All Ords Report 15 March 2016
At Christmas, I was in Bali with some friends, and one person didnít know how to swim, in fact they could not even float. Being a former lifesaver, and someone who taught kids to swim when I was young, I offered to teach them how. This person expected me to teach them all of the strokes however I explained that the first lesson was about how not to drown. Why?
Quite simply, if you are in the water up to your neck and in a panic, you canít breathe, so you wonít be thinking logically, nor will you listen to logic. After the first lesson, they became calm in the water, no matter the depth or situation. However, it was only once they knew how not to drown that they were able to start learning to swim.
The same is true for the share market. Once you learn how to protect your capital in a down market, you are learning how not to drown. At this point, your money is much safer and this allows you to enjoy more freedom and peace of mind, because no matter what occurs you know you can handle it.
To me, first and foremost, successful investing is not about how much money you make, itís about how much you do not lose, and this is especially so in a bear market. I find that the majority of people are influenced by market myths, not market fact, and so they drown when the water gets a little rough. Yet when confronted with a fact, instead of embracing it, and adjusting how they manage their portfolio, they stay fixed in their old ways and follow the herd.
Whilst space does not permit me to run through all the myths that influence investors, or even why they are myths, one myth I cover in my book How To Beat The Managed Funds By 20% is called ďdollar cost averagingĒ, which quite simply does not work.
So why do investors stick with ineffective investment strategies?
Quite simply, it is fear of losing and making the wrong decision. Operating out of fear in a bear market often results in no decisions being made or emotional ones that generally result in portfolio returns falling by 20%, or more. This makes investing very stressful, which is the opposite of what it can be.
Learning some simple rules in how not to drown in these conditions will save you thousands and reduce stress the next time the market corrects. More importantly, the rules show you how to be prepared for the market, no matter what it throws at you.
There are two paths you can take to break the fear and Iím only going to mention one of these this week, which is to learn a strategy and a process for running your portfolio that you can put into action today.
Imagine turning the energy you may have wasted in feeling fearful into something rewarding that will give you greater self-confidence in the market. I share exactly what you need to know in my Trading Mentor Course.
What do we expect in the market?
Last week the Australian market continued to rise, however later in the week there were signs that the rise may be slowing.
Generally, we will see a market rise for roughly two to four weeks before falling away for roughly two to four weeks. In a bull market the rise is longer and the fall quite short, whilst the opposite occurs in a bear market. Given we are in week five of the current rise, I suggest that we will see some downward movement in one or more of the coming few weeks.
At present, if the market is now bullish, I do not see any falls going below 5000 points and in saying that, it would not be more than two weeks in decline. If it falls for longer in time and price then we will need to re-assess.
What have been major contributors to the rise and what lies ahead?
Emotion in the market has been very strong, with Oil and Iron Ore price rises being a major contributor to recent speculator activity. Markets factor in growth six to twelve months in advance and therefore fast moves in commodities like this can be a precursor to further price hikes in the broader market. However, they can also represent what I like to call a ďsuckers rallyĒ, where the emotion gets way ahead of reality.
Again, I stress that right now is the time for patience and waiting for the market to confirm its direction. If it is up, then get ready for some great buying opportunities as stocks in Energy and Materials are looking good, and banking is showing positive signs too.
Global events like the FEDís stance on interest rates will continue to play a part and keep market players guessing. Right now, it seems there are a number of signs pointing to an increase in the official US rate, however the situation in Europe appears to be delaying this move. I believe that the FED will raise rates before 30 June 2016 and therefore we may see markets slow again at the time this trigger is pulled.
The Dow Jones Industrial Average (DJI) has been rising for more days than our market and has almost reached the level my analysis indicates is important for the next short term peak, being around 17400 points. After this level is broken, watch closely for a test of buyer support, and we are likely to see our market follow suit. Bear in mind that a retest of the February low is necessary for the market to make a sustained move higher.
Dale Gillham is Chief Analyst at Wealth Within