GLOBAL MARKETS PLUNGE 4-5%. OIL PLUNGES 6%.

I know what you’re thinking: ‘I’ve got to get out before it gets any worse.’ 

It’s been a terrible week for investors. Two weeks ago the ASX200 stood at 4602.90. By close on Friday it was sitting at 4105.40, and who knows how much further there is to fall on Monday after the selloff continued in Europe and the US overnight. That’s a massive fall of 500 points, or 11%.

Fear is gripping global markets, with indices around the world tumbling as the US looks set to head back into recession. Europe is a basket case, with one country after the other hitting a point of no return with its debt levels. None of this is news to those following the markets closely, it’s just that…

But what about Australia?

While we’re hardly immune to what’s going on around the world and our market will be a bloodbath today, we are not the USA. Nor are we Europe. The aftershock of current global market gyrations is sure to be felt on our shores for some time, but that doesn’t necessarily mean that you need to sell your entire portfolio in a panic. China’s ongoing growth and demand for raw materials will still drive many aspects of the Australian economy onwards and upwards, and many emerging economies are also experiencing strong growth.

Anyone who has invested at any stage over the past 10 years would have experienced the panic of the market sell-off. Fear grips the market and billions are wiped off the value of sharemarkets around the world. Of greater importance, large chunks of your own personal wealth disappear without a trace.

The tech wreck saw markets plunge almost overnight as euphoria for IT stocks wore off, followed closely by the 9/11 panic. More recently we had the fear surrounding the GFC, which saw global markets plunge in 2008 with no apparent bottom in sight.

But there has always been a bottom. Well-managed companies continue to make profits. The key for the savvy investor is to not sell a good quality stock in a panic at the bottom, or to be scared off investing for good. This is all part of investing.

You really need to analyse why you want to sell. Is it simply because everyone else is selling? Because of the negative news that is flowing out of the US and Europe? Or is it because the fundamental outlook for the stocks in your portfolio has changed?

Sure, the outlook for some Australian companies is far from rosy. It’s no secret that retail, banking and junior miners are in trouble. Australians have stopped spending, banks around the world are facing a rise in the cost of funding and soaring bad debts, and many junior miners will likely see projects collapse as funding dries up.

But not all companies are set to suffer. A recession certainly doesn’t mean that all companies go under at once. In fact, market plunges can present fantastic opportunities for those who remain calm and manage their investments in a sensible manner.

There are three main categories of investors

 If you’re a new investor – Maynard Paton

My advice? First off, don’t panic. Markets always suffer downturns from time to time, and while this week’s falls may seem scary, they’re nothing compared to the horrendous plunges we saw during the tech crash of 2002 and banking collapse of 2008. Shares bounced back strongly after those awful years, and they’ll bounce back once again I’m sure.

That said, it can be hard to ignore today’s doom and gloom – and the emotional trauma or watching your shares slide ever further into the red. The key is to remember the advice of master investors such as Warren Buffett, who said ‘be fearful when others are greedy, and be greedy when others are fearful’, and Sir John Templeton, who said ‘the time of maximum pessimism is the best time to buy’.

So what now? Simply continue those regular contributions to your tracker – pound-cost averaging has always made good sense for long-haul investors. In addition, look for high-quality companies trading at good-value prices. In a widescale rout, good shares often get thrown out with the bad and very often genuine bargains do emerge. All you need is the courage to buy.

If you’re approaching retirement – David Kuo

The harsh reality is that the global growth is slowing. Consequently, the futile attempt by the west to stoke growth through assuming more debt is tantamount to someone maintaining an unaffordable high life by applying for yet another credit card. Lower growth also means that some companies will make less profit and lower profit implies that certain companies will be less valuable. Hence, the fall in global stock markets.

However, indiscriminate selling, which is what we are seeing, will provide opportunities for canny investors.

If you are someone who, like me, is approaching your twilight investing years, then you have hopefully been life-styling your portfolio anyway. In other words, some of your investments should have been allocated to safer asset classes such as cash and bonds. Consequently, the fall in the value of equities and the rise in value of bonds means that you should at some stage consider rebalancing your portfolio.

That may sound like a boring solution to a wild market problem, but at my age there is only so much craziness I can take.

Taking the long view – Owain Bennallack

Last week I admitted I was getting nervous about the stock market. A rare comment from the office ‘permabull’, and for that most disreputable of reasons, too – the gut feel that comes from reading and writing about shares and companies all day, every week, and from monitoring my portfolio the way most people watch over their children.

From the bond markets to the latest US economic data to a lack of enthusiasm for great earnings reports the tea leaves looked murky.

Many good quality stocks will be oversold, presenting great entry points in companies whose outlook remains bright. Brokers have been busily placing buys on defensive stocks like Wesfarmers and Coles over recent weeks, as well as CSL, Cochlear and Telstra. Some miners too – although juniors are noticeably absent – with the ever popular Atlas Iron (Credit Suisse & Merrill Lynch) and Coal & Allied (Citi, Deutsche, UBS, Perpetual & Credit Suisse) also featuring strongly in broker buys over the past week. There’s even a retailer in the mix, with several brokers (RBS, UBS, Deutsche) bullish on Kathmandu’s prospects after recently reporting a 36% profit increase.

