All Ords Report 17/07/2012

Australian’s are broke and the statistics prove it. A survey of 18 to 65 year olds conducted by Rabbo Bank in May revealed that 46% of working Australian’s have one month or less in savings, whilst a further 20% said they had no savings at all. Having been involved in the financial industry and helping people invest for most of my working life these figures are not surprising, in fact I would suggest that whether the economy is booming or in recession these figures would not change much.

An old saying that rings true is that ‘often people run out of money before they run out of month’, and to me this is caused by a lack of financial literacy. Simple things like budgeting and understanding the real cost of borrowing are simply not taught to many of our children, and this makes it very difficult for them to become financially responsible as adults. When helping people understand their finances and how to budget, I have shown how any person can save 10% to 20% of their income without dramatically affecting their lifestyle. This ‘broke mentality’ that many Australian’s have is one of the main reasons why so many struggle to retire, but it need not be the case when there are many simple things we can do to ensure that we have money for now, and more importantly, for our future. So a little bit of planning now can eliminate a lot of pain down the track.

If only every Australian followed the three laws to wealth creation that I talk about in my book How To Beat The Managed Funds By 20% they would not become one of the statistics I mentioned above. So what are the three laws to wealth creation?

• The first is to spend less than you earn, which might sound like an obvious one but is ignored by many.

• The second is to invest your surplus wisely. A wise investment must have two components – it must give you capital growth (your assets appreciate in value) and it must give you income. If your investments do not have both of these components, then someone else is benefiting from the component you are not getting.

• The third rule to wealth creation is to leave your investments alone to grow. Einstein referred to this as the power of compounding or the eighth wonder of the world.

Sadly, however, many Australians have been lured by sexy marketing campaigns enticing them to go down the path of short term gratification, and as such they throw away their potential to grow real wealth.

So what do we expect in the market?

When world economies are in a state of uncertainty, a week can be a long time in the share market. Just as we were thinking that the market had some direction and would rise, last week it decided to head south to levels that it first broke below this year in May. This sort of reaction is normal in these types of conditions and why I previously suggested that we take a ‘wait and see’ approach to the market rather than jump in trying to grab bargains.

So far this week the market is rising to recover some of the lost gains, however, I also suggested previously that I did not think the next move up would last long as the yearly low for our market is due sometime around September. Whilst it is possible that we may be falling into the low now, I still suspect that we may get a little further upside prior to the eventual low coming in.

In a defensive reaction to current market conditions we have seen money flowing into Telcos, Financials, Healthcare and property stocks over the past few months, but before you plough your money into these sectors I suspect the tide will turn back to other less defensive sectors later in the year.

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Until next time
Good luck and profitable trading

Dale Gillham
Chief Analyst