Special Free Report From The Motley Fool
Dear savvy investor,
Bear markets come around every so often – so make sure you're prepared for it.
And I'm not talking about minor dips here, or corrections. I'm talking Global Financial Crisis (GFC) type bear markets, where even high-quality stocks can fall by as much as 90%. Your investing portfolio can be halved in a short period of time, and your biggest fear is that it could then be halved again!
And it seems a few seeds are being sown for our next market crash…
With interest rates around the world at all-time lows, investors have little choice but to invest in stocks if they want to beat the insidious effect of inflation.
Now, the US has virtually zero interest rates, and Australia's official cash rate is trending the same way.
Where the bubble is right now…
Investors' hunt for decent returns, income and yield is driving up the prices of the higher quality assets, such as stocks.
Investors both here in Australia, and abroad, have seemingly shrugged off the devastating financial disaster.
They're rushing back into stocks.
You'd reckon that's a good sign, right?
Think again. Little do they know what they may be getting themselves into.
"Mum and Dad" shareholders seem to have a happy knack of buying shares when they are trading high, and selling them at the low point.
At The Motley Fool, we're generally not ones to preach doom and gloom. But we have to admit…we're more than a little concerned.
Even the experts are worried
Australia and New Zealand Banking Group's (ASX:ANZ) CEO Mike Smith recently told the Australian Financial Review (AFR), investor's hunt for yield means risk is not being properly priced by global financial markets, and this is a "worry".
Investment bank Citi recently cut their recommendation for all four major banks, ANZ, Commonwealth Bank of Australia (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corp (ASX:WBC) to sell. The chart below compares the big four with several major banks around the world.
Source: CapitalIQ
Interestingly, in 2005, the Reserve Bank of Australia warned that if "an economic shock caused a faster-than-anticipated rise in global policy rates, [the investment positions put in place to take advantage of low interest rates] could be reversed very sharply, causing dislocation in financial markets". This situation is reminiscent of our current scenario, and as a reminder, we had the GFC just over two years after that pronouncement.
And BT Investment Management recently said that there's a 50% chance of a recession in Australia in the next couple of years. BT's head of fixed income Vimal Gor says he could easily see a scenario where the RBA cuts rates to less than 1%, and there's a decent chance of a recession – "We haven't had one for a long time."
Gor has told the AFR that a slowdown or price falls in the housing market would be "the worst thing we could possibly have." He thinks that apart from Sydney and Melbourne, the market isn't strong.
Should you sell out?
Some doomsayers will tell you that you should take your profits and get out of the market now. They'll tell you that you've had a good run over the past few years, where the S&P/ASX 200 has produced a number of years of double-digit returns, and stocks like Commonwealth Bank of Australia have more than doubled.
They might even tell you that once you're out of the market, you can jump right back in once it starts heading higher.
But there's just one problem
Very few, if any, investors can successfully time the market. Sell out now and the market could sail along merrily for years. Keep holding and wait for prices to fall and then sell?
"Many investors sell after they experience losses, and buy back once the market recovers. This dooms their portfolios."
It's a major lesson I've learned in my 25-year investing career as well. But you don't have to take my word for it.
Take it from John Bogle, legendary founder of Vanguard, widely acknowledged as the most respected mutual fund company in the world. Here's what he has to say about market timing…
"After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently."
And being out of the market for just 10 days can dramatically reduce your wealth, as this chart from Fidelity Investments shows.
Source: Data from Fidelity Investments
The chart clearly shows how sitting out just the market's 10 best days can cut your portfolio in half.
See how costly it can be to listen to these so-called experts, who claim they can help you time the market? Because the fact is they can't.
Successful investing really is simple.
Find the best quality companies. Buy them at a good price. Own them for a long time. Add more money regularly. Don't panic.
Here's what else you can do
Prepare yourself now, both mentally and physically.
Mentally, knock a further 10 to 20% off the value of your portfolio. Know what it feels like if and when the market tanks.
Physically, prepare NOW to deploy some of that cash pile you've been sitting on, either in term deposits, or because you've been patiently waiting for a moment just like this.
If you don't have a handy cash buffer to take advantage of stocks on sale, NOW might still be the time to prepare.
