Don't Write Off the Market Just Yet
During times of market change, it is our natural instinct to protect our investments and distance ourselves from risk. While this reaction is not surprising, it can also mean missing out on growth opportunities created during volatile times.
Warren Buffet, one of the world's wisest investors, sees market downturns from another viewpoint, saying "Look at market swings as your friend rather than your foe; profit from folly rather than participate in it."
Generally when we see a cheaper price for something we want we rush in for a good deal, however it can be quite the opposite with shares. Why is it that we treat stocks that have dropped in price with dread? Share prices of a company can fall for a multitude of factors.
Lately we have seen the share values of a number of good companies with healthy balance sheets be negatively affected due to a rush to sell as a result of the economic crisis.
Despite the uncertain trading environment, professional investors are always checking the market for buying opportunities. Many fund managers are searching to find shares in healthy companies with strong balance sheets and returns. For example Australian companies such as household names like David Jones have delivered strong profits after tax and dividends in 2008. However during 2008, David Jones' share price fell by more than 30%.
Not all companies will be affected by the world economic crisis in the same way. Some industries are more susceptible to the economic cycle than others.
Providers of basic goods and services continue on almost unchanged, for example we all need to eat - so food producers aren't as affected as much as manufacturing, motor vehicle sales or luxury goods.
Australia's population growth is at a 18 year high and growing at 1.7% per annum. Australia's growing population provides increasing demand for goods and services as people need food, housing, cars, etc. Unlike many overseas countries, Australia benefits from two key factors: a high population growth rate and a high demand for houses.
Population growth is nearly double that of the US while Germany has negative population growth. In the US there is an over-supply of housing while Australia suffers from a lack of supply. The combination of limited housing and a rising population will create growing demand for housing which will support further building and provide opportunities for the building industry.
The value of companies
Many people view companies with falling share prices with fear, but we need to take a look under the bonnet of these firms to find out why. Have they borrowed heavily?
What industry are they in? Are they competitive against their peers? Only by answering these questions, can we know if their stock price has fallen for valid reasons or if the company is indeed on sale.
When investing, many professional investors seek firms with high and maintainable returns, strong balance sheets and ongoing cash flow. These companies are more likely to outlast the volatility storm and may give you a greater return when the market moves into the next phase of recovery and
Before you consider changing your strategy, you should see a professional. Having a financial planner and a long-term financial plan can give you confidence to manage the effects of market cycles. With the right advice you can ensure your investments are tailored to your risk profile and time horizon, giving you the certainty of knowing you're doing what's right for you.
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