At the end of October the Dow Jones US stock market index
briefly surpassed its previous record high closing level of
January 2000. If you were watching CNBC or other financial
channels you would have seen a fair bit of hype and excitement
when that happened. In reality however, the Dow represents
only a small number of large ‘blue chip’ companies.
The more representative S&P 500 is still a long way from
its 2000 highs and the NASDAQ is still trailing its 2000 high
by a whopping 55%. So anyone who invested in stock markets
at the worst possible time (as many did) in early 2000 will
still be waiting to get back their original investment.
So who is winning?
As far as the US stock markets are concerned and most global
markets for that matter, if you invested prior to 1999 or
after 2002 you are probably looking at some pretty healthy
gains, up to 50% or more. Even if you had invested in technology
stocks or funds prior to 1999 you would probably be alright
as you would have enjoyed the market surge before the crash.
Unfortunately, human nature being what it is, most investors
jumped on the bandwagon during 1999 and early 2000, just in
time to get on it before it tipped over! Warren Buffet, the
richest man in the West after Bill Gates, has always been
a winner. His strategy of careful analysis, namely look for
good value and hold, has consistently kept him and shareholders
in his company, Berkshire Hathaway, ahead of the markets.
The story goes that when everyone else was buying technology
stocks he was buying paint!
Outside the stock markets who are the recent winners?
Over the past five years real estate has been the big success
story in many countries. The same goes for Bali, where despite
the bombings and other problems, land prices are still soaring
and villas selling at prices comparable to those in many western
cities. Commercial property funds have also done well. Gold
and precious metals have appreciated sharply in the past couple
of years and anyone investing in energy may have made over
200% in less than three years.
But where there are winners there are also losers
Bond funds have had a miserable few years. As interest rates
rise the capital value of bonds falls and this has been the
case since US rates moved from close to zero to over 5%. In
Bali, anyone who invested in a tourist related business will
have gone through some tough times since the collapse of the
Rupiah in 1997 and subsequent events. Airlines have suffered
also as a result of skyrocketing fuel prices.
Who will be the future winners?
It frequently happens that today’s winners become tomorrow’s
losers and vice versa. What is for sure is that people will
invariably follow the flavour of the day. In 1999 and early
2000 it was technology stocks. Running with the herd gives
a feeling of comfort but can lead to disaster. Ever seen TV
pictures of herds of animals stampeding over a cliff? That’s
often how investors behave. The real winners are those who
ignore the herd and correctly anticipate the next boom in
a particular asset class. It could be bonds, stocks, gold,
commodities, - who knows? But putting all one’s money
into a hunch, be it a particular stock market or a new bar
in Bali, could result in hitting the jackpot or in disaster.
The balanced approach
The safest approach is to avoid going for the flavour of the
day or the hottest performing asset. Just step back and follow
the principles of sound investing. This means an overall split
of assets in roughly the following proportions:
- 10% to 20% in cash or short term assets
- 60% to 80% in medium to long term (but accessible) financial
assets
- 10% to 20% in fixed assets (real estate, a business etc.)
The financial assets should be further broken down into a
diverse range of sub-assets including stocks, bonds, hedge
funds and commercial property funds. The actual percentages
should be those recommended by professional asset allocation
experts and should be tailored to your risk profile, financial
goals and base currency. Larger investors may include other
more exotic assets such as gold and precious metals, commodities,
works of art etc. but these should not exceed 20% of the financial
segment. Anyone whose fortune is tied up in any single asset
class is courting possible disaster.
The above approach is unlikely to make you an instant winner,
but you are less likely to be a loser and should certainly
be a winner in the long term. And that is what sound financial
planning is all about. Ignore the Dow Jones!
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions related to personal finance you may
contact him at 021 520 8099 or
colin.bloodworth@financial-partners.biz
