News - MG Financial Planning Gippsland's leading financial planners & accountants

Retirement Planning... Lovgevity

Wed, 11 Jan 2012 00:00:00 -1100

You need to allow for the possibility that you will live beyond the average age and that the averages are increasing.

Life Expectancy at birth in 1946: Male = 66.1 yrs, Female = 70.6
Life Expectancy at birth in 2006: Male = 78.7 yrs, Female = 83.5
Life Expectancy at age 65 in 1946: Male = 77.3 yrs, Female = 79.4
Life Expectancy at age 65 in 2006: Male = 83.3 yrs, Female = 86.5

Keep in mind that to arrive at an average, you must have numbers below and above.

It is easy to justify a case to plan for your capital to last longer.

Our preference is for you to plan for you to have money until age 100.

Market Commentary

Wed, 11 Jan 2012 00:00:00 -1100

When reviewing your portfolio it is important to assess the performance in terms of the financial markets. Following is a summary of the performance of the markets:

Global Market Performance to 31 December 2011

Keys points from the above table are;

The calendar year has been very poor. 5 year numbers are also still mainly negative and 10 years are well below average.
These index returns indicate how difficult an environment it has been for investing.
We have been adding value with our portfolio construction, however it is starting from a low base with the markets, making the overall return not where we would like it.
The Australian share market has been particularly disappointing, as it has been outperformed by the overseas market index.
The importance of diversification is crucial and adds value or at least, can reduce losses.

Outlook:

The US are working through their problems and making some progress although not exciting.
The excessive debt levels in Europe continue to cause concern. Progress is painfully slow and the markets are not responding until they are satisfied of the resolution.
Volatility will remain high and returns will be impacted, whilst the problems in Europe persist.

January Newsletter 2012

Thu, 05 Jan 2012 00:00:00 -1100

It's prediction season again

We are at that time of year when we are provided with predictions of what is going to happen financially for the ensuing year.

As you know, our usual view that it is extremely difficult to accurately predict what is going to happen. In the current environment of extreme volatility it is nearly impossible.

Who could have predicted 2011?

Last year saw the following:

Floods in Australia.
The NZ earthquake.
Japanese Earthquake, Tsunami and Nuclear disaster.
Civil War in parts of Northern Africa and the Middle East.
A number of Political leadership changes.
The US debt ceiling debacle and the subsequent rating downgrade.
The ongoing European debt crisis.

There are so many unforseen events, it is futile to rely on predictions.

The current position and what we do know

Rather than look into the crystal ball, we can consider what is currently actually happening and the impact it will have.

Based on current results, the US economy is improving and growing. The growth is very slow, but it is still positive. This doesn't mean it is sustainable, but it is a good start.

The Chinese, Asian and Emerging markets are showing slower economic growth as the European problems have an impact. However they are still growing at a reasonable rate.

The consensus is that China will grow at 7% in 2012. At the risk of being cynical, this almost makes it a certainty that 7% won't be the end figure. Whether it is higher or lower depends on how well the Chinese manage the financial impact from events outside its borders. They have done this well so far.

The combination of deleveraging (reducing debt) and budget cuts in Europe will continue and this means it is extremely difficult for those economies to grow. If we do not see growth and instead have deterioration, then a recession is the likely outcome. This will dominate the headlines and have a negative impact on markets.

The European Central Bank (ECB) and others have not done enough yet to resolve the crisis. The latest significant announcement from the ECB of changing the Long Term Refinancing Operations to allow Banks to borrow at 1% for 3 years (previously 1 year) and also accept lower rated collateral as security. The ECB is hoping that the European Banks will use this to borrow to buy Government Bonds from countries such as Italy.

This sounds good in theory but why would a Bank buy more sovereign debt when having too much sovereign debt caused much of their problems.

There is a potential return to be made, but the risks are high making it unlikely for Banks to be excited about this option. This means that a real solution is still not with us.

The biggest obstacle to reaching our long-term investment goals often is not the market itself, but our own behaviour.

Common mistakes include failing to diversify, overlooking the influence of the costs of trading, ducking in and out of the market and getting distracted by daily headlines.

The fact is that as fallible human beings we tend to over-rate our own abilities and imagine that we can see things that others can’t. In an extremely competitive arena such as the financial markets, this can be ruinous.

It is in the nature of markets to go up and down. You can’t control that. But employing a structured and disciplined approach frees you up to focus on things you can control.

This includes staying diversified, keeping costs low, being mindful of the tax impacts of investing and most of all keeping your nerve amid all the short-term noise from the markets and the media.

