We have just entered the new financial year and with it comes a mass of analyst reports highlighting what happened last year and predicting what is expected in the coming year. While these reports are meant to be informative for investors, in my experience I find it really overwhelms people because of the significant diversity in opinions. And unless the investor knows how to use the information in the context of their investments, it tends to add little value.  The reality is that most investors just want to own shares that rise in price, which is why I always recommend keeping things simple. If we just look at the top 20 shares on our market last financial year, they rose 19.67% excluding dividends, which averaged around 4.0%. So if all an investor did was buy and hold the top 20 shares, their portfolio would have achieved a return of around 23%, which I am sure many investors would be happy with.  

So what is happening on the market?

   In previous reports I indicated that the market would present a number of false triggers given the increased volatility, which has certainly been the case over the past three weeks as the market traded up for 5 days before falling for 5 days and then rose again for 6 days. As a consequence, the market has really only traded sideways as it has done for the last 3 months within a 4% band.  As regular readers of this report, you will be aware that I have been expecting the market to fall into its yearly low, and without trying to sound like a broken record we are still waiting to confirm that the market is heading down. This will occur when the market falls below the low of 6200.10 achieved on 13 June, which again I expect will happen in the next week. Once this happens I believe the market will continue to trade down to between 6000 and 5900 points before it finds support around-mid July after which the market will trade up strongly once again. That said, given that the market has not behaved as expected over the last few weeks, it is possible for the fall to extend beyond mid-July.   

Today is the last day that people can take advantage of the Governments tax incentive to place up to $1 million in super funds. In speaking to a number of people who have set up Self Managed Super Funds as a result of this offer, it is evident that they are unaware of the compliance requirements of running a SMSF. This is supported by the recent Australian Audit Office report, which found that around 25,000 SMSF had failed to lodge a tax return. While I am a strong supporter of investors controlling their assets, three issues need to be made really clear; first, there is work involved in operating a SMSF in comparison to a managed super fund; secondly, if compliance issues are not handled correctly it will potentially cost the investor a lot of money, and thirdly, the individual is the investment manager of the fund, therefore they need to have a working knowledge of the various investments available to them. If people are not prepared to take the time to understand these issues, it might be better for their superannuation to stay where it is.   
 

So what is happening on the market?

It is now 17 days since the All Ordinaries achieved its all time high of 6437.70 point on 4 June and in that time price has swung up and down within a 4% range. Last week I indicated that the current weakness in the market would continue for a number of weeks, which has certainly been the case. I also stated that there was an increased probability that the All  Ordinaries was falling into its yearly low but to confirm this we need to see the market fall below the low of 6200.10 achieved on 13 June, which I expect will happen in the next few trading days. Once this occurs I believe the market will continue to trade down to between 6000 and 5900 points before it finds support. As I have previously indicated, it is highly likely that the fall will last into mid July after which the market will trade up strongly once again.

In recent months, there have been an increasing number of clients asking whether they should diversify their portfolio into overseas equities based on the fact they are receiving advice from their financial planner that they overweighted to the Australian market. This is an interesting debate and one which I always question, particularly in regards to the motivations of the financial planner giving the advice.

Diversification, in its true sense, means to diversify into other asset classes (fixed interest, property) that are unrelated to the asset class in which you are investing in order to reduce the risk of your investment portfolio and increase returns. However, the argument that diversification into overseas equities can lower risk without sacrificing returns is a myth perpetuated by many in the financial services industry. If we just look at the Australian share market this year, it has risen 14.01% in comparison to the Dow, which has only risen 9.38%. That’s a whopping 49.25% difference. And if we compare each market over the last 4 years, the All Ordinaries has outperformed the Dow year in, year out. In my opinion, investing in the same assets offshore not only di-worsify’s your portfolio but condemns you to mediocre returns.

So what is happening on the market?

Since my last report the market has continued to rise to test the last all time high of 6435.70 points achieved on 4 June. I also stated that I expected some weakness to occur in the market earlier this week and for the All Ordinaries fall away. And while the market traded up until Wednesday of this week to within 9 points of the all time high, it is now showing signs of weakness as it fell away slightly yesterday and is falling today.

I believe the weakness in the market will continue over the next few weeks, which will see the All Ordinaries fall away into its yearly low, although that said we do not have confirmation of this yet. Given this, there is still a low probability that the market will move up to break above its all time high but it will need to break strongly through the all time high to indicate that the market is still bullish. If I am correct and the market does fall away, I believe it will fall into mid July and below 6000 points.

A research paper recently released by Inalytics indicates that most fund managers fall into the same trap as individual investors when it comes to shares by selling winning investments and holding on to underperformers. It seems that the majority of fund managers are optimists, spending more time buying stocks rather than managing their positions to sell at the right time, which explains why the majority of fund managers fail to outperform the index. It is common for investors to sell winning stocks because they fear taking additional risks with stocks in which they have already made money, which also appears to ring true for fund managers. Given this, you have to ask why investors would pay to invest their money with these so called’ experts?  In my opinion, unless the fund managers learn how to time the market by selling losers to hang onto winners, they will continually under perform the index. 

So what is happening on the market?  

After reaching a new all time high of 6435.05 on the 4^th of June the market fell away 3.59% over the next 6 days into a low of 6200.10 on Wednesday this week. Yesterday the market rebounded strongly rising nearly 80 points and it has continued to trade up today. In my last report I indicated that with the current indecision in the market, anything was possible and that the All Ordinaries could trade above its recent highs. The market is obviously rising right now to test the all time high, which is normal as markets will generally test major highs and lows before deciding on a direction. What happens over the next few days will confirm whether the pull back I have expecting is unfolding or whether the market is still bullish.     Given that I believe the market is moving into its yearly low, I suspect that we will see some weakness in the market either today or Monday which will see the All Ordinaries fall away. If the market continues to move up over the next week it will need to break strongly above the all time high of 6435.05 for my opinion to change. If I am correct and the market falls away, I expect it will fall into mid July and below 6000 points.      

Time is running out to take advantage of the Governments tax incentive to place up to $1 million in your super fund before 30 June. And while there are advantages to doing this, I often find that investors make investment decisions based on tax rather than the investment itself. Remember, a super fund is a simply a tax structure, not an investment vehicle and depending on your investment goals there may be disadvantages to placing all your money in a super fund. This is particularly so if your goal is to use leverage to increase capital gains as a super fund cannot borrow to invest, which could have a significant impact on someone in the wealth generating stage of life.

The other important fact to consider is that any money placed in a super fund cannot be accessed until retirement, which may not provide you with the flexibility you require to grow you net wealth. As a rule of thumb, I always say that if an investment needs a tax incentive to make it attractive, it is probably not a good investment.          

So what is happening on the market?

On of the key mantra’s I use in trading is to always wait for confirmation of a move before acting, and right now this is paying off. After trading sideways for the past month, the All Ordinaries rose strongly on Monday this week breaking above its previous all time high of 6376.90 achieved on 9 May before reversing to trade down over the past three days. False triggers such as these are not uncommon and often catch traders and investors unawares, which is why it is better, at times, to take a wait and see attitude.
  
I still believe it is too early to confirm that the market is falling into its yearly cycle low but the probability increases each day the market trades down. If the market is falling into its yearly low, we need to see it fall for at least two to fours week and more than 10% in price. With the current indecision in the market, anything is possible right now as it is still possible the All Ordinaries could rise up to trade above its recent highs, although I believe the probability of this occurring in the near future is low.

As I have stressed before, investors should take a wait and see attitude until we know for certain which direction the market is heading.