Managed Funds Markets and credit crunch, stay or go?

Hi Invested,

After a lot of discussion and learning on this forum a few months ago, I bought four funds in November last year. I have a timeframe of 5 years, and of course I expected volatility. However, I was not expecting the current global "credit crunch" to have such an effect on the markets, which has dropped the value of my investment by almost 25% within a few months.

If the markets turned around and started returning 10% tomorrow, I calculate it would take approx. 3 years just to get back where I started a few months ago. However, now having seen the effect that the "credit crunch" is having, I feel this is an unrealistically optimistic outcome (i.e. I don't believe the markets will turn around tomorrow).

Do you share this belief? Are you still holding your funds? Have you sold (or planning to sell)? I would like to understand your reasoning.

Thank you,

Anthony

 

Hi Anthony

I hate to tell you this but I don't believe the markets will turn around any time soon.

It's very hard to tell which way to go.
Which funds did you buy?
If your funds are good I'd say stay with them.

I don't get involved with funds these days.
I much prefer shares as it allows me to have better control of my portfolio.
Have you lost a lot of money?

Cheers

 

Theoretically the current market prices reflects the sum of what everyone knows and believes about the future market prices. If a lot of people believe the price will go down in future the current price should already reflect that. The safest prediction is probably to assume the market price will reflect the long term average and in that case you should hold.
I wouldn't listen to people's predictions on the future on this forum - such predictions are only good to judge current market psychology.

 

Rowande

Yes but, the forum is where people express their views/opinion
based on what they read and the economic climate as they see it.

Opinions are not investment advise.
If you disagree with something I've written feel free to correct me.

 

Of course, I enjoy reading people's views/opinions on this forum. I do, however, believe people have no real idea about the future, even with detailed knowledge. I've seen the histogram of performance by professional fund managers and it looks like a negatively skewed bell curve, so even professionals can't get it right. Maybe, the reason that professionals can't get an advantage is because their knowledge is already built into the share price.

My posts are also just opinion.

 

Rowande - so what you are saying to people in Pinkeye's position is "don't believe anybody" ?

Does this go for advice and experience of investors who have been in the market since before the 1987 crash and have seen this cycle a few times before ?

I am sure uninformed experience is just as interesting as a slick commission-based prediction from an investment advisor who is fresh out of college and does not even own a share, let alone seen a full economic cycle. After all it is not the advisors money and they make a margin on trades either way.

We have people here, not just punters.

I'll respond to Pinkeye in another post - with my dubious experience & opinion.

Cheers,

Rob

 

Anthony, you need to consider a couple of issues:

1) Have you borrowed to buy the securities ?

2) Do you have to get back your money and get out of the market after 5 years ?

Obviously, with borrowings you retire debt if it costs you more than your projected investment returns.

If you must get back your money in a short time - does this mean you must pursue higher risk & higher returns ? At some point you could end up gambling though.

Nobody likes selling when prices are down because you realise a loss.

I don't expect the cash rate to stay so high for more than a year or so, but I am sitting here with my watch list, and observing the falling prices.

Economies usually take a couple of years before they start a consistent growth trend again. This puts a big hole in your timeframe.

Have to sign off, but I am interested in how people are planning for the current climate.

Cheers,

Rob

 

Rob - I'll leave that question alone because I don't want to sidetrack the thread.

I will be holding what I currently have in stock but have stopped adding to it, preferring to keep cash at the moment. Holding for at least 5 years was my original strategy and I plan to stick to it. This is partly because I'd kick myself more if I sold and there was a recovery vs holding and losing more. The market over the last few months has taught me some valuable lessons. I plan to diversify into more sectors in the future. I will probably wait at least six months before making any decisions - given the current problems.

 

Perfectly valid to hold and see considering the current movements.

Like I mentioned, I have not bought for over 2 years.

Five years still seems short given that the Reserve Bank has been able to slow down growth and extend a cycle.

What this means is that growth is much slower and more prolonged - making it hard to see when it has started, and you need to be in for longer.

Personally, I am not considering capital appreciation (or depreciation !). I am looking at some form of yield, obviously looking at the nature of the business.

e.g. Bank yield 5.6% FF = 8% gross

This is not quite 1% above a term deposit, and yet you have risked your capital.

BUT if the bank has a solid book of domestic depositors and not reliant of overseas lenders, has had prudent lending strategies then it is not as risky as might seem at first.

