We bet you didn’t realise this about the Aussie market.
Apparently investors have been asleep since the start of the year.
That was until yesterday.
According to the Sydney Morning Herald, that was when there was a ‘Wake-up call for investors as shares plunge’.
The Aussie S&P/ASX 200 fell 1.5%. It was the biggest drop for the year so far. Get ready for the hollerin’. You’ll start to hear the same stories as last year about tapering and falling markets.
The same stories that caused many investors to miss out on the big stock rally.
If that sort of talk stopped you from making the most of the stock rally last year, you’ve got a decision to make. Will you let the same talk stop you from investing now? And importantly, if you do, will it be the right thing to do…?
It was the same old story from the Sydney Morning Herald yesterday:
‘The Australian sharemarket has shed $24 billion in value in its worst trading day since September, as investor worries ahead of the US earnings season reverberated across global stocks.‘
Every time the stock market tumbles the mainstream press wails about the billions wiped off stocks. Rarely do you see the story on the other side of the ledger when stocks rise 1.5%.
It’s no wonder so many investors become ‘paralysed’, too scared to invest at a time when there are so many exciting opportunities around.
Fewer Stocks to Take Bigger Risks
That’s what kept so many people out of stocks last year. Maybe you were one of those investors to miss out. That was a shame. The S&P/ASX 200 index gained 15.1% last year.
While that was below the performance of many overseas markets, it was certainly a better option than many other investments – gold, property, and of course, cash.
So, is now the time to switch to cash or something else other than stocks? Remember the old saying, ‘past performance isn’t always a reliable indicator of future performance’. In other words, just because Aussie stocks went up last year, it doesn’t mean they’ll go up this year.
The simple answer: for most investors, now is not the right time to get out of stocks.
As you should know by now, we advocate a relatively conservative approach to asset allocation. But we do that for a reason. The more conservative your asset allocation strategy, the more risks you can take.
That probably sounds like gobbledygook, and counterintuitive.
After all, in order to take more risks, don’t you need to have a high-risk asset allocation strategy? Not necessarily. Not if you follow our approach.
It all comes down to how you invest and where. For instance, we recommend a maximum stock allocation of 50%. That should consist of at least 30% in dividend stocks and the rest in a mixture of large-cap and small-cap growth stocks.
The other 50% should be in a combination of cash and gold.
Exactly how much you allocate to each of these investment classes is up to you. It’s not that hard to work out; you’ll soon get the feel of it. But what about the idea of increasing your risk by becoming a more conservative investor?
Speculating With Small Stakes
The reason we can recommend such a high cash balance is because of the type of stocks we recommend investors hold in their share portfolio.
Most financial advisors recommend big blue chip stocks and nothing else. Many financial advisors have no choice. A condition of their affiliation with a financial planning group may stop them from recommending stocks outside the 200 biggest ones.
That’s terrible. It means the financial planner can’t recommend 90% of the stocks listed on the ASX.
We recommend something most financial advisors wouldn’t dare recommend. That is, we recommend investors get into some of the riskiest stocks on the market. There’s a simple reason for that. These stocks are so risky that if you back the right one, it can return many times your original investment.
That means you only need to invest a relatively small amount in each stock. Of course, there’s a flipside to investing in these risky stocks. There’s the risk you could lose some or all of your investment.
Using this approach is a great way to get into the market if you’re unsure of whether to buy stocks or not. And it’s a great way to get access to potentially big returns without risking a lot of money. Let’s say you have $100,000 of investible cash. You could choose to keep $95,000 in the bank to earn interest.
With the remaining $5,000 you could invest in a small handful of speculative small-cap stocks. The worst case is you lose the $5,000 you speculated (and that’s unlikely if you split the money between three or four well-researched stocks). On the positive side, the interest you earn on the cash should make that back.
Do you see what we mean? Just because you’re a conservative investor with a conservative asset allocation strategy, doesn’t mean you can’t make speculative investments. We’ve shown you an extreme example. The same principle for speculating applies for investors prepared to invest more in stocks – blue-chip and small-cap growth.
The only question remaining is where should you invest your speculative portfolio? There are a number of choices with a lot of potential. We’ll give you a couple of ideas on that tomorrow.
Cheers,
Kris+
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