Think collectively for 2013
AFTER a relatively flat fourth quarter in 2012, the US market exploded into the New Year. The year started with a 308-point relief rally on January 2nd, celebrating the last-minute agreement that kept the US from falling off the "fiscal cliff" - at least for a while that is! From there, The Dow kept going until it established a new 5-year high close of 13,954 on January 29th, right on the cusp of 14,000!
A fiscal free pass
News that the US economy had actually contracted during the fourth quarter triggered a decline at the end of the month. Still, the DJIA (Dow Jones Industrial Average) closed January at 13,860.58, up over 5% for the month. January's performance was the best for the month in almost 20 years.
So, almost four years into the recovery, the Dow is on the cusp of 14,000 (actually as I write this, it is above 14,000 intraday). Not only that, once it reaches 14,000, the Dow will be on the cusp of a new all-time high! Fears are abating and excitement is building, but can this market growth be sustained further into 2013?
Global equity markets responded warmly after the US Congress approved a deal to avoid the fiscal cliff. However, a sustainable and long lasting solution for improving the US fiscal position remains elusive.
The fiscal cliff describes the $600 billion of automatic spending cuts and tax hikes that were scheduled to come into effect at the start of 2013 – although aimed at improving the US fiscal position, these steps would have pushed the US firmly into recession. During negotiations, Republicans wanted spending cuts without raising taxes, while Democrats wanted a mixture of spending cuts and tax increases. After much negotiation, an agreement that prevented going over the cliff was finally reached.
Although an agreement to tax rises was reached, an agreement on budget cuts is still needed by 1st March in order to prevent automatic and indiscriminate budget cuts, which could lead to recession – uncertainly over the next 2 month s could still lead to heightened equity market volatility.
The economic cycle
Ever heard that story about seven good years followed by seven lean years? Thousands of years later, life hasn’t changed that much, except now people refer to it as the economic cycle! The good years are when interest rates are falling and people are happier.
Governments, investment banks and big businesses spend a fortune trying to predict where the economic wheel is, how fast it’s going and in what direction. They don’t have a great deal of success. But here’s a secret: most of those earning a crust by giving forecasts of future economic conditions just follow the trend. If you follow what happened yesterday (or last week or last month) and repeat it today (this week or this month), you’re statistically more likely to be right than wrong.
In any case, you don’t have to follow the so-called expert ‘forecasts’. You couldn’t buy fully into their research and guesstimates even if you could afford to buy their material. It’s not usually for sale because it’s reserved for pension and other funds controlling billions, which gives the researchers and their bosses’ huge volumes of business.
Considering investment funds
But don’t worry. As the long-term manager of your own money, there are many ways you can do as well, if not better, than those highly paid city types! You don’t have to buy stocks and shares yourself – you can do it with others in a collective (or pooled) investment fund. These collective funds reduce your risk by spreading your investment across a wide range of companies. Here are a few…
Investment Trusts – These aren’t in fact trusts, but companies that can invest in other companies, and their shares are bought and sold in the normal way. They are legally obliged to make appropriate investments in areas they specify, eg ‘European Recovery’, or ‘Brazil Growth’ – they can’t just suddenly start buying Australian mining shares for either fund.
Unit Trusts – Instead of buying shares, you buy units of the total value of the investments that these trusts hold. So if the value of the investment doubles in a year, the value of your units does too. Again, unit trusts specialize in particular areas – high income, high growth and so on - but unlike investment trusts, they can buy more investments in those areas and issue more units according to demand.
Tracker funds – These unit trust funds invest in a broad enough selection of shares in a market to be representative of the whole index – eg the FTSE 100 in the UK - so that their value rises and falls with the market as a whole.
Open-Ended Investment Companies – These combine the qualities of unit and investment trusts. They are companies that issue shares but, unlike investment trusts, the price is determined by the value of the funds’ assets and more shares can be created or cancelled depending on investor demand.
Exchange Traded Funds – These are baskets of stocks and shares that track an index, a market or an asset class such as the FTSE 100 or pharmaceutical shares. Because these shares are exchanged between traders in the market, not bought and sold, they have low management costs.
WOULD YOU ever consider investing in a collective fund? Will you be expanding your investment portfolio this year? Tell cashy below!