Index returns for the 12 months ended 30 November 2011 were:

Sector	1 Year % Returns
Cash	5.02
Australian Listed Property Trusts	2.23
International Property (Hedged)	4.95
Infrastructure (Hedged)	6.40
Australian Sharemarket (S&P/ASX 300 Accum Index)	-6.27
Australian Small Companies	-12.09
International Shares - Hedged (removes the effect of currency movements)	2.84
International Shares - Unhedged (includes the effect of currency movements)	-5.23
Emerging Markets	-8.82

Returns from shares and property remain disappointing for the above period. Our portfolios have been adding value which in some cases has meant that overall losses have been avoided. Whilst this is still not ideal it is a better outcome than the market average.

Are you prepared for a traumatic health event?

It’s a fact of life that we all get sick, and sometimes seriously. The cost of recovery from an illness like cancer or heart attack can have a huge impact both emotionally and financially. That’s when you need Critical Illness insurance.

Critical Illness insurance is about helping you with survival.

Australians are suffering an increasing incidence of cancer and we still experience high levels of heart disease and stroke. With ongoing advances in medical science, we have greater chances of surviving a serious medical condition. In many cases, this survival period can be measured in years. Critical Illness insurance is designed to pay a lump sum to you if you suffer a critical illness, to ensure that you can cope with the effects on your lifestyle, family and work.

Critical Illness insurance helps you to survive financially while you take the time you need to recover.

What are the chances of surviving a Critical Illness?

One in five men and one in seven women between the ages of 30 and 64 will suffer a critical illness*.

115,000 new cases of cancer were estimated in Australia in 2010†.
More than 60% of cancer patients will still be alive more than five years later†.
Every 10 minutes an Australian will suffer a Stroke (about 60,000 new or recurring Strokes were estimated in 2010)‡.
Two out of every three people that suffer a first time stroke will be alive one year later‡.
About 88% of stroke survivors live at home and most have a disability‡.
For working people who suffer acute coronary syndrome (heart attack and chest pain), the average time before returning to work is three months - and one in five will remain off work§.

A lump-sum payment allows you to choose how you spend the claim amount – it might be paying off your mortgage, making alterations to your house to improve access and mobility, or taking a family holiday.

Many people survive an illness only to be crippled financially. Critical Illness insurance can help you recover financially by:

Reducing or eliminating debt.
Offsetting lower levels of income for an income earner returning to work following a critical illness.
Creating an emergency fund or cash reserve.
Boosting retirement savings.

Or a lump sum can give you the funds you need to explore alternative treatment options, without putting a severe strain on your finances.

* GenRe LifeHealth Australian Critical Illness Survey 2008

† Cancer Council, Fact Sheet. www.cancer.org.au 2010

‡ The Stroke Foundation, 10 things you should know about stroke www.strokefoundation.com.au 2010

§ North Shore Heart Research Foundation. National Preventative Health Strategy 2008.

What are we doing?

After much analysis and research we have appointed an additional manager to our portfolios that we use for you.

It is in the Infrastructure asset class and provides a number of benefits. It diversifies that asset class and also enables us to reduce overall volatility by reducing exposure to shares.

The reduction to shares has been spread across Australian, international, large companies, small companies and emerging markets. This way, we have made subtle changes to a number of asset classes rather than selling out of a single class or fund whilst markets are down.

The overall summary is that the new fund will provide slightly lower returns in strong markets, but more importantly, better results in falling markets and provide greater stability to your portfolio.

You will see more details of this fund and the other changes as we conduct our reviews for you as part of our ongoing service.

November Newsletter 2011

Mon, 28 Nov 2011 00:00:00 -1100

The European rollercoaster continues

As November draws to a close, we have again endured another poor month. However news over the weekend of a bailout for Italy has received a positive response from markets today.

The recent problem has been that as soon as one Country makes a positive move, the markets and speculators move on to the next.

Spain is already in the spotlight, Belgium was downgraded last week and interest rates are rising almost daily across many European countries. This later point is a measure of the risk of investing in these countries.

As always risk and return are related. You can currently get a 25% return on Greek Government Bonds. The risk is that you will not get all your money back!

The Italian bailout and more meetings over the next few weeks may deliver some sustainable progress.

When Buyers Meet Sellers

"Sellers were out in force on the market today after negative news on the economy." So say the talking heads on television each night. Have you ever wondered if there are so many sellers out there, who is buying?

