AS THE year ends, we find the best investments were within our borders.
As we approach the end of another roller-coaster year in finance, it pays to look back and see what investment lessons we can take away. While markets are hard to pick and may fall into the same holes again, as investors we need to continually keeping learning to avoid making the same mistakes.
So, what gives for 2013?
First of all, Australia is still a great place to be. You could have done a lot worse than keep your investments contained within Australia. As for specific lessons from 2013:
1. Markets are driven by psychology, not reality
Cutting interest rates doesn’t spur confidence when the chips are down, and confidence remains the most important driver of sharemarket rallies. Consumer and business confidence were weak for much of the year, only bouncing once the US debt fiasco and the Federal election were out of the way. That was despite two cuts taking interest rates to record lows and a solid economy.
Poor confidence levels outweighed the reality of an unprecedented 23rd consecutive year of economic growth, a solid job, strengthening property prices, local interest rates the envy of the developed world and a terrific standard of living.
2. Low interest rates affect property prices
Interest rates remain the bellwether for property prices. Property swung hard in most capital cities this spring, with auction clearance rates topping 70 per in Sydney and Melbourne for much of the season. But the record-low interest rates tended to spark action from investors rather than first-home buyers and the biggest value gains were in those markets, particularly Sydney, where there was a supply shortage as well.
While low interest rates seemed to stabilise values, an oversupply of stock had a dampening effect on price rises in areas such as southeast Queensland and Perth.
3. A strong currency can aid offshore investments
Despite the well-publicised challenges faced by the US economy and its politicians, America is still a solid place to invest with a strong Aussie dollar. Not only did US markets offer an opportunity to capitalise on our strong dollar, but the Dow Jones index also comprehensively outperformed our local market. If you’d bought into the US Dow Jones index at the start of 2013, you would have enjoyed a 22 per cent capital gain, plus a 13 per cent boost from the falling Aussie dollar. If you’d bought into the All Ordinaries index on New Year’s Day, the capital gains over the year would be a meagre 10 per cent.
But a word of warning. While currency movements can supercharge profits on overseas markets, they can also cause big losses. So be careful.
4. Precious metals offer few easy predictions
Lets start with gold. The precious metal staged a tremendous dive this year, even as fear, volatility and money printing … the traditional drivers of a rising gold price … were in plentiful supplyIt’s an old lesson but an important one. Gold doesn’t generate cash flow, pay dividends or have any practical use. It’s decorative and precious and, as a result, its value is hugely speculative. A lot of investors got badly burnt by gold and gold miners this year. Lesson learnt.
On the flip side, there was so much doom and gloom about iron ore prices at the start of the year with lots of predictions of a fall to $US80/tonne. It didn’t happen, and the price of our biggest asset stayed above $US130/tonne. China’s economy defied the pessimists and remained solid.
5. Opt for Strong dividend-yielding stocks
We saw the value of solid dividend-paying investments rocket as falling interest rates and reduced appetite for risk drew investors to the big banks, Telstra and our supermarkets in particular Many private investors make the mistake of just focusing on movements in share prices rather than the power of strong consistent dividends. That lesson was reinforced this year.
6. Invest for the long term
The biggest lesson to come out of 2013? Investing remains a long-term game. Despite two debt ceiling debates in the US, conflict in key energy-producing nations and debt woes throughout Europe, Asia and America, most investments ended the year higher and over the long run will continue to do so.
The trick remains picking good investments and holding them for the long term. Cash-flow generating, assets such as shares and property, are vital.