September 2008

Over the past two weeks we have seen further market turmoil, as the full impact of the global credit market crisis continues to unfold.

The current state of play

The weekend’s events in the United States show that the market volatility and uncertainty associated with the credit crisis is far from over. This means there is unlikely to be a sustained ‘rebound’ in the investment markets in the short term.
While Australian markets have sold down substantially, they remain relatively insulated from events overseas.
Market sectors that are affected by tight liquidity, like the property sector, will continue to feel constrained.
More companies are expected to be affected by the collapse of Lehman Brothers, the merger of Merrill Lynch with Bank of America, and the problems facing AIG in America. Events such as these often have a flow-on affect.

Markets around the world sold down in the wake of the weekend’s events. In the US on Monday, the S&P500 fell by 4.7%, the most in one day since September 11, 2001. In addition to the pressure on banking and finance shares, commodity prices also fell, affecting the Australian market. Global markets, including the US, rebounded overnight on Tuesday, but suffered another fall last night. So its still very sensitive and volatile.

On Sunday the US Federal Reserve Board announced several initiatives to provide additional support to US financial markets, including enhancements to its existing liquidity facilities. They also stepped in to assist the insurance company AIG. These actions should operate to partially stabilise the US investment markets and the volatility we are experiencing.

Implications for Australian investors
It’s easy to panic and feel anxious about your investment when markets are volatile and returns are down. It’s important not to forget the fundamental concepts of investing. It’s also important not to forget your long term financial goals and plans.

Risk and return
Generally, the higher the level of risk you are prepared to accept, the higher the potential return from your investment. At the same time, a higher level of risk may also increase your chances of incurring a loss – especially in the shorter term.

In uncertain times it is difficult not to focus on the ups and downs of your investment portfolio. We should also remember though that volatility is a normal part of the financial market cycle. In the end, good quality investments, and an appropriate investment time frame, are likely to lead to investing success.

Diversification remains important
Diversification is achieved by holding more than one type of investment. Your portfolio is diversified in one or more of the following ways:

investing in different asset classes, such as shares, property and fixed interest
investing with several different fund managers, in a variety of companies
investing in both Australian and international asset classes.

Depending on how your investment is diversified, underperformance in one area may be offset by positive performance in another.

Time in versus timing the market
Each investment fund within your portfolio has a suggested minimum time horizon. This is the minimum period of time you should consider holding your investment in a particular fund. Holding an investment for the suggested time does not guarantee a positive return, but it does make it more likely.

However, if you are tempted to try to time the market – for example by selling assets to avoid further falls – there is the risk of missing out on market rises, which often come after the falls. Timing the market is very difficult and even the most sophisticated investor can incorrectly judge short-term movements. Taking a longer-term view and being prepared to ride out the lows may, in the long run, maximise the value of your investment.

Sticking to your investment goals and to your financial plan
The volatility your investments are experiencing is dependent on the markets and asset classes in which you are invested. I am able to review your investment risk profile at your request to ensure your current profile reflects the potential risks and returns you are willing to accept. For example, lower risk investments potentially result in lower losses but, conversely, returns over the medium to long term are not as high as investments with greater risk.

The events affecting large global companies in the media, like Merrill lynch and AIG, are understandably unsettling. In most cases the management of your investments isn’t affected – but if you have any concerns, please call me to discuss. Before acting on any information outlined please keep in mind it is general in nature. It does not take into account any individuals’ specific situation or circumstances.

It’s at times like this when my role as your financial adviser becomes even more important. As always, I encourage you to phone me to discuss your concerns and advice needs.

Yours sincerely,

Cliff Cole & Quintin Buchel & Kylie Bainbridge
UCIS Financial Planning

Authorised Representative
Financial Services Partners Pty Ltd
AFSL 237590 ABN 15 089 512 587