Investing in Adversity - is there an Upside to the Downturn?

Dec. 16, 2008 - PRLog -- Recent turmoil in global financial markets may have spooked millions of investors around the world, but it hasn't come as bad news to everyone. For some, the market decline presents a cost-effective opportunity to position their portfolio to grow once share markets recover.

David Simon, Executive Westpac Financial Planner, discusses how to take advantage of opportunities in the current market and what (http://www.bt.com.au/investors/default.asp) investors need to consider before they 'dive in'.

David's tips

Don't follow the herd
Looking for opportunities to invest during a 'bear' market is really about taking a 'contrarian' or alternative view. Investors who seek out opportunities to buy when the other investors are sitting on the sidelines have found success in the past.

If you invested in Australian shares during the last significant downturn – that is, in the aftermath of September 11 and the Tech Wreck in 2001 - chances are you would have done well. Over the seven years since its low in October 2001, the ASX 200 has gained 48%.

Benefit from dollar cost averaging
If you're investing in a managed fund, you don't need to invest all your money at once. A lower risk approach involves making instalments via a regular (http://www.bt.com.au/investors/investment-education/inves...) investment plan, so you can take advantage of dollar cost averaging. By investing the same amount of money each period, for example monthly or weekly, you can buy more units when prices are low and fewer units when prices are high. Over time, the price is averaged out. As a strategy, dollar cost averaging dilutes risk by spreading the money you have to invest over a period of time.

Consider borrowing to invest
For the more aggressive investor, you could consider taking out a (http://www.bt.com.au/investors/investment-education/margi...) margin loan, in which you're borrowing funds to invest in managed funds or listed securities. With borrowed funds, you can increase the amount of money you have to invest and thereby enhance your potential returns over the long-term, once the market bounces back.

Despite increased interest rates and marginal tax rates, borrowing to invest is still feasible in the current market due to the potential investment income and tax efficiencies. It's also important to note that if you have a reasonable gearing ratio (say 50 per cent) the market would need to fall another further 30% before a margin call will be triggered.

While it may be courageous, it's worthwhile considering that since its peak in November 2007, the Australian share market has fallen 33%. If we are near the bottom of the 'slump', then it could be argued that increasing your exposure to a market that should eventually rise, could make sense.

Keep in mind, however, that as much as borrowing to invest can increase potential returns, it can also have the capacity to magnify losses.

Make sure your investment helps spread risk
As the saying goes, don't keep all your eggs in the one basket. Make sure any new investment contributes to the overall diversity of your portfolio and that your investments are spread across a range of asset classes - including shares, property, fixed interest and cash.

By diversifying your investments, you minimise the risk of exposure to a single asset class downturn and ensure your long-term returns are more consistent.

Choose assets appropriate to your risk profile
When deciding which assets to invest in, it's important to consider your risk profile - or how you feel about investment risk. What is your tolerance and appetite for risk? How much investment experience do you have? What is your investment time frame? What form of investment returns are you seeking, growth, income or a combination? How would you react if the market dropped further?

By understanding your investment goal and how much risk you're willing to take to get there, you can more appropriately allocate your funds across the major asset classes.

The other factor to consider is your (http://www.bt.com.au/investors/default.asp) financial needs  and objectives. If you have an aggressive financial goal, then there is justification for exposure to growth assets, such as Australian shares and property.

The last word from David
Opportunities do exist in the current market, as long as investors are aware of the risks associated with volatile markets and keep these key investing principles in mind.

About David Simon
David currently operates his own practice within Westpac Financial Planning as part of the recently launched Adviser Pathway program, which allows advisers to operate within Westpac while maintaining their independence. David's practice employs four staff and is one of the top performing practices within the Adviser Pathway program.

David joined Westpac eight years ago as a branch-based adviser and has since moved on to senior manager and executive planner roles.

David Simon is a representative of Westpac, ABN 33 007 457 141, AFSL No 233714.

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BT Financial Group (BT) has been helping Australians create and manage wealth since 1969 and today is one of Australia’s strongest wealth managers with more than $95 billion in total investments. We are the wealth management arm of the Westpac Group.