The notion that in bear markets sellers outnumber buyers, this just doesn't make sense. What the news reporters should say is that there were not enough people willing to buy shares at the prices the sellers were seeking.

What happens in such a case is either the would-be sellers sit on their shares or prices adjust lower until supply and demand come into balance. This is when transactions occur and is described by economists as "equilibrium".

But equilibrium isn't a permanent state. That's because new information is continually coming into the marketplace, forcing would-be sellers and would-be buyers to adjust their expectations.

That new information might be company-specific news like an earnings warning. It might be news that has implications for an entire industry—like a spike in oil prices forcing airline stocks lower. Or it might be an economic development that affects the entire market, like we are seeing in Europe.

Given this constant flux in news and information flows and the forever changing expectations of participants, individual shares and the market itself are said to be always moving toward equilibrium.

When markets are going down, it can be reassuring to remember that at some point supply and demand must come into balance. Buyers eventually will see value in the market and will invest if the prices are low enough.

Trying to time these inflexion points is a fool's game. That's because prices tend move in a random way. So it is impossible to consistently predict what the market will do next.

This in turn reflects the difficulty of successfully forecasting the future. That doesn't stop many people from trying, mind you. And sometimes they get it right. But that's usually down to good guesswork, not scientific method.

But during times like these, investors can comfort themselves in the knowledge that in a market economy, over the long term, there is a return on capital.

So rest assured there are still plenty of buyers out there. The market is doing its job and the rewards will be there if you remain disciplined and diversified.

Index returns for the 12 months ended 31 October were:

Sector	1 Year % Returns
Cash	5.02
Australian Listed Property Trusts	-2.25
Infrastructure (Hedged)	3.90
Australian Sharemarket (S&P/ASX 300 Accum Index)	-3.95
Australian Small Companies	-8.22
International Shares - Hedged (removes effect of currency movements)	3.87
International Shares - Unhedged (includes effect of currency movements)	0.43
Emerging Markets	-6.18

October was a very positive month, but despite this the results for the last twelve months have been disappointing.

Until there is a satisfactory resolution in Europe, markets are unlikely to recover.

Even in the long term there is a cycle

The following chart shows a real accumulation index for US stocks since 1900. The trend line represents a real rate of return (return above inflation) of 6.2% pa. Whenever the index is rising faster than the trend line, stocks are providing above trend returns (Bull market). Vice versa when it falls relative to the trend line (Bear market). Again this reinforces the long term trend, despite negative periods.

Long-term bull & bear phases in US shares

Source: Global Financial Data, AMP Capital Investors

What are we doing?

We have been reducing risk in portfolios by removing a manager that carries a little more risk than we currently want in the defensive assets classes. This manager has been profitable, so we are not crystallising losses.

We continue to work hard behind the scenes, reviewing the portfolios we construct for you. This includes, meeting monthly to assess our approved list and portfolios and meeting with managers to gain further information on their funds.

Overall we are satisfied with the funds we are using and our portfolios continue to add value above the market averages and losses have been limited.

However we are always looking to improve and we intend making changes over coming months to add further value.

Retirement Planning... How Much Will You Need For Capital Items?

Mon, 14 Nov 2011 00:00:00 -1100

This is the second part in our series on Retirement Planning. Our first article focussed on the income you need. You can read it here.

Now we turn to the capital items that you will need or want to fund throughout your retirement. They need to be estimated even if they are many years into the future. This all helps build the model and the projections to help answer the crucial question of how much you need to retire.

Capital Lump sums - What is important to you?

Car upgrade every XX years $
Major holiday every XX years $
House improvements $
Gift to family members $
Clear loans $
Leave an Estate to beneficiaries $

These amounts should be estimated prior to retirement and indexed for inflation depending on their timing.

All of the above need to be reviewed regularly.

October Newsletter 2011

Fri, 28 Oct 2011 00:00:00 -1100

Are we there yet?

Not quite, but at least we are heading in the right direction.

Last night the European leaders held their 14^th meeting/summit/talkfest in 21 months and it appears that at last progress has been made.

It was interesting to watch the media looking for negative angles and conducting interviews where clichés like “the devil is in the detail” were overused. Whilst this coverage was occurring, markets continued to climb. Some examples include the French stock market rising 6.28% and Germany 5.35%. The US S&P was up a more subdued 3.43%. These are amazing numbers for one day, particularly when considering that Term deposit are paying in the high 5% range for one year.

Of course the share markets needed to rise after a recent dreadful period, as the figures below indicate.

