This article appeared in the September 2011 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
This month's Update focuses on dealing with volatility.
By Tony Featherstone
Welcome to the September ASX Investor Update, an issue that was planned as global sharemarkets fell sharply last month. We wanted this issue to provide educational information that helps readers understand and deal with bouts of higher sharemarket volatility, which can sometimes test the nerves of even the most experienced investors.
Readers will note there is less market, trend and company information than usual in this issue, and more education around topics such as capital preservation, using stop-loss points (a predetermined point at which you sell to lock in profits or minimise losses), the importance of holding cash in portfolios, the dangers of speculation, and exchange-traded funds (ETFs) and listed investment companies (LICs) that provide lower-cost diversified passive or active exposure to shares.
We also ploughed through ASX Investor Update archives, to identify more timeless stories that could help readers. In '12 top stories' (in ASX News) AMP's Shane Oliver writes on why markets and investors are often irrational - an excellent piece for the times. Share Wealth's Gary Stone considers 10 key trading traps, and investor Roger Montgomery examines when to sell shares. Several other stories outline the importance of asset allocation and risk management.
Examining long-held concepts
The starting point for this issue was asking Wealth Within's Dale Gillham to provide a different perspective on some long-held investment concepts, such as the "buy and hold" strategy and diversification. Not all readers will agree with Dale's 10 investment rules but there is some excellent, commonsense information in his article.
We asked the economist Shane Oliver to provide commentary on the outlook for Australian and global shares. As always, Shane cut through the market "noise" to present a clear argument on the sharemarket's prospects. His view: Australian shares look cheap, but plenty of global risks remain.
In his usual colourful way, veteran investor Ian Huntley talks about the need for conservative portfolio investors to focus more on larger, more-established companies with reliable yield, and less on those that are highly speculative. Such advice may not suit all investors, but Ian's story is fundamentally about understanding the potential downside of any company, before its upside.
Dixon Advisory's Nerida Cole argues the case for holding cash in investment portfolios, and warns that such investments are not always as straightforward as they seem. Although ASX Investor Update is fundamentally about listed securities, it cannot overlook the importance of share investors always holding some cash, either as a defensive investment, to cover unexpected living costs, for diversification, or to be able to buy shares when they fall below their intrinsic value during market sell-offs.
Vanguard's Robin Bowerman completes the Market View section with a feature on exchange-traded funds. He emphasises the need for investors to control what they can: asset allocation, diversification and fees, and shows how a handful of low-cost ETFs can provide diversification across Australian and international equities. Robin also considers the "core-satellite" investment strategy of holding index funds in the portfolio core, and active investments such as shares or funds, as portfolio satellites.
Among other stories, Tradeideas.com.au's Greg Tolpigin has a strong piece on understanding support and resistance levels on charts. He shows how to spot support, which acts as a floor to market indices or share prices, and resistance, which acts as a ceiling, with some simple charting techniques. The goal is to help active investors know when to exit the market or a trade.
Bendigo Wealth's Julie McKay continues the capital-preservation theme with a feature on some simple options strategies, to safeguard portfolio losses. Contango MicroCap's Boyd Peters finishes the newsletter's editorial component with a useful commentary on key questions asked about listed investment companies, a market that has become more popular this year.
We hope you find this issue of ASX Investor Update useful, and will appreciate any feedback you might have, or your requests for educational stories in future issues.
About the author
Tony Featherstone is consulting editor, ASX Investor Update.
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