Investing

It looks like it will be a bumpy ride for investors for a while to come. Here is a checklist of strategies and tools to deal with the situation, following five earlier ones that we published.

Please click here to read the first five strategies.

Get credit savvy

JBWere chief investment officer Giselle Roux refers to previous times of market turmoil when many more investors held bigger proportions of fixed interest. For those revisiting fixed interest – or buying for the first time – it’s important to understand exactly what it means.

“Investors shouldn’t reach for equity-like gains in the fixed-interest market, that’s not their purpose; the low volatility, the sleep-well part of the portfolio,” she says.

A key trap is looking only at the yield and not at the credit quality. “There is sufficient information and no excuse not to be informed,” says Roux. “Make sure you understand it and get advice if you need it.”

The head of global investments for HSBC in Australia, Geoff Pidgeon, says while sovereign bonds (bonds offered by national governments in foreign currencies) represent poor value, there are “fantastic” opportunities in corporate bonds.

“Relative to government bonds they represent great value,” he says. “You’ve got companies with strong balance sheets and low corporate default rates.”

The head of investment strategy at AMP Capital, Shane Oliver, says Australians are “blessed” that local banks are paying term deposit rates of about 5.5 per cent (as at late 2011) compared with the US or Europe where it’s zero.

“But even here you need to think about it carefully because you can get good cash flow out of bank interest but by the same token there’s lots of other opportunities out there,” he says. “When it comes to corporate debt, investors need to distinguish the high-yield stuff from the low-yield stuff.”

Review benchmarks

Whatever asset class you’re invested in, says Roux, question whether you really need to be benchmark-aware.

“Do you need to hold X amount of BHP just because that’s what the index says? If you choose to have an income-centric portfolio you are not going to have a whole lot of mining companies, although they represent a significant proportion of our equity market.”

The same applies to cost-of-living indices such as the consumer price index.

“A lot of people say they want to maintain the real value of their money,” says Roux. “But what is their CPI as opposed to the measured CPI? Their lifestyle costs might be quite different. The CPI is constructed for the median person with 2.2 children. Not all of us live like that.”

You should also give thought to other benchmarks such as how your super fund is split. Find out its components and whether it suits your needs.

Look for opportunities

Pidgeon feels there are trading pattern similarities between now and 2008 and identifies four main stages: one, when emerging and developed markets are sold off in sync; two, when emerging markets start to underperform those of developed markets; three, when the market starts trading sideways; and four, a V-shaped recovery, as in March 2009.

“What happens in stage two is people start to look at value and stock fundamentals again, especially emerging markets, where there’s been such a comprehensive sell-off,” he says. “That’s when people start to see equities as representing good value relative to bonds.

“We are probably between stage two and three, where we are hoping there will be a positive outcome out of Europe. We feel that may be difficult in a short space of time. We’re predicting the market will slow in the next six months [to mid-2012] and then we will see some type of positive data coming out of the US but also Europe, where we feel it will take longer for them to get their ducks in a row.”

Dividend yields from Australian shares relative to bond yields are also appearing attractive again.

Oliver points to recent “outcome-based” managed funds where, rather than trying to beat the performance of rival funds, the aim is a target return of, for example, inflation plus 5 per cent. “These funds tend to have much more flexibility in the asset allocation and less reliance on equity markets,” he says.

And despite retail equity investors feeling flummoxed by high-frequency trading, Bell Direct’s Selvarajah says there are buying opportunities when there’s a large separation between the share price and underlying values.

“If there is a stock you are interested in going through a downward run, rather than getting too caught up in intraday volatility there may be an opportunity to jump in because you know it will recover in the week or so following.”

Spot trends

In a bear market, it’s much more difficult to make money. Bell Direct states since the peak of the market in 2007, only 48 out of 200 stocks have gained in value. In a market so ruled by sentiment rather than fundamentals, there’s more to be gained by learning how to pick turning points and becoming more sector-aware.

Online broker Bell Direct’s chief executive, Arnie Selvarajah, says research and charting tools can help.

“One of the things we include on our quote page is the top five stocks in the sector you’re looking at, as well as Bell Potter broker research on each of them,” he says. “We also have consensus recommendations [from Morningstar] on every stock so you can see what the analysts are saying and who is recommending buys or sells.”

Other tools include one that shows when unusual volume is being traded in a stock; another that keeps investors informed of when directors are buying and selling stock; and one that overlays the 200-day moving average of a share over the share price to help spot changes in the share price. “What we are seeing from our clients is that they are certainly more active,” says Selvarajah.

“The ones who are seriously looking to manage and grow their portfolios are looking at using as many tools as they can to try and rebalance their portfolios rather than buying and holding.”

Pool resources

Selvarajah has noticed online broking clients forming informal investing groups across websites such as hotcopper.com.au and Twitter. “The interaction between them on a particular set of stocks allows them to gain another source of information because you obviously can’t watch every stock at the same time,” he says.

“They used to just jump on the online site and everything on that site would provide ideas. But more and more they are looking for inspiration from other sources.

“Twitter is a great source as it gives you a sense of momentum around a particular stock or of the general market.”

Please click here to read the first five strategies.