This article appeared in the August 2012 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.
Welcome to the August ASX Investor Update.
By Tony Featherstone, editor
Lincoln Indicators' chief executive, Elio D'Amato, talks about the "need to block out market noise" as the critical issue for investors, in his video in this month's newsletter. With so much sharemarket information available, the danger is investors making decisions based on short-term market sentiment rather than long-term sharemarket fundamentals, he says.
The August ASX Investor Update devotes several stories to the long-term outlook for shares. That is not to say short-term market and shares commentary is unimportant, or that the long-term sharemarket view is more likely to be correct.
Rather, the aim is to provide readers with a different perspective. With so much global commentary these days on where shares are heading next week and next month, it can be useful to think about shares in terms of years or decades, and use history as a guide to understanding sharemarket cycles.
Wealth Within's Dale Gillham, one of this newsletter's more conservative forecasters, leads this issue with an analysis of Australian shares since 1875. Gillham identifies three distinct cycles that lasted around 40 years and were punctuated by global financial shocks that lingered for up to a decade.
Gillham believes the next great bull market could start in 2013 or 2014, but does not rule out further sharemarket losses in the interim. He writes: "If I am correct, we are heading towards the best and lowest-risk buying opportunity in 40 years, regardless of where the market heads from here."
Another columnist, AMP chief economist Shane Oliver, considers the long-term performance of shares and whether "long-term buy-and-hold" investing still works. Dr Oliver argues that the current period of poor returns for shares is not unusual, and that it is dangerous to conclude that shares will no longer provide a higher return than cash and bonds.
A long-term focus is also evident in Robert Brain's charting analysis for this issue. The national director of the Australian Technical Analysts Association (ATAA) shows how to spot shares that have "broken higher" after falling and trading sideways, often for months or years.
Elsewhere, author Allan Trench considers the long-term outlook for the resources sector, and MyClime's Matthew Koroi does the same for banks. These sectors account for a combined 70 per cent of the S&P/ASX 200 index, meaning the sharemarket will struggle to recover if the financial services and/or materials and energy sectors badly underperform.
Of course, history is not infallible when it comes to share investing. A Global Financial Crisis without precedent arguably makes the past less useful in predicting this sharemarket's future. But a recurring truth is that the sharemarket tends to move in long-term cycles, and that those who proclaim that "this time is different" invariably learn it is not.
Another truth is the tendency for too many investors to sell at the bottom when short-term sharemarket negativity is deafening, crystallise losses and miss out on the next bull market. Or buy at the top when so many commentators tell them shares will only head higher.
Gillham believes this is the time when investors should cautiously re-enter the market to position for the next upturn, not avoid the market at all costs because of excessive short-term negativity. History shows this contrarian view of share investing often separates great investors from the rest.
We hope you enjoy this ASX Investor Update and find it provides a useful long-term perspective to make sense of short-term market sentiment. As always, do not act on the themes in this Investor Update without talking to your adviser or doing more research of your own.
- Tony Featherstone is consulting editor of ASX Investor Update.
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