INVESTING
"Is this a good time to invest?" - is one of the most asked questions. The appropriate reply is usually "it's never the wrong time to make a good investment" but the problem is that the pessimists and the timid can always find a reason to put it off and leave their money in the bank. In 1946 it was because the Dow had peaked at 200, in 1950 it was the Korean war, in 1969 it was the big crash, in 1974 another big crash, in 1992 the global recession and so on.
With this in mind it was enlightening to receive the latest bulletin from Shane Oliver, chief economist of the AMP. He looked back exactly 10 years, and instead of asking "what factors would make me wary of investing today?" pretended he had a crystal ball and could forecast what would happen between 1992 and today. He then put the question "would you invest today (February 1992) if you knew:
Japan would spend 10 years stumbling into and out of recessions. The government of the world's second biggest economy still seems to lack the political will to solve the country's structural problems.
The Australian dollar would fall to a record low against the US dollar. The record low of 47.75 US cents set in April 2001 would have been thought impossible even a few years ago.
Russia would default on debt. World financial markets went into turmoil after Russia's failure to meet debt payments toppled the US-based hedge fund Long Term Capital Management.
An Asian economic crisis would push Australia's major trading partners into recession. It started in July 1997 with the plunge in the Thai baht and spread as far north as South Korea and as far south as Indonesia.
Australian 10-year government yields would rise from 6.4% to 10.7% in nine months in 1994 and scare the pants of all the capital stable investors. Many were sceptical then that inflation would stay low when the world economy recovered from the recession of the early 1990s.
Terrorists would use hijacked passenger jets to destroy the World Trade Centre in New York and to damage the Pentagon in Washington, starting a war between the US and the rulers of Afghanistan. The Dow Jones Industrial Average lost more than 7% in its first day of trading after the terrorist attacks, only to recover that within two months.
The Nasdaq Composite Index would fall by about 70% in 18 months. From a record high of 5,132.52 on 10 March 2000, the bellwether for technology stocks was as low as 1,387.06 on September 21 this year.
Oliver comments "All these mis-happenings took place between 1 January 1992 and 31 October 2001, yet stock prices rose higher and higher. That's because a thriving global economy allowed companies and investors to prosper. Even though they have hiccups, economies tend to grow over time. Over this nearly 10-year period, the Australian share market's benchmark All Ordinaries Accumulation Index returned an average annual 11.01%. In the US, the Dow Jones Industrial Average returned 11.28% a year. As well, the benchmark for international shares, the MSCI Index ex-Australia in local currency, returned 8.53% annually."
The message is simple - don't let bad news affect your decision to invest in shares, but also expect economic challenges to keep happening. Right now it's Argentina, next month it will be something else. The smart investor thinks like the captain of a ocean liner. You chart a course, leave on time and stick to your route. Provided your ship (or your portfolio) is solid you will make it through the inevitable storms.
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