The Current State of Investment Markets


The Current State of Investment Markets

Many business owners hold investments outside their business. They hold share investments via their superannuation funds or through direct investment. 

Over the last nine years since the Global Financial Crisis (GFC) share markets have been rising. They have fallen occasionally but not like they did between October 2007 and March 2009 when they fell by 50% or more.

The last nine years have been a cautious period for most investors, wary of another GFC type crisis.  Therefore, any share investments have been undertaken conservatively, without much borrowing to do so, and with plenty of cash left on the sidelines by most people. This prudent attitude means that business owner-investors are not as vulnerable as they were in 2007.  However, the current positive share market run is very long by historical standards. Since the 1920’s only one period, i.e. during the 1990’s, have share markets around the world gone up for a longer period.

This means we are nearer the next fall in share markets. By fall I mean a drop of more than 20% from its peak. The timing of this event is difficult to predict with any certainty. Acting now in anticipation of such an event could mean changing course too early and missing out on gains that may be made over the next year or two. However, thinking about the short-term impact of share market falls now while things are going well is very important.

So, what should business owner-investors do? Here is my checklist of some of the items:

  • Ensure the investment you are in