The measures announced in Europe are long overdue and should be seen as a positive step and not a final solution. If implemented as announced, the changes will avoid severe financial problems in Europe.

Issues ahead

There is still too much debt in developed economies which must be reduced. This will limit growth. This means we will still see low growth numbers from Europe and the US for some years to come.

On the positive side China is still performing strongly and reported 9.1% growth for the twelve months ended September.

China and other Asian countries will continue to increase their rate of spending, which is necessary to offset the fall in spending by the above mentioned developed economies.

There will continue to be volatility in these Emerging Markets and talk of a ‘hard landing’ will persist. However over the long term this region will be a key part of world economic growth.

It was also pleasing to see that overnight the key political leaders involved in the US Supercommittee, set up to decide on spending cuts, have said that they would like to see a solution before the November 23 deadline. They are also finding some common ground. It appears that they have learnt from their previous appalling conduct in resolving the debt ceiling issue.

Market update

The importance of the recent good news can be seen in the results for the last twelve months. In particular, the period since the end of April has been very poor.

Index returns for the 12 months ended 30^th September were:

Sector	1 Year % Returns
Cash	5.02
Australian Listed Property Trusts	-6.29
International Property (Hedged)	1.06
Infrastructure (Hedged)	3.00
Australian Sharemarket (S&P/ASX 300 Accum Index)	-8.71
Australian Small Companies	-12.11
International Shares - Hedged (removes effect of currency movements)	-1.26
International Shares - Unhedged (includes effect of currency movements)	-4.52

Shares beat cash & bonds over the long term

Source: Global Financial Data, Bloomberg, AMP Capital Investors

The results in the above chart show a remarkable difference in outcomes. It is based on returns of 11.9%, 6% and 4.6% for Shares, Bonds and cash respectively.

The message is that investing is not about reacting and changing your approach based on the latest news reports. The ability to avoid emotions having an impact on your strategy is very valuable. Focussing on your situation and your long term plans will serve you far better.

Fee reduction from Blackrock

There was very pleasing news during the month when Blackrock reduced the fees on their index funds to 0.20%. This is a very low cost and importantly, Blackrock are the largest Fund Manager in the world, so we are hoping that other managers will follow their lead.

Give your children the gift of financial independence

While they may now be old enough to make their own decisions about their future and their finances, there will always be room for a little parental wisdom to help them along the way.

Encouraging your children to seek advice on their financial planning and security is one such suggestion you can make that can have a big impact on their welfare.

We are more than happy to meet with them to explore the possibilities. Please call our office on 03 5143 7400.

September Newletter 2011

Wed, 14 Sep 2011 00:00:00 -1100

Has the world become worse?

There is no doubt the global financial crisis has left the world with a hangover in the form of excessive debt levels, extreme monetary policy settings in advanced countries, excessively easy monetary conditions in emerging countries, a greater reliance on the more volatile emerging world and increasing business regulation. This is resulting in shorter, more volatile business cycles and an increase in the importance of asset allocation.

At the same time, talk of looming physical crises such as a peak in global oil production, food shortages, resource depletion and global warming, are only further adding to the sense of trepidation, which has not been helped by this year’s run of natural disasters.

But has the world really changed? The global economy has been through difficult phases in the past. The last century was full of disasters and catastrophes. Here’s a sample:

Early 1900s – San Francisco earthquake, US financial panic, World War I and Spanish flu pandemic;
1930s – The Great Depression and World War II ;
1950s – Korean War and flu pandemic;
1960s – Credit crunch, Cuban missile crisis, Vietnam War and flu pandemic;
1970s – Organisation of Arab Petroleum Exporting Countries oil embargo, US Watergate scandal, Iranian revolution and second oil crisis;
1980s – Latin American debt crisis, Chernobyl nuclear disaster, global share crash, first Gulf War, Japanese bubble economy collapse and US savings and loan crisis;
1990s – Second Gulf War, Asian financial crisis and tech wreck;
2000s – September 2001 terrorist attacks and Lehman Brothers collapse.

Over the years, Australia has regularly been hit by droughts, floods, cyclones and bushfires. The rest of the world has also seen a regular, wide range of natural disasters. And yet, despite this litany of disasters and periodic swings since the 1900s, Australian shares have returned 11.8% per annum, which is double both the 5.9% pa return from bonds over the same period and 5.3% pa returned on cash since 1926.

Source: ASX, AMP Capital Investors

Or are we suffering from information overload?

