's ASX 200 index broke through the 5000 mark.
Very crudely, it's a bit like this: we lost our job at a time when we had lots of debts to pay, so we whipped out our credit card and started spending to make ourselves feel better and get over the hump.
Really, all we did was kick the can down the road a bit - it was always going to catch up with us. What we're seeing in Europe is probably just the start of things to come.
So what does it mean for you?
Several months ago some super funds were crowing about a comeback to double-digit returns on your super. Then came May.
The market is already down about 7 per cent and, according to SuperRatings, the average balanced fund is currently tracking towards a 9 per cent return (at this stage).
The meeting notes from the Reserve Bank of Australia indicate it's prepared to sit on its hands in the short term to see how some of the most indebted households on the planet stomach some of the highest interest rates on the planet.
A flipside to the carnage is it will give the RBA another reason to hold fire on raising interest rates - at least for the next few months.
Tread your own path!
