One of the greatest challenges for anyone investing is to work out what your strategy is. For me, because I don’t plan to retire for some time, I’m heavily exposed to the stock market, but eventually I will become more conservative.
When you have a self-managed super fund (SMSF), you have to write out your investment strategy and because we have this fund with our two sons and we all have a non-conservative approach to investing, at the moment, it’s easy to construct a strategy that applies to all of us.
In a nutshell, the strategy is to be nearly fully invested in stocks apart from a cash buffer to cover expenses for running the fund and any tax bills. Sometimes we let the cash reserves run up ahead of an expected sell-off but this represents the toughest time for me as chief investment officer. Generally, we buy income-paying stocks as these are very reliable and we buy these good companies, especially on the dips.
Last year we purchased BHP Billiton at $31.28 and Rio Tinto at $50.08 respectively. I’m not arguing I am a market genius, but we liked these companies for the long-term and so we will dollar cost average down our overall acquisition cost of companies we like if we buy them when the market overreacts with a sell-off.
Now we could have got these BHP and Rio plays wrong for this year, instead of the nice gains we pocketed, but we were all sure we would be right in two or three years’ time.
A matter of time
I hate timing the market and prefer the old adage of “it’s time in the market not timing the market” that brings great rewards on stock markets. That said, if you can time the market and then spend time in it as well, you might pull off the double play.
Anyone who bought stocks for the first time in early March 2009 in the USA could be up around 90% while Aussies could be up 60% including dividends.
All of this revelation of our investment strategy comes about because I received a letter from a subscriber to our Switzer Super Report, designed for those running a SMSF. The subscriber wrote:
“Knowing I 'd be overseas for six weeks, and a little fearful of the ‘cliff’ implications, I liquidated my share investments mid December. Watching the market from afar, I'm now concerned that the ASX may accelerate further away from me. My dilemma now is — do I now get back in or should I wait for a month or see how it may unfold in the USA. Whilst I realise you can’t give specific advice, I would appreciate your general comment. I might add that my share proclivity is towards fundamentally sound good dividend Australian companies”.
The subscriber’s general strategy is sound and a bit like mine, but he has taken a punt on a big sell-off and now is caught in the concern about a potential double whammy if he gets in and then there’s a sell-off.
Basically I don’t know what the answer is, but this is what history points to — January is good for stocks and it usually extends to March or even April. That’s why there is that old market cliché — “sell in May and go away”. If you tend to get in, say, November and ride the market until February or so, it can be a rewarding strategy but you will have the timing worries to keep you awake at night.
The Yanks will have debt debate worries again in March when Congress has to look at new limits to US government borrowing and this could easily spark a sell-off.
Against this, most of the market analysts I respect agree with my improving picture for economies such as the USA and China, along with the ASEAN countries, which has led to expectations that stocks will rise 10% this year.
WAM’s Matt Kidman, the author of Bulls, Bears and a Croupier, thinks 20% is possible, pointing out in a rebound year there have been instances of where the All Ords has bounced 40%!
Stocks to rise
I think stocks will be up this year and my strategy of being invested in great companies and buying the dips is still a good strategy.
My subscriber could wait for a “sell in May and go away” time, which could start in March if the US Congress screws around on debt deliberations, but it’s a risk. Right now there’s a bit of a pull back on for stocks, but I can’t see it being too serious and so the strategy might be to get back in on the dips and any major sell-offs, if they come along.
Otherwise, get back in with a little more exposure to cyclical stocks that might do better than dividend stocks, but this is against my subscriber’s generally sound strategy of buying dividend stocks.
I know my guidance isn’t clear but that’s because it’s always hard when you try to time the market. The only time I will cut down my exposure to stocks will be when interest rates start to rise such that a term deposit starts looking competitive with a good dividend stock, and I reckon that’s a couple of years off.
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au