While not to deny the current list of worries, we do wonder whether the communication revolution is making things seem worse than they really are. We are now bombarded by news on a continuous basis. Whether it’s on the television via regular updates on numerous news and finance channels, or through websites, blogs and twitter on smart phones, it’s hard to escape. Also bad news sells better than good.

The Risks Worth Taking

These are risks that provide return that is worthwhile, based on that level of risk. Economists have identified three of them:

First, there is the market itself. Shares are riskier than bonds. So they offer, higher expected returns as a reward.

Second, small companies have higher expected returns than large companies. This makes sense, as smaller companies are more of an unknown quantity.

Third, lower priced or ‘value’ stocks offer higher expected returns than higher priced or ‘growth’ stocks. A value stock is one that is out of favour for one reason or another.

So you can raise your expected return by increasing the proportion of stocks relative to bonds; of small stocks relative to large stocks and value stocks relative to growth stocks.

We have been doing this in the portfolios that we manage for you. It has added value, even though the overall returns are not where we would like them due to poor returns from the major assets classes.

Index returns for the 12 months ended 31 August were:

Sector	1 Year % Returns
Cash	5.00
Australian Listed Property Trusts	-2.63
International Property (Hedged)	19.04
Infrastructure (Hedged)	4.90
Australian Sharemarket (S&P/ASX 300 Accum Index)	2.07
Australian Small Companies	7.24
International Shares - Hedged (removes effect of currency movements)	12.48
International Shares - Unhedged (includes effect of currency movements)	-5.10

As you can see, following the traditional approach of large companies in Australia and overseas, and Australian Property along with cash would have delivered an overall result close to zero. Accessing returns from other asset classes has improved the results.

The Term Deposit Guarantee has been amended

The Government has announced that the Guarantee on Term Deposits will continue, with a new deposit level to apply of $250,000 per person, per institution from 1 February 2012. The current level is $1M.

It will not apply to deposits held in branches of Australian banks overseas. However, it will apply to deposits invested with foreign banks holding an Australian-based banking licence.

Be wary as not all deposits are the same

With the Global financial markets displaying unsettling levels of volatility, we are seeing some higher term investment rates being offered. This is clever marketing by those offering security that is not always as safe as it seems.

As we have seen before, some of these investments can collapse completely, resulting in a permanent loss of part or all of investor's capital. This is much worse than temporary losses from sharemarkets.

If you require a second opinion please contact us.

Contacting DMG Financial Planning & DMG Financial via email – please update your records

As of today, we have turned off our old email addresses and will only be contactable on our new email addresses. Email addresses ending in mcmgroup.com.au, mcmillansgippsland.com.au or duesgipp.com.au will not be delivered to us.

Only emails sent to addresses ending in dmgfinancial.com.au will make it through.

Retirement Planning... How Much Money Do I Need To Retire?

Wed, 07 Sep 2011 00:00:00 -1100

The first step is to determine how much income you require to live the life you want. The Association of Superannuation Funds in Australia (ASFA) Retirement Standard provides some guidance. It contains detailed budgets of how much singles and couples need to spend to fund either a modest lifestyle or a more comfortable lifestyle. For example to live a comfortable lifestyle, it is estimated that the following income is appropriate;

Single is $772 per week or $40,121per year.
Couple is $1,057 per week or $54,954 per year.

Of course this is only a guide and you need to tailor this amount to your situation. You can do this by completing a budget and we have an excellent free version on our website at http://www.dmgfinancial.com.au/financial-calculators/

It requires a brief registration before you sign in and is very easy to use from there. Alternatively we can help you to calculate the figure as part of our initial interview. Don’t worry, it does not have to be exact as we always ensure that your finances are structured with enough flexibility to meet your changing needs. If in doubt allow a little extra as it is better to have the income and not need it rather than need it and not have it. Any unused surplus can be reinvested.

Once we have a figure we can start to build the model to calculate your overall amount needed. We will allow for any taxes (we aim to reduce this to zero and even generate refunds) and we will index this figure to allow for inflation.

Next issue: Including capital items

Becoming Depreciation Wise

Thu, 25 Aug 2011 00:00:00 -1100

In terms of depreciation, what should you consider when making an investment property purchase decision?

If you are looking to purchase an investment property, it is worthwhile asking yourself a number of questions. While many investors consider location, purchase price and tenanting ability when contemplating an investment property purchase, they often overlook depreciation as an important factor. Depreciation can help unlock the cash flow potential within an investment property, often meaning the investor will have thousands of additional dollars each financial year.

