Anyone who has taken on the Switzer Super Report and believed my cautious optimism on what might happen to stock markets would have seen stocks go up by around 10% since October. But if you were wise enough to play the US market, you would be up close to 20% and the fund managers who ended up shooting the lights out were the ones who saw every big sell off last year as a buying opportunity.
Now, I’m not stupid enough to rule out any more big bad days for stocks ahead – those troublesome Greeks and their debt, not to mention many of their other European Union (EU) buddies, are bound to create some challenges for investors and SMSF trustees in 2012. However, the 2011 experience gives us an unforgettable lesson: you need to be long-term in your thinking. You need to have a quality collection of great stocks that both give you some similarity with the index such as the S&P/ASX 200 and you should hold historically good dividend-paying stocks.
Risk or safety?
Of course, if you want to shoot the lights out, you might deviate from my safety first approach to investing inside an SMSF, but you will have to be prepared for very bad days as well as very good days. You will have to become an astute market timer, which is not easy, and you will have to be willing to take some big risks to pocket the great returns.
In a nutshell, you will have to be a gambler. I have a client who ignored my safety-first recommendation and decided to hold just three great companies. His tactic worked for some time because they were great companies and his research was sound, but along came an earthquake in Japan and a sharp drop in uranium prices and my client’s portfolio was hit hard.
However, he did have a sound back-up strategy. Most of his money was in a safe long-term play, but he siphoned off a significant amount to play out his risky three-company strategy. So he only made losses on his play money – not his nest egg.
Stocks will go up
So, can we expect stocks to head up this year? I give this question a cautious yes and I will be buying the dips, just like I did last year. Right now the market has gone higher thanks to better US economic data, pretty good US company earnings results and progress in the EU with respect to their debt drama, which means sovereign bond yields are falling as access to credit becomes easier in Europe.
Back in August the alarmists got it wrong and spooked a lot of people and let’s hope these nervous Nellies can again be proved to be prophets of doom who should be ignored. Not many of them were around in October 2007 when they were really needed before the market crashed!
Personally, I like the VIX – or fear index – sitting around 18; that’s a good reading and means investors are heading back to stocks. Over the weekend, Reuters reported that Credit Suisse in the US was the first to upgrade its call on where stocks were going in 2012. I know these market guys always seem to be wrong lately, but the law of averages means they have to be in the money sooner or later.
Another good sign is that the European Central Bank has been buying European bonds, helping bring down interest rates in Europe. Reuters says the “three-month dollar Libor, the cost at which European banks can borrow dollars, marked its ninth straight day of declines”.
That’s great news!
Add this to a stronger-than-expected US economy and China not heading for a hard landing, and the argument for being positive on stocks is building.
The next challenge
That said, the next big challenge will be the severity of the recession in the EU and this could resurrect that old US market cliché, “sell in May and go away!” That worked well last year and that other old historical event of the Yanks buying stocks in the fourth quarter ahead of a Santa Claus rally held as well.
Aside from economic challenges to stocks, Europe will be testing material. Right now the Greeks are trying to make their private creditors take their 50% crew cut to a near shiny bald cut of 70%.
And this week, eurozone finance ministers will meet, meaning anything to make or break the market could happen. Meanwhile, Reuters says the Baltic Exchange main sea freight index has hit a three-year low and this can be a good forward indicator of what the global economy might do.
I can give you heaps of positive and negative omens, but the volatility is why I stick to a great investment strategy based on good income paying stocks, which I buy when they look like great value. This long-term strategy is the only way to remain sane dealing with something as crazy as the stock market!
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