Volatility the only short-term guarantee

Posted by news.com.au on October 06, 2008 BY RUSSELL EMMERSON

BANKS are going bankrupt, global share markets are tumbling and the only guarantee is further volatility. It is a nerve-wracking time for any investor.

The first tonic for those nerves is "don't panic'' - this volatility is the downward part of the cycle that also gives investors their upside, although this cycle has a bit more drama than expected and perhaps a fundamental economic shake-up that wasn't foreseen. Patience remains the key, experts say.

Investors who are feeling skittish, however, may want something reassuring, perhaps a plan.

There are some strategies that can minimise the pain.

Be conservative

William Buck financial services director Wendy Drake said a conservative approach had limited client losses to 10 per cent - compared with losses up to 50 per cent seen elsewhere.
"We have always recommended our clients keep cash and cash deposits and have a (relatively) high proportion of their portfolio in cash, so we're not feeling the heat as much as other people have,'' she said.

Big company falls in the current climate had been primarily driven by high debt levels, reflecting conditions that "brought the pack of cards down'' in 1987.

The higher cost of debt responsible for the spectacular dive of highly geared property trusts also may have an upside.

Westpac senior economist Justin Smirk said cash investments were likely to be protected, with upward pressure on rates expected to continue.

While the Reserve Bank is expected to lower rates by 50 basis points when it meets tomorrow, a global credit shortage will maintain banks' interest in keeping your cash deposits.

"When the RBA cut rates, the fixed rates didn't all move, and that is a sign of how rates are,'' Mr Smirk said.

"You will still find deposit rates being competitive as all banks around the world are scrambling for deposits. They are a more secure deposit base for banks, so we will see strong pressure to maintain deposit rates.''

Goldman Sachs JBWere Private Wealth Management investment strategist Giselle Roux, however, warns "cash is not an investment decision''.

"If I am putting money into the bank, that bank has to make a return over and above what I am being paid. They are hoping to lend that money to a business over and above what they pay me, and that business has to make a return to cover that cost,'' she said.

"You have to recognise that investing in business will give a better return or else don't believe in the capitalist system. The only time you should invest in cash is if you want to buy a car, if you're waiting for an opportunity or in times of significant uncertainty.''

The general feeling is that there may be opportunities close at hand.

Spring clean your portfolio

Portfolios with a high proportion of blue-chip stocks were weathering the storm better than those with smaller companies and higher international exposures, Ms Drake said.

"You have to have a good look at what you're holding and their prospects. If they have got good long-range prospects, stay with them. If not, take your money out,'' she said. "Discard your rubbish and get on to the good stuff.''

Holding on to companies with poor prospects was likely to lead to larger losses as the companies did not have the ability to grow in future, she said.

The good companies, however, would continue to build in the future, despite current setbacks. And given that the ASX's top 50 companies are down 27.5 per cent from this time last year, this is the best opportunity to get them at a discount.

Westpac's Mr Smirk said few companies would be protected from higher credit costs. Safe sectors might exist, but only for companies with low debt levels and less exposure to credit, he said.

"The only area from a macro perspective that would be more immune would be resources, because the unfolding credit crunch has caused our currency to be really hard hit, so it has fallen further than commodity prices,'' he said.

"So resources companies' prices are actually up and they are also cashed up and have only a small requirement to borrow capital. But that is the major resources companies. Minor companies which need credit to expand will still see the impact of those higher costs.''

Plan ahead

Now might be the best time to sit back and take stock. Undertaking a similar process a few years ago might have helped reduce losses now, so start thinking about the next phase - including your debt, Community CPS chief executive Kevin Benger said.

"It is a good time to pay down debts, if you can,'' he said. "If liquidity gets tighter, the Reserve Bank may decrease interest rates but it doesn't follow that credit cards will also come down.''

"If you're stuck with debts with high interest payments, your investments might seem less attractive, he said.

Whether to fix rates to avoid higher or lower rates in the future is a trickier question. While the Reserve Bank may be in the mood to cut rates, banks are paying higher prices for their credit.

Even Treasurer Wayne Swan seems careful about criticising the banks for this one.

Superannuation

The head of the Association of Superannuation Funds of Australia suggests people also use the opportunity to review their super - including what their funds intend to do.

Chief executive Pauline Vamos said investors should take a direct approach.

"There is absolutely nothing wrong with calling up a fund and saying `What are you guys doing? What is your strategy?' '' Ms Vamos said.

"You have professional trustees. Ask them. They will tell you what they are doing and what their are thinking and how you are positioning yourself.''

Financial Planners Association state chairwoman Kerrin Falconer said investors who had just retired or were expecting to retire soon were the most affected by the current conditions.

But those approaching retirement could look to set themselves up properly, she said.

"They can have two to three years' expenses sitting in a cash account and the rest of their investment in growth-oriented investments, so they can draw down on their cash investment and let their growth bubble away,'' she said.

"Eventually, the situation will settle down and the markets will be up a little.''

If, however, people were forced to return to work, they could avail themselves of a retirement transition strategy, drawing down on their tax-free superannuation if they were aged more than 60, and replacing those funds using salary sacrifice.

Ms Falconer said people should get expert advice on the matter, but it was a way to make the tax system work for you as you recovered from global shock.

Source - news.com.au