Hedge your bets

Published in Daily Telegraph, July 2010 by Karina Barrymore

If the boss of the US central bank is still on the edge about the global economy, what hope has the average Aussie investor of working through the maze?

Companies that appeared strong and robust have fallen. Billions of dollars have been lost through unstable investment schemes and bad advice.

Even if your investments survived the storm, chances are they are still well below value.

According to AMP financial planner Andrew Heaven, households should be aiming to "bullet proof" their finances.

"Start setting up an emergency fund. This is to make sure you have enough money in the bucket if something untoward happens," Mr Heaven said. "Typically this is about three months take home pay in a high-interest savings account. This will let you ride out most emergencies such as unemployment, sickness or an accident, or a major expense such as replacing a car or hot water system.

”But remember a credit card limit is not an emergency fund."

Borrowing to invest is even riskier when financial markets are volatile.

If you have a margin loan, make sure you have enough in your emergency fund to cover a margin call," Mr Heaven said.

"Avoid, at all cost, having to sell investments in distressed or falling markets. Contracts for difference are basically a margin loan on steroids. Make sure you know what you're getting yourself in for."

Wise-owl equities analyst Tim Morris agreed: "My motto is to only ever invest what you can afford to lose and still live a comfortable lifestyle. As CFDs involve leverage, investors should ask themselves whether they can afford to place such large bets."

The warning follows a push by the investment watchdog ASIC to review regulation and risks of these investment tools.

Mr Morris had been advising clients to be net sellers in 2010.

"A lot of our investors put money in the market during 2009 and are sitting on some meaningful gains and taken profits over recent months," he said.

"However, people just entering the market are not so fortunate in these conditions you have to be a bit patient."

If you've held back so far while the global crisis evolved and watched as asset and investment prices fell, does that mean it could be a good time to buy?

"There are some exceptions in a downward market where you can buy well-seasoned blue chips if you have a long-term investment horizon. But if you're only looking 12 months ahead you want to be sure that you are not trying to push a train up hill," Mr Morris said.

"You need to wait until you have a tail wind working to your benefit, so I'd suggest to wait for the dust to settle first. Sentiment can turn very quickly."

Almost two years after the global crisis began, even experts don't know what is ahead.

"You could be excused for thinking that the share market is like a roller coaster at the moment. Every time the market rises we see a corresponding fall that wipes out the recent gains," fund manager Wealth Within founder Dale Gillham said.

"This ‘groundhog day' type performance has seen our market go nowhere in over two months, even though there have been some large moves both up and down.

"We need to accept that the landscape of the Australian share market has changed. We are no longer in a long-term bull market and what worked before the subprime meltdown is unlikely to work now.

"Investors cannot continue to behave like fair-weather sailors and hope for the best.

"Instead, a well planned strategy is required."