As the pundits debate whether the RBA will slash rates a further 25 basis points to 2.00% tomorrow or hold them, there is one thing that is likely: the longer term direction of our interest rate is down and likely to stay down.
The latest Bloomberg survey shows over 80% of economists expect the RBA to cut rates tomorrow. The expectation has increased over the past two weeks as the Australian dollar continues to gain against the USD, rising from US76c to as high as US80c late last week.
Whilst further rate cuts will likely propel the eastern property markets to increasing heights, the RBA is having to counter the international forces putting upward pressure on the Aussie dollar.
The slowdown of the US economy in the March quarter and the quantitative easing programs of Europe and Japan are adding to the strength of the Aussie dollar, according to a recent article in The Australian Financial Review.
The 24 hour news cycle we have today can put too much emphasis on short term events, such as the RBA's rate decision tomorrow. Don't get me wrong, it is extremely important that investors monitor the economic news to help determine what impact major events may have on the companies within their portfolios.
It is likely, however, that the tried and tested strategy below will continue to provide good returns in the future. By filtering out the short-term noise, investors should improve their long-term investment returns.
Take the longer term view
Over the past 30 years to 2014, the Australian share market has returned an average of 11.7% pa to investors. During that time there have been many significant world events, including the dot-com bubble and the GFC, yet the stock market still provided exceptional returns to patient investors.
Investors should always aim to buy shares in companies that will stand the test of time. They should be companies that will continue to grow in the future and preferably have a competitive advantage over their rivals.
Healthcare as an example
The combination of an ageing population and increased spending on health in most developed countries will ensure the healthcare sector has a bright future. Long-term investors should invest in this sector to help achieve market-beating returns over the next 30 years.
CSL Limited (ASX: CSL) has achieved an average total shareholder return of 27% over the past 10 years. The biopharmaceutical company is expected to grow earnings at an annualised rate above 20% pa over the next two years.
CSL is currently trading around $91 per share on a P/E ratio of 25 which is a significant premium to the sector average of 17, however, great companies rarely trade at a discount. With a long-term track record of exceptional shareholder returns and significant growth ahead of it, CSL could be a valuable addition to a long term portfolio.
Cochlear Limited (ASX: COH) has achieved an average total shareholder return of 13.2% over the past 10 years. After a product recall during the 2012 financial year significantly hurt earnings, things appear to be back on track at the world-leading implantable hearing device producer. Earnings per share are expected to grow over the next two years to $3.16 which will surpass the previous high of $3.09 in the 2011 financial year.
The anticipated release of the Nucleus 6 processor looks set to drive earnings growth into the future, with sales up 15% in the most recent half when compared to the prior corresponding period. Around 15% of total revenue is spent on research and development ensuring that Cochlear will stay ahead of the competition into the future.
Cochlear shares have fallen around 10% over the past month to trade around $84 on a forward P/E ratio of 30. The current dip could provide investors a good place to start a position for long-term returns.
Long-term investing can help you overcome the volatility inherent in the stock markets, but is your portfolio prepared for a stock market crash?
