Share Market Wrap 22nd June 2007

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.

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