One concept that has dominated the financial services industry for decades and which has had a significant impact on the performance of portfolios in recent years is the notion of dollar cost averaging. According to industry experts, dollar cost averaging reduces the risk of investing in volatile markets and helps to avoid the ‘so called’ pitfalls associated with ‘timing’ your entry into the market.

Dollar cost averaging involves placing deposits into an investment at regular intervals over a period of time, regardless of whether the market is moving up or down, so as to average the price of the investment. Obviously this strategy is questionable given that portfolios using this strategy have fallen heavily since 2007. Furthermore investors and professionals practicing this technique have subjected their investments to a higher level of risk, which is exactly what they were trying to avoid. In my opinion adding to an investment that is falling in value increases risk and should be avoided at all times,

So what can we expect in the market?

Markets always test highs and lows, and I believe the current down move on the market is simply a test of the previous low. If this is correct, we should see price hold above the low of 3201.5 achieved on 21 November, before it moves up in the next bullish run into May or June 2009.

That said nothing in the share market is guaranteed and it is still possible the market may fall to below 3000 points. It is for this reason why it is always essential to wait for confirmation of a move before making a decision to enter into the market. Right now many investors are buying shares because they believe they are cheap, which is a very high risk strategy. Until the market confirms a direction, investors should avoid making any decisions. Remember, patience is the key.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au

Given this is my first report for the year, I thought it would be interesting to look at what occurred in 2008, highlight what went wrong and, more importantly, what you can do in 2009. Let’s face it, 2008 was the worst year in history on the share market, so it’s no wonder that investors who practice a buy and hold strategy lost on average around 40%. But that need not have been the case if some simple rules had been put in place. So what actually happened?

In 2008 the All Ordinaries Index closed 43.01% lower than it opened for the year, and of the top 20 shares which represent 47% of our total market, not one of them made a positive gain. The worst performer in the top 20 was RIO (-71.63%), and the second worst return was Macquarie Bank (-62.19%) which also made a loss in 2007 (-3.46%). The best performers in the top 20 were CSL (-7.32%) followed by Telstra (-18.34%) and QBE (-22.59%). The average loss for the top 20 shares during 2008 was -37.89%, and for 7 of the top 20 shares it was the second consecutive year of negative returns.

There is an old saying that what goes up must come down and the share market is surely evidence of this. The landscape of share markets worldwide has changed and so must we. As investors we need to understand that the share market will fall and during these times we need to act to exit shares rather than rely on the outdated thinking of buy and hold. In my opinion, the buy and hold mentality was responsible for most of the losses suffered by investors in 2008 and will be responsible for poor returns in the coming 1 to 5 years.

So what can we expect in the market?

Before Christmas I indicated that the market may fall away to test the low of 3201.5 achieved on 21 November, which is what is occurring now as the market has fallen around 5% this week. I believe the market will rise up from next week into late January and possibly early February before we see another short term move down.

The volatility we experienced in 2008 seems to have subsided and the panic selling has stopped which is a good sign. It now seems as though the market sentiment has shifted and overall I believe it will be bullish up until around May/June 2009 before the market falls into its yearly low around August or September 2009.

As a word of caution, you should always ensure that any share you hold has an appropriate stop loss to enable you to exit if it does not unfold as expected. I believe there is good money to be made in the share market during 2009 for those with the right knowledge and who take an active approach to managing their investments.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au