- These long term yields depend upon your period of observation
- Current equities are at record PE ratios - due for a tumble
There is no question that humans are not omniscient, and thus should diversify, but you get to a point where you can only watch and understand so many markets, so it might be a better decision to monitor a particular set of markets more closely than more markets. This also guards against an unforeseen `systematic risk`. A systematic risk is a concealed risk that a market might fall because of falls in other markets. In the last 20 years, the US and other western governments have greatly increased money supply, credit growth, fuelling an asset bubble, starting with the dot.com bubble in Sept 2000, and more recently property & broader equity bubbles. We are thus due for a huge fall in equities and property markets which will quash consumer & business spending.In 1928, investors taking positions in the market would have had to wait until the 1940s to recoup their capital. Quite apart from the desire to conserve capital, there is a huge opportunity cost in taking unnecessary, ill-timed investments.
Technical analysis offers investors some simple tools for understanding investment timing - when to buy and sell. There is no point investing in markets if there is evidence its in a long term downtrend -unless you are trading for short term profits. It makes more sense to identify growth markets.
When asset values are artificially inflated by `easy monetary policy` it makes sense to invest in real assets - as opposed to `paper-inflated` financial assets like equities, property. The real assets are commodities (food, precious & industrial metals, energy). The best real assets are those that are not impacted by weaker global demand - thus gold and food make the greatest sense. Go for the more profitable equities market if the yields (PERs) are not inflated by bullish market conditions.
There is a perception that investors can protect their position with derivatives, but these instruments are voodoo, since there is no escaping the existence of a counterparty to any `unlimited` risk which is limited by the counter-party. Someone is wearing the exposure, and given the extent of derivative contracts outstanding relative to the physical market, there is huge potential for derivatives to destroy financial markets. In a crash or unexpected market move, there is every likelihood that derivatives will offer little or no protection, and the market is too large for any central bank to prop up. Furthermore, its your managed funds that are at risk.
There are only a few guidelines for risk management:
- Avoid systematic risks
- Avoid investing more than you can afford to loose.
- Use technicals to pick entry & exit points. ie. If the market is telling you that
Risk is often inversely correlated with returns, but in fact we all have a different perception of risk, and a different understanding of markets. Understanding market fundamentals is a full-time job. My advice is try to identify analysts that pick market trends more consistently. You dont normally find them in newspapers, or among financial journalists. I recommend:
- Morgan Stanley GEP Digests Archives
- Kitco essay contributors
- The Conference Board
- Max Walsh `the Bulletin`
Most get issues of timing wrong, which is why fundamentals commentary should help you identify the opportunity, but charts should tell you when to buy and sell.
There is a ATO tax rule that saids if you buy stocks mainly for gains, you may attract the full income tax rate rather than the 50% concessional rate. Under Section 118-20 of the CGT rules, income tax rules take precedence over capital gains tax laws. Peter Bobbin, senior partner of Argyle Partnership saids `if investors buy stock mainly to make gains, they may attract the full income tax rate rather than just the 50% concessional capital gains tax rate`. Fortunately my investment strategy is not about making gains, in fact I don`t invest in alot of the companies I identify here. I invest only in those companies with whom I respect their objectives and management. So I leave the tax to all the `vulgar materialists`. eg. For instance last year I choose to make a loss even though charts said the market was in a long term decline.
`The common wisdom is that you get a capital gains tax concession if you sell shares after holding them for 12 months. But that is not true. You only get the 12mth CGT concession where you purchased the shares for the income they would generate, such as dividends` says Bobbins. The only way to avoid such nonsense is to incorporate.
Does anyone still believe tax is `well-intentioned` welfare redistribution? Are you tired of trying to jump through the ATO hoops and hurdles? FIGHT FOR REFORM - limit the unaccountable power of governments! The ATO is prepared to enforce this law - fighting in 2004 against a women who traded St George Bank shares.
The easiest solution is to document the reasons why you buy a share. If you intewnd to claim the concession, then your stated aim should be to generate income, not to make a capital gain. If you incorporate, then you are able to realise gains at the flat corporate tax rate.