The prevailing investment environment underlines the value of ensuring that an investment portfolio is appropriately diversified in accordance with your personal circumstances – including your risk tolerance, your present and future needs and the investment timeframe.

Other investment basics for an investor to consider at all times, irrespective of what the markets are doing include:

• Regularly review your long-term asset allocation investment strategy and rebalance your portfolio to ensure it fits with your asset allocation
• Review your investment costs and research alternatives to ensure your costs are kept to a minimum.  There is no need to pay for services that you don't use.
• Know the companies in which you invest.  Don't have so many stocks that you can't keep up with what is happening in the companies.
• Remember that a dividend is the company paying you for the use of your money.
• Remember that a little and often does work.  In investment terms this is called dollar-cost-averaging when you invest amounts at regular intervals so as to even out the costs of the stock.  By buying regularly you can buy more stocks when the price is lower and less stocks when the price is high, so you average out the price and reduce the risk of investing large amounts before a price fall, and also reduce the risk of making an investment which is emotionally driven.  Align this with a review in investment costs to ensure you have an optimal scenario.

What do successful long-term investors say?

• Patience is your friend
• When buying shares, think like a prospective owner of a business
• When making a stock market investment, if you don't plan on holding it for 10 years then don't waste more than 10 minutes considering it
• You don't need a lot if good investments, you need a few outstanding ones
• Keep investment costs to a minimum. This is one of the factors over which investors have much control.
• Practise dollar-cost-averaging. This involves investing regular amounts in the sharemarket at regular intervals.  In this way, you buy more stocks when prices are lower and fewer stocks when prices are higher. You average your buying costs and reduce the risk of investing a large amount shortly before a fall in share prices.

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Astute investors who move cautiously and remain optimistic about the long-term future of the share market may still be able to cash in on the investment opportunities of a lifetime.

Investors who have an understanding of share market movements and who themselves move cautiously will be able to maximise the opportunities available at the moment, even though the markets appear rather chaotic.  To survive investors need to remember some key elements.

Firstly remember that a contrarian view can be taken with the markets.  Don’t let yourself be caught up in any panic selling.  Secondly, consolidate as much of your debt as possible, pay off what you can and ensure that you minimise taxes on your portfolio.  Thirdly, keep watching the market and consider buying shares in quality companies now available at bargain-basement prices.  And fourthly, buying gradually using dollar cost averaging ensures that, even if you don’t pick the bottom of the market on a day, your buys will be spread across the lower end of the market.

This is also an optimum time to obtain financial planning advice from an independent professional whom you really can trust.  The benefit of an independent professional is that they are not emotionally involved in the investments and will give strategic and tactical advice.

Your advisor will check that your investment strategies are still appropriate and suggest amendments as required.  Additionally, your advisor will also check whether your asset allocations for your portfolio are still appropriate for your circumstances and if your risk tolerance has changed.  Changes to any of these issues may necessitate changes within your portfolio, particularly in light of the present market and expected trends.

The strategies outlined below are those we suggest for our financial advice clients.

1.  Focus on things that you can control

Rather than becoming overly concerned with what is happening day-to-day in the markets, concentrate more on what you can control.  Review your personal budget to see where you may be able to save money, and reduce costs wherever possible.  For example, retire or reduce your debt (particularly any debt that is non-deductible), minimise capital gains tax on your investment portfolio by keeping the turnover of your shares to a minimum, and also check whether you are paying excessive funds management fees.

Perhaps, by the time you have finished attending to these practical matters, share prices might have begun to recover again and any temptation to sell out of the falling market may have passed.

2.  Emotion has no place in your investment decisions

By using an advisor you are eliminating the emotion in investment decisions.  Your advisor can look totally subjectively at your portfolio and at opportunities.  The fear and greed that is discussed by friends around the Saturday night BBQ have no credibility for your investments.  Buying at the top of the market and selling when things go bad are actions that do not align with your long-term investment strategies.  That action is a formula certain for losing money and that is not in your investment strategy.  Remember that if you are buying top quality stocks, they will recover but it may take time for them to recover from [say] a 40% drop in line with the rest of the market.  Selling because everyone else is selling when stocks have dropped is generally emotionally driven.

3  Remember that selling costs $$$

Selling quality stocks at depressed prices is a wasteful exercise.  It crystallises your losses with the fall in stock prices, triggers capital gains tax on any past capital gains, and prevents you from fully benefiting from the inevitable market turnaround.

At this time of market volatility take time to focus more on your franked dividend yields, and don’t become overly concerned that the paper value of your portfolio has fallen.  The importance of the income side of investing should never be overlooked and history teaches us that investing for the long term is beneficial.

4.  Use the market downturn to your advantage as a selective buying opportunity

Concentrate on quality stocks that have been hit hard.  This means investing in companies that are market leaders, well-capitalised and have excellent management teams.  But remember that the market could continue to fall for some time before its eventual turnaround.  Take a really long-term perspective and don’t count on any quick profits.  Use dollar cost averaging to spread your buy prices across your stocks once selected.

5.  Use dollar cost averaging

This means that you invest your capital regularly by buying a fixed dollar amount of a particular investment or investments on a regular schedule, regardless of the share price.  More shares are purchased when prices are low, and fewer shares are bought when prices are high.  You are less likely to be hit by a sudden rise or fall in share prices if the market continues to fall over the next few months, and you should be well-positioned to enjoy the benefits of the market rebound.  Additionally, your buying costs are averaged out over your buying period.