Of course, you will most likely need to let go of some stocks that present a significant risk to your portfolio. Just take a look at the top 10 shorted stocks on the ASX and you’ll see just how unpopular retail and media stocks are, with David Jones, Harvey Norman, JB Hi-Fi and Fairfax all bet against by the shorters. And as much as you love that junior miner that is set to soar, you may have to look at moving on before it loses a large chunk of its value. It’s probably best to de-risk your portfolio sooner rather than later.

The important point is not to panic over the coming weeks; to be smarter than the average investor. There will be a lot of pain on the market today – and in all likelihood for some time to come – but that doesn’t mean that all is lost. Companies keep making money, markets recover and good investments are made by those who are astute and remain calm. Investing is a lifetime activity, and this current wave of volatility is all part of the journey. 

 

Market declines rarely end with days like Thursday’s 513-point drop for the Dow.

So even if you think that we’re just suffering a mere correction within an ongoing bull market, you still should be prepared for lower prices in coming sessions.

That at least is the conclusion that emerged from my analysis of past bear market bottoms. The days on which those bear markets actually registered their final lows typically were rather uneventful – nothing like what we saw on Thursday.

Consider March 9, 2009, the day of the closing low of the 2007-2009 bear market, arguably the worst one since the Great Depression. Even though there were many days during that bear market that witnessed panic selling, the day of the final low experienced a drop of just 79.89 points.

It was more than three months earlier than then that the Dow Jones Industrial Average DJIA (^DJI – News) experienced a panic-induced decline that was as bad as Thursday’s. That day was Nov. 20, 2008, the day when – not coincidentally – the CBOE’s Volatility Index (VIX – News) spiked to its all-time closing high near 81.

Many traders made the same mistake then that I fear that is being made today: Thinking that panic selling signals a low. They were three-and-a-half months early.

Or consider the Crash of 1987, which is the grandaddy of selling panics in U.S. stock market history. On that day, Oct. 19, the Dow dropped 22.6%. And even though the Dow bounced back impressively over the two trading sessions following that Crash – gaining 5.9% on Oct. 20 and another 10.1% on Oct. 21 – the stock market’s post-Crash low wasn’t registered until Dec. 4, more than six weeks later.

Chances are that the final low of the decline we’re experiencing will not be recognized as such until well after the fact. It’s most unlikely that, on that day itself, so many traders will be doing what they did on Thursday – falling over themselves announcing that the bottom has been seen.

An old Wall Street saying has it that they don’t ‘ring a bell’ at market bottoms. It would appear that this saying contains a lot of wisdom.

The political bickering over the US debt ceiling didn’t help, but the fact that recent US economic growth figures have been revised downwards probably spooked investors more. A key US employment indicator called ‘non-farm payrolls’ that was released on Friday afternoon resulted in some relief. It revealed that the US economy created 117,000 jobs in July, which was slightly more than expected.

Here in Europe (Chicago Options: ^REURTRUSD – news) , once the Greek debt situation was dealt with (temporarily at least), investors turned on Spain and Italy. Both economies are stronger than Greece, but much, much larger. Indeed, the Italian government debt market is reckoned to be the third largest in the world. The popular theory is that these countries are too large for a bailout, so more radical action is required. When you’re relying on politicians to ‘do the right thing’, it’s hardly surprising everyone’s getting skittish!

As investors sold what they perceived to be risky assets, they fled to safe havens such as US Treasuries, the Yen, the Swiss Franc and even UK gilts. To complicate matters further, as it’s the holiday season, trading volumes in most markets tends to be lighter, so price movements tend to be exaggerated.

Yet, despite all these problems, shares appear to be pretty cheap. For example, the FTSE 100 index trades on a forward P/E of just 9 times and yields a chunky 4%.

In aggregate, UK blue chips were decent value before the crash. And they’re cheap now, too. And by the time markets have truly started falling, it’s a bit late to start rearranging the deckchairs on the Titanic – just look at the prices of the major miners and cyclical firms for evidence.

How long will the crash continue? As long as markets are fearful – nobody will intervene to make equity investors feel better, because in the short-term the equity markets don’t matter. A crash is not great for confidence or the wealth effect, but it’s the Italian government not being able to repay its debts – or the wages of millions of its workers – that’s the sort of the thing that focuses politicians’ minds. We all love equities, but bonds rule the roost.

But as long as you’ve avoided leverage, or dangerously focussing on one hot sector such as mining or energy, then you’re not on the Titanic, if history is any guide. A good portfolio in turbulent times is more like a seaworthy ship in a storm, diving into the trough of a wave but eventually bobbing out the other side.

So that’s what we think. The key message at times like this is not to panic or make hasty decisions. Market falls can be times of great opportunity, but whether you make the most of them is up to you.

Please note that this column should not be construed as advice. TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.