Sure with a profits downgrade there could be a reduction in dividend, but in the future they might want to expand by issuing equity - in which case they will keep a generous dividend.

I would want a premium more than a mere 1% still, but note that the banks have already just taken a 30% hit. Another 10% and I could easily exceed a 2% risk premium over cash.

Then I am interested, since I am in it for a 20 year horizon and the eventual capital gain is more likely to kick in as a bonus. I would already be ahead on cash flow.

Hence I am not so much concerned about price - once I am in.

Just my thoughts.

Cheers,

Rob

 

I should add that I am using some form of yield to work out if something is worth buying.

Once I am in, the price does not matter any more as long as I get my fully franked dividends.

I am not trying to time the bottom, and it can go down & sideways for a few years for all I care as long as I get my fully franked dividends.

In the long term (10-20 years) I would look for capital appreciation, but I accept uncertainty in the short/medium term.

Cheers,

Rob

 

In the world of money, which is a world shaped by human behavior, nobody has the “ ****** “ notion of what will happen in the future.
Mark that word = NOBODY !!.
Thus the successful trader/investor does not base moves on what supposedly will happen but react instead to what does happen.


“In the long term (10-20 years) I would look for capital appreciation, but I accept uncertainty in the short/medium term”


Hmmm...in 10 or 20 years time, you may not be around.
As B. Graham said : In the long run we are all dead.
Anyway...Have a nice dream.

 

Buy & hold is based on time in the market, the opposite of trading. Almost totally unknown to investors today.

My estate will be in a testamentary trust for the benefit of my family if I die.

(Don't tell me a meteor might hit the earth & vaporise everything so that holding is pointless).

Cheers,

Rob

 

Hi BV,

I think a lot of people are agreed on this point... but what to do about it?

CFS geared share, CFS geared global share, Challenger China, Challenger Asia. I think the CFS funds are quite well diversified, and I recognize that the Challenger funds are more risky. Ironically, the CFS funds have dropped a lot further than the Challenger funds. I think the geared funds are hammered.

Perhaps not a lot of money for others, but a lot of money relative to my salary and my savings. Dividends are reinvested, but I'm not planning to make any more contributions. But I value your opinions more than any sympathy .

I chose MF instead of stocks because I don't have sufficient knowledge of the companies and industries, or enough money to be appropriately diversified in stocks.

Thanks for your opinions, which I consider...

Anthony

 

Hi rowande,

I have already decided the conservative prediction I will base my strategy on (disclosed in my first post), so I'm not looking for other predictions. I just want to understand the reasoning for buy/sell/hold based on this prediction.

Thanks for your information and reasoning,

Anthony

 

Hi Rob,

Thanks for your detailed explanations. Can I ask you some questions...?

If I had borrowed to invest, it would be costing me ~9% (loan interest paid) to have the borrowed money in the market. Fortunately I didn't, so it's only costing me ~7% (cash interest lost) to have my own money in the market. This is obviously simplified because there are tax implications and other distinctions between each case, but I see loan interest paid (in the case of borrowed money) and cash interest lost (in the case of my own money) as equivalent costs of being in the market.

I think this view is widely shared, and I don't anticipate returns greater than my cost in the near future. By my logic, that means I should sell. Have I missed something?

I purchased the funds in my own name and I don't see any difference between a paper loss and a realized loss. Is there some tax implication?

Anthony

 

Anthony, I know what you mean.

Look, if I was in this situation and depending on my immediate & future plans, the amount I have invested, how my mrs feels about this etc etc I would probably lighten up my portfolio recognise some losses and move on.

I would then concentrate on paying off my mortgages instead
or would invest in a few selective shares which seem like good value.
The resource sector seems like a no brainer but it has it's ups and downs like everything else. Also, I am worried about any recession overseas, the price of iron ore & metals dropping etc etc.

Short term I would probably go for solid engineering & construction firms as there is a lot of infrastructure for tender and lots on the plans to be constructed so even if the resource sector slows down the state and fed governments will keep on spending on infrastructure.

I would probably avoid finance stocks/bank stocks although for some reason I do like RHG (am I the only 1 who sees value in their current price?... )
Cheers

 

Cheers,

Rob

PS Has kochy has been reading my posts ? (AFR Investor, Feb 17, p.4).