Or at least they are for the moment at the time of writing!
Things can change from day to day however; the best analysts
in the world cannot tell you for sure what the markets will
do tomorrow.
Bulls and bears
Just in case anyone is not familiar with the terms, a bull
market is one where prices are going up, a bear market is
one where prices are coming down, generally over a period
of time. The terms can apply to any asset but are most often
used in relation to stock markets. In the late 90’s
for example there was a huge bull market driven by the revolution
in technology. This was followed by a meltdown in March 2000
that provoked a bear market which lasted until March 2003.
Then we had a recovery which became a bull market that accelerated
up to early May this year. Why do we use the terms bulls and
bears? The reasoning is that the bulls ‘toss’
the markets upwards and the bears ‘claw them down’.
Outside the New York Stock Exchange is the statue of a bull.
There is no bear; investors do not like bears! Unless you
are a hedge fund manager ‘going short’. But that’s
another story!
Why did the party come to an end?
If you have been a long time follower of the markets you will
know that all parties come to an end as sure as night follows
day. What we never know is when the party will end or when
the next one will begin. It is always easy to look back in
retrospect and justify why the market acted in a particular
way. At the peak of the technology boom many clients were
pressing me to put more of their money into technology funds.
The problem is everyone wants a piece of the action when there
is a success story. Unfortunately the average investor jumps
on the bandwagon too late – just before it tips over!
But why did stocks suddenly fall in May? The spark that set
it off was a comment by the Chairman of the US Federal Reserve
expressing concern at rising inflation and hinting that interest
rates could rise much further. When interest rates rise it
costs people more to borrow, pay their mortgages etc. and
they have less money to spend. This in turn slows down the
economy and brings down profits, which in turn means lower
dividends. Hence a fall in the value of shares. The whole
world is affected because demand by the US for imported goods
falls and so whatever happens on Wall Street quickly impacts
markets around the world.
This time it was not just stocks
The recent bull market was not restricted to stocks. We have
been witnessing a huge rises in the price of energy, gold,
precious metals and most other commodities. Hedge funds have
also been producing outstanding returns. Property has enjoyed
a long bull market but in many countries this has come to
an end, although to date the long–feared ‘crash’
has not materialised.
The bull market in land and property seems to continue unabated
in Bali, driven by supply and demand. How long it will last
is anyone’s guess. When the mini-crash started in May
it affected all the asset classes that had been rising. Even
hedge funds took a heavy knock as their managers failed to
anticipate the reversal in trends.
Should we be worried?
No! Not if you have been following sound financial advice
and have the correct spread of investments across a wide range
of assets. And above all have retained a suitable level of
cash reserves (remember the guidelines? – 10% to 20%
of total assets) so that you are never forced to sell any
asset at a loss. If you have excess cash it could be a good
opportunity to add to existing investments now that prices
are lower than a month ago. Prices could go even lower of
course but don’t expect to be able to time the market.
Don’t leave it too late and join the next party when
it is already in full swing!
Those who get to the party first get the choice of the best
pickings (whatever they may be). The best strategy is to keep
on building across the full range of assets, including property.
But don’t go overboard in any single asset. That is
a recipe for disaster, whether it be stocks, gold or property.
Or of course cash; being overweight in cash means you are
losing purchasing power in the long run and if you are in
the wrong currency you could lose out heavily. I recall a
person once telling me he was not prepared to take any risk
whatsoever and was going to keep all his money in the bank
in USD. Over the next two years the dollar fell by 40% against
other major currencies. Since he was not American and did
not need USD he had effectively incurred a loss of 40% by
‘not taking any risk’.
To sum up, if you had been enjoying the long party since March
2003 you may now have a bit of a hangover. But you should
still have most of your eggs intact, especially if you kept
them in several baskets. And don’t leave the party scene;
there are certain to be more parties ahead but be prepared
for the occasional hangover!
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions relating to personal finance you may
contact him at 021 520 8099 or colin.bloodworth@financial-partners.biz
