Too many people put off investing in shares because they’re worried about a market collapse. Fair enough, no one likes to see their money disappear overnight.
However if you put it off for too long, you’ll lose more than just your initial investment. You’ll lose the opportunity to buy stocks at what proved to be great prices. If you put off investing $10,000 in Australian shares 30 years ago, you lost the opportunity to make the $270,000 other investors are sitting on today.
In the last 15 years, despite a GFC, dotcom bubble and numerous other market corrections, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and BHP Billiton Limited (ASX: BHP) have each returned over 200% – not including dividends!
Accepting the market could fall at any time is the first step to becoming a successful long-term investor. But the catch is, it doesn’t always have to be a bad thing for your portfolio.
As investors (not traders) there’s two ways you can play a falling market and still make a profit. Firstly, you capitalise on low prices and buy shares in companies you’ve always wanted to. Secondly, you can buy stocks which appear to be counter-cyclical and quick to recover after a major economic downturn.
These next companies appear to be just that because even if you bought them in May 2006, pre-GFC, you’d still be sitting on gains upwards of 190%, not including dividends.
The first company is Northern Star Resources Ltd (ASX: NST). It is a high-quality low cost gold producer with key assets located in Western Australia. During times of economic uncertainty and global instability, investors rush to commodities like gold and push up its price. This is great news for gold producers because it means they can continue doing the same thing but for more profit. As confidence returned to stock markets the price of gold has dropped significantly, providing an opportunity for savvy investors to buy good stocks at cheap prices. NST has great balance sheets and increasing production.
Litigation funder Bentham IMF Ltd (ASX: IMF) has also proven to be extremely reliable through tough economic times. In fact, during the GFC it managed to significantly appreciate in value. It pays a good dividend (although guidance can sometimes be missed, forcing it to postpone distributions) and has a low risk business model and excellent balance sheets.
Lastly, when credit card limits run overdue and bills can no longer be met, Collection House Limited (ASX: CLH) is one company which will continue to hire staff. It’s a debt collection business with operations spread throughout Australia and New Zealand. It is currently trading very cheaply (around 12 times FY13 earnings per share) and pays a reliable dividend.
Even if you don’t understand it, you shouldn’t avoid the stock market. It’s an exceptional way to invest your money and build your wealth over time. When you first decide to invest, remember to diversify your holdings and find companies out of favour with the market because when the tide turns, there’s a chance they’ll be quicker to recover.