Selling is tempting when all about are panicking. DON'T be the scaredy cat.
Prepare NOT to sell, just because the market is falling.
Prepare to BUY high-quality stocks as the market falls, because stocks are cheaper and dividend yields are higher.
Remember that markets will recover, and so will your portfolio.
Quality, not quantity
Investment advisors will also advise you to diversify. If you have 80% of your portfolio in bank stocks, it won't matter if you hold one, two or five banks when the market falls. Because they dominate the S&P/ASX 200, the big four banks will likely be front and centre when it comes to a sell-off.
Clearly, investors need to diversify.
But owning 10 different stocks won't help you much either if they aren't high-quality stocks.
Make sure you have a portfolio chock full of high-quality stocks, many of them paying strong, and rising fully franked dividends.
If you want to know where to find quality companies – that's where Motley Fool Dividend Investor can help (more on that below).
Do you have the stomach?
Here's the really good news… When the investing crowd is running hard in one direction – buying opportunities will almost certainly be on offer for the thoughtful, business-focused investor.
After all, history shows that a well-chosen, appropriately diversified portfolio, held with a long-term view has been a wonderful place to invest money you don't need in the short to medium term.
Famed investor Peter Lynch has said:
"Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether".
You can always invest in a sensible mix of low-cost Exchange Traded Funds (ETFs), Listed Investment Companies (LICs), and keep some money in cash and term deposits.
Take the simple, Foolish (capital 'F') route
Are we headed for an epic bear market today? Out honest answer is "we don't know".
But our view is "not bloody likely"!
You see, unlike many other "fly-by-night" operators, the types who may promise the world but deliver hot air, The Motley Fool believes share market investing should be a lifelong endeavour.
So, for investors like you and us saving for retirement, we'd be better off ignoring all the hype, the predictions of a market crash, and instead stick to buying great companies at reasonable prices.
To sum up, The Motley Fool generally and genuinely thinks,
"The best time to invest in the world's top companies is always RIGHT NOW."
There may be some short-term volatility, but if you can see through the falling share prices and keep focused on the long-term, through the beauty of compounding returns, you still should be able to generate significant wealth from investing in the share market.
Adopting such an attitude as your investing mantra can help individual investors like you and me secure our financial futures rather than give in to panic.
Becoming a better investor
If you're like us, looking for honest, independent advice to help you become a better investor, you're in the right place. We think it's advice that could help you safely and steadily accumulate real wealth over time, whatever the market is doing.
A market crash may not cost individual investors like us millions. But sitting out the next bull market will be a huge mistake!
An important announcement from The Motley Fool Australia (including my $100,000 commitment to dividend stocks!)
My name is Bruce Jackson, and I'm the General Manager of The Motley Fool Australia.
I want to extend a personal thank you for reading this report today, and tell you our bit of 'big news'.
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Last updated: 5 November 2015
This report was prepared by Mike King, and authorised by Bruce Jackson. This report contains general investment advice only (under AFSL 400691). Please refer to our Financial Services Guide (FSG) for more information. Employees and contractors of The Motley Fool, may have an interest in any shares mentioned in this free report. These interests can change at any time. The Motley Fool has a clear and concise disclosure policy.
Any and all advice contained in the above content is general advice that has not taken into account your personal circumstances. Before you act on the general advice we provide, please consider whether it is appropriate for your personal or individual circumstances. Please refer to our Financial Services Guide for more information or email us at [email protected] to request a copy.
Please remember that investments can go up and down. Past performance is not necessarily indicative of future returns.
All returns cited are hypothetical and based on the percentage change between the stock price at the time of recommendation and the current or sell price (if the position has been closed) at the time of publication. Brokerage, taxes and any other associated costs are not taken into account. Please remember that investments can go up and down. Past performance is not necessarily indicative of future returns. Performance figures are not intended to be a forecast and The Motley Fool does not guarantee the performance of, or returns on any investment. Any money back guarantee is strictly limited to the subscription price paid for the product. All figures are accurate as of 20 April 2015. Any and all advice contained in the above content is general advice that has not taken into account your personal circumstances.
