With another financial year behind us it’s worth looking at the performance of a few key asset classes – shares, cash, gold, and property.
However, one point worth noting is that this isn’t an exercise in saying you should put all your money in one asset class rather than another.
And we aren’t saying you should diversify your assets across an equally balanced portfolio.
Rather, we’re saying you should actively manage your investments and not be afraid to re-balance your portfolio at certain points during the year.
Because as the past 12 months have shown, those investors who refused to see that the market had change have missed out on spectacular gains…
First, let’s see how the various assets stack up over the past year:
- S&P/ASX 200: up 17.3%
- Cash: up 4-5%
- Aussie dollar Gold: down 13.2%
- Property: up 2.85%
There is no doubt shares were the best performing asset class over the past 12 months. Remember, we’re not being a ‘Hindsight Harry’ on this. We’ve said since late 2011 that it was time to build up your stock exposure (especially dividend stocks) after we had been bearish for the previous year.
The worst performing asset was gold. What more can we say? Gold is a great investment and you should own some. But it won’t make you rich.
As for property, that figure is of course the gross amount based on numbers from RPData. If you take into account financing and other costs of holding a property, then it has been a negative financial year for the average property investor.
Look, we know spelling this out won’t be popular. Bashing the stock market has become something of a blood sport in recent years. Heck, we’ve even given it a well-deserved smack around the chops.
But as we’ve continued to explain in Money Morning, whatever the knockers say, the stock market still remains hands down the best way to build wealth. Of course, the numbers we’ve just given you are last financial year’s numbers.
Who’s to say the stock market will give investors the best return this financial year?
Two More Years of Gains for Australian Stocks?
The following chart shows you how the last financial year’s performance compares with previous years:
You don’t need that chart to tell you it has been a volatile seven years for stocks.
So after a standout year, can you expect this year to provide another big double-digit gain?
Well, our bet is that Australian stocks will hit a new record high in 2015. In order for the market to do that, the Australian market will need to gain 46% from Friday’s end-of-financial-year closing price.
That’s roughly a 21% gain each year.
It’s not impossible, but we won’t kid you…it’s a tough ask considering how volatile the market has been over the past seven years.
And it will be even harder following the market’s recent 10% fall.
The Market Has Made These Gains Before
Despite that, there is a precedent for the market to make stunning returns when few expect it to. You only have to look at the last nine months for a classic example.
But also look at March 2003 to October 2007. In four-and-a-half years the market gained over 150%. That’s three times the percentage gain we need for the market to take out a new high in 2015.
Of course, that’s longer than the two-year timeframe we’re looking at now. But how about March to October 2009? You may have forgotten about that period because it all happened so quickly.
In the space of just seven months, while most investors thought the entire world economy and financial system would collapse, the Aussie index gained 54%.
We agree that was an extreme time. But that’s exactly our point.
It’s at times when most investors, analysts and commentators have given up on the market that you should look to buy. But what and where?
Right now, from an Australian market perspective, we’ve got our eye on two key segments – companies that can pay a dividend and hopefully grow that dividend; and speculative stocks.
That’s not to say other stocks such as blue-chip growth stocks won’t go up, because there’s a good chance they will if the market pans out as we expect.
But the important factor is to get as much bang for your buck as you can, without unnecessarily putting too much of your money on the line.
Even Big Corporations Keep a Cash Buffer
Obviously, you’ll have your own attitude to risk. It will be different to ours and to other people’s.
If you’re as bullish on the stock market as we are, you need to shift more of your cash into it.
That doesn’t mean investing all your cash. It’s crucial to have a big cash buffer – even big corporations like Google [NASDAQ: GOOG] and Apple [NASDAQ: AAPL] keep plenty of cash in reserve. (At the end of March, Apple had USD$145 billion in cash, about one-third of its market cap.)
That’s why we like term deposits. It forces you to lock cash away for 3, 6 or 12 months at a time. It means you can’t succumb to temptation and invest more than you should in the stock market.
Even so, to our mind the conditions are ripe for another stock rally. Interest rates, regardless of recent spikes, are still near record lows globally. The Reserve Bank of Australia’s Cash Rate is at a record low and seems set to fall further.
And even if it doesn’t, the recent fall in the Australian dollar should provide a boon to Australian exporters and attract investors.
Finally, the overseas market that appears to influence the Australian market the most – Japan’s Nikkei 225 – has started to rebound after a torrid few weeks. For all the talk of the Japanese market crashing, it’s still up 52% for the year.
The Australian market has underperformed compared to the Japanese market in recent months. That’s due to the poorly performing resource sector. That trend won’t last for long.
But as we say, that’s not the only bargain out there right now. Before you add risky resource stocks to your portfolio, you need to make sure you’re on board with the yield rally.
Despite the talk about the yield rally being over, the reality is different. It’s far from over. In fact, the recent stock price slump has created a bunch of opportunities investors would be foolish to ignore. And if we’re right, stock prices and high yields won’t stay this way for long.
From the Port Phillip Publishing Library
Special Report: Just What are ‘Turbo Cap’ Stocks?
Daily Reckoning: How the Power of Tweets Saved Tesla Motors
Money Morning: Don’t Get Caught in the Market Crossfire
Pursuit of Happiness: Is Technology the Most Exciting Industry in the World?
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks