IN YOUR INTEREST

Paul Clitheroe’s advice for investors in 2013 is to avoid chasing the crowd

Paul Clitheroe

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ANOTHER YEAR GETS rolling along. Investment markets may be unpredictable but one thing is for sure – each year seems to go by faster. I’ll have a crack at a snapshot of how I see markets in 2013 and beyond; but first, about the only good explanation I’ve ever seen of why the years go by more quickly comes from Greek philosophers many thousands of years ago. They argued that the sense of time came from new experiences. For a young child, many simple things can be new experiences – it may only be a butterfly. But as we age, the ratio of new experiences to repeats in any year tends to become far less.

I get this logic. It makes sense to me that in my 58th year I am likely to see and do a lot of stuff I have done before – I’ve already done a fair bit. So I guess the trick is to keep finding new challenges and new things to do.

When it comes to investment markets, the reality is that, despite a ridiculous amount of media coverage and just about any prediction you care to read, absolutely nothing has changed. The one really good guide to investment markets that has proven incredibly reliable is also very simple. Take a look at where most money is flowing and this will be a very good area to avoid. When most of your friends, people you never heard of and the media tell you property is booming and do not miss out, it will not surprise you to find that prices are soaring. When money charges into shares and you see a big rise in prices, you will see money heading that way.

Over the past few years, vast amounts of money have flowed into cash and term deposits. We all understand why. Shares were a pretty horrible investment in 2009 and 2010, and 2011 was not a great year either. Property in many parts of Australia has been flat to falling in value – and in holiday areas and top-end prestige property, a disaster. Greece and Europe generally have been less than inspiring and the media are full of economic gloom. As is quite typical, money came out of shares as investors grew impatient – and let’s not underestimate how negative the returns were.

Investors were well and truly spooked and many sold shares to invest in cash, or invested any spare money in cash. It became so ridiculous that Commonwealth Bank shares fell to a bit more than $24 in early 2009. I say ridiculous because, then, bank deposits up to $1 million were guaranteed by the Australian government and money was thundering into our banking system. At $24, CBA shares, along with the other three big banks, were paying about 13% in dividends, including the value of franking credits. So, if in the panic you bailed out of shares or super to move to cash, or simply added any new savings to cash, you missed one of the best buying moments in decades. Since then CBA shares have moved up to $60 or so and the Aussie market is up by more than 50% since early 2009. A bog basic balanced super or managed fund in 2012 will have generated 10%-plus for investors.

So money has flooded into the secure haven of cash at the bank. And it saw some very nice returns – a few years ago as much as 8% on a term deposit. But, little to my surprise, as money poured out of shares and property into cash and the economy slowed, interest rates fell steadily. Today term deposits are closer to 4% than 8% and investors are realising that a bit more than 4% in taxable income with inflation close to 3% is just a great way to go broke slowly. So there is much head scratching among investors.

What for 2013 and beyond? Well, money continues to charge into cash at the bank, so it is a pretty safe historical bet that will not be the place to be invested. Money in the bank is great for funds you need tomorrow, next month or even next year; or if you just want part of your money to be in a nice safe place.

As rates fall, quality shares look better and better, which is why the market is rising. It is difficult to hold long-term money in a term deposit at a bit over 4% when I can buy decent shares paying dividends of 5% or more, often with franking credits, meaning tax has already been paid at 30%. Even if the shares do not rise in value, the income alone is higher.

Regular readers will know I have been banging on for years that shares are cheap. But in my view property has been pretty pricey. I still think property is quite expensive but add a real slowdown in price growth, a growing population and a broad undersupply of housing to increasingly cheap money in the form of mortgages as low as 5.3% and property suddenly looks a better place to be than cash.

How you invest your money depends upon you, your situation, your time frame, your attitude to risk and so on, so I’ll leave that to you. But take my advice and watch where money is flowing. If it is all flowing to one particular asset class, don’t chase the crowd.

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