6.  Rubbish stock are still rubbish even if the price is low

A dog of a share doesn’t suddenly become worth buying because its price is a fraction of what it was a few months ago.  Rubbish remains rubbish, no matter the cost and your buys still attract costs.

7.  Continue super contributions and consider making contributions into cash

Super contributions should not cease.  Continue your salary-sacrifice super contributions even if you are concerned that the value of your superannuation has decreased because of the market turmoil.  By keeping up your voluntary contributions, you should partly offset the fall in the value of your portfolio and put yourself in a stronger position for the eventual market rebound.  Your contributions, for example, into a balanced or growth super portfolio will buy many more units at this time than when markets are riding high.

However, if you are reluctant to keep buying shares in this market, one strategy is to make your future super contributions into your fund’s cash investment option until the market settles, provided your existing investment asset allocation and diversification allow for the increase in cash.  Otherwise your advisor will review the benchmarks which are appropriate for your circumstances, including your personal tolerance to risk.

8. Close to retirement – then consider building-up a cash reserve

If you are running a direct share portfolio, it is often prudent to have a higher allocation to cash.  This is especially so if you are close to retirement.  Holding extra cash reduces the need for forced selling of quality assets to pay for your living expenses when markets (and yields) may be low.  Additional cash also allows you to move quickly in taking up investment opportunities such as rights issues.  The turbulent market can be viewed as an opportunity to build up your cash reserves.

9. Consider remaining in the workforce longer

With an increase in lifespan for both men and women – with the increased likelihood of living until age 90, your retirement savings, on a short-term perspective at least, are likely to have been hit hard again by the present market downturn.  If you are within a few years of retirement, it may be appropriate if your health is good to consider whether remaining longer in the workforce than initially planned is an option for you.  Reducing hours and perhaps working part-time, may be a preferred alternative to drawing down on your retirement savings when markets are down.

A transition-to-retirement pension may also assist you to stay in the workforce longer.

10. Take a ‘transition to retirement’ pension and make higher salary sacrifice super contributions

This strategy is potentially a big winner for those over 55 who are eligible for a transition-to-retirement pension and who have the ability to salary-sacrifice more into super.

This popular strategy has many benefits, including that salary-sacrificed contributions are only taxed at the 15% contributions rate, the taxable proportion of the pension is taxed at your marginal rates (with a tax rebate of up to 15% until you reach 60 when the pension becomes tax-free), and assets within your super fund supporting the payment of the pension are not taxed.

The combination of a transition to retirement pension with increased salary-sacrificed contributions can provide a significant opportunity to maximise your retirement savings.

11.  Is a part aged pension an option?

More retirees are expected to be eligible for a government part-pension with the value of investments dropping.  A home-owning couple can own other assets valued at up to $873,500 and still be eligible for a part-pension.

If you are really concerned about values dropping, Centrelink will reassess the value of a pensioner’s shares every two weeks if necessary to determine eligibility for a part-pension.

12.  Be patient, stay with the long-term asset allocation and learn from history

In most instances, if the long-term asset allocation of your portfolio was appropriate before the market began to fall, it is likely to still be appropriate today.  This is provided that your personal circumstances – including your finances and your risk tolerance have not changed.  It is unlikely that your portfolio will require any major changes due to the present market rollercoaster.

Whilst it may be difficult to look past the losses on world stock markets over the last several years, history shows that long term exposure to growth assets will provide the best returns over the long term.

Researchers have summarised the returns of the major asset classes over the last 30 years and demonstrated that a long term investment strategy with an exposure to Australian shares has averaged 15%. return on investment over the last 30 years.

World share markets in the past have rebounded strongly from some events and downturns that were considered horrific, especially at the time.  For example, just since 1974, the markets have made impressive comebacks from the OPEC oil crisis, the 1987 share market crash, the Asian financial crisis, the bursting of the IT bubble, the September 11 terrorist attacks, and the invasion of Iraq, and the current global financial crisis.

Whilst the ability of the market to strongly recover in the past is no guarantee of the future, it is a valuable guide and helps put the current market turmoil into a long-term context.

With years of experience we have established a reputation of Trust, Service, Commitment, Communication and Opportunity

We would be delighted to help with your investments and financial planning.  Our established team of professionals and specialists look forward to helping you achieve your goals.  

Our service covers many areas and particularly the following:

           Financial Planning

ü   Full Financial Planning Service

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"Knowledge you need when you need it”

Leenane Templeton

T: 1300 587 673

W: www.self-managedsuperfund.com.au

W: www.financialplanner-newcastle.com.au

Offices in:  Newcastle, Sydney, Brisbane

Disclaimer – The information contained in this document is based on information believed to be accurate and reliable at the time of production/publication.  Any illustrations of past performance do not imply similar performance in the future.  To the extent permissible by law, neither we nor any of our related entities, employees, or directors gives any representation or warranty as to the reliability, accuracy or completeness of the information; or accepts any responsibility for any person acting, or refraining from acting on the basis of information contained in this document.   This information is of a general nature only. It is not intended as personal advice or as an investment recommendation, and does not take into account the particular investment objectives, financial situation and needs of a particular investor.  Before making an investment decision you should read the product disclosure statement of any financial product referred to in this communication and speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives, financial situation and needs.

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