How to create wealth in a volatile market
Tuesday, 5 February 2008
Last Updated: Tuesday, 5 February 2008
By Michael Laurence
With the sharemarket bouncing, but heading downhill, smart money will seek out stocks that have been dragged down by the stampede, despite their obvious quality.
The sharemarket is providing the best wealth-creation opportunities in many years – for astute long-term investors who are brave enough to buy savaged stocks at bargain prices.
But be prepared for rising volatility. Don’t be unnerved whenever the market dips sharply in coming months, and don’t pour all of your cash into the market at the same time.
The intense volatility at the level experienced over the past few months is likely to continue for at least six months, perhaps much longer – with prices racing downwards only to bounce upwards again to, almost inevitably, give false hope that the storm is over.
Whenever much of the market panics or many investors are forced to sell following margin calls, as they have been in January in particular, astute buying can become particularly appealing.
By the end of January, the S&P/ASX200 was trading on a forward price-earnings multiple – which measures past one-year corporate profits against estimated future earnings – of 12.6 times compared with an average over the past 10 years of 15.3 times.
This signals excellent buying opportunities for careful, highly selective investors to progressively buy into the market.
The key opportunities may include the big banks, food and electronic retailers, heavyweight, diversified resource companies, telcos and perhaps even the top-quality listed property trusts that are not handicapped with the heavy gearing that has caused this sector to be punished over the past three months.
I am not suggesting that investors try to time the market – attempting to pick the best times to buy and sell – which is one of the biggest errors that investors can make. Even the best professional investors cannot find the right time to buy, except occasionally by extreme luck.
A smart strategy is not to try to pinpoint the exact low in the market – and pouring in a massive amount at the one time – but to invest progressively into oversold quality stocks in accordance to your personal circumstances; including your ability to cope with risk.
Your tolerance to risk is unlikely to have altered just because of the recent rocky market.
Investors who buy at this time should, however, steel themselves for the possibility of a long market downturn. And as this column has said again and again: Never panic!
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