There are several factors for consideration that will enable the property owner to maximise tax depreciation benefits including:

The age of the property: Both new and older properties will attract some depreciation deductions, although a property with an age between 1-20 years will provide higher depreciation than an older property.
The type of property: If the property is part of a strata complex or community title development, each unit is entitled to claim common property benefits in addition to the unit’s depreciation benefits.
The amount of common property: Common property items within a strata or community title complex such as lifts and swimming pools are included in the depreciation report. The more common property there is, usually results in higher depreciation claims.
The amount of plant and equipment: Plant and equipment are items that can easily be removed from the property as opposed to items that are permanently fixed to the structure. Plant and equipment includes items such as light shades, stoves, air conditioning systems, blinds and carpet. These items can be depreciated at a higher rate and add significantly to the depreciation claim. More plant and equipment generally means higher depreciation claims.

Once you have purchased an investment property, what can you do to increase your depreciation deductions?

In order to maximise the tax benefit your investment property will attract, you will require the services of a recognised Quantity Surveyor with specific property tax depreciation skills and experience. To ensure you claim all your entitled depreciation deductions a site inspection will need to be carried out as this will accurately identify all items of plant and equipment. These specific items attract higher depreciation rates than what is applied to the building. An over-capitalised property with more expensive fittings such as ducted air conditioning and stainless steel oven, cooktop and rangehood will have a higher depreciation claim than less expensive fittings such as split system air conditioning and an upright stove.

Example: Tiles vs. Carpet

To obtain the highest depreciation claim when removing old carpet, should it be replaced with tiles or new carpet?

Item	Value	Basic Rate	Depreciation 1st Full Year	Depreciation Over 10 Years
Tiles - Division 43 (Capital Works Allowance)	$3,000	2.5%	$75	$750
Carpet - Division 40 (Plant & Equipment)	$3,000	20% (Diminishing Method)	$600	$2,906

Note: This does not include scrapping of the original carpet. Replacing the old carpet with new carpet in lieu of tiles will attract a higher depreciation rate of 20% using the diminishing value method, opposed to the tiles attracting a rate of only 2.5%. In both cases you will obtain depreciation but in this case it would be beneficial to the property owner to replace the old carpet with new carpet in order to obtain a higher return. BMT Tax Depreciation are specialists in maximising depreciation claims and can provide advice about any property scenario.

Current Market Volatility Update

Tue, 09 Aug 2011 00:00:00 -1100

In our ongoing efforts to keep you informed throughout these volatile times, we feel it is important to contact you. We understand that this has been very unsettling for many of you, as you listen to daily media reports.

This is not permanent

Contrary to some media reports stating that there may not be an end to this, the truth is there will be an end. As with all financial and other news events they are short term and not permanent.

You are not 100% invested in shares

Only in very rare cases will someone be 100% invested in shares. This means that a fall in the sharemarket does not mean that your whole portfolio has fallen by the same amount. There are assets in your portfolio that will be affected to a lesser extent and some that will not be affected at all.

What has caused these events?

The US long term credit rating downgrade.
The appalling conduct of the US Politicians in addressing the debt ceiling issue.
The agreement on the debt ceiling issue was inadequate.
European & US debt concerns.
Concern that the austerity or debt reduction measures being taken around the world will lead us to a recession.

What happens if you sell out of your portfolio and go into alternatives such as a Term Deposit or Property?

By selling out, you turn paper losses into real losses.
You sell out of the markets at somewhere near the bottom.
You miss out on the recovery in the markets.
It will take you longer to recover your losses.
The downside is that you could experience further temporary losses before making a full recovery.

Is it logical that leading, stable companies are worth significantly less than they were a few weeks ago?

To some extent there may be an argument, say commodities fall or if we were in recession, but the reality is that the majority of these businesses will continue to operate and do so profitably. We are currently seeing many companies locally and around the world announce better than expected profit results. In a normal market this would drive share prices higher.

Shares are cheap

Of course they can still get cheaper, but they are now getting back to 2009 levels. The table below illustrates this point by using the price/earnings ratio. This measures the number of years it takes for the company earnings (E) to repay the company share price (P). A lower value indicates the share price or market is cheaper.

Source: Thomson Reuters, AMP Capital Investors

Can the sharemarket recover?

Yes and it will. For example, from the previous low point in March 2009, the Australian sharemarket recovered 61% to April 2011.

There is more information available on our website and we will continue to post material under the news and media centre for your perusal. Click Here to listen to a radio interview with the ABC that has further information.

As always we are available to help you. Please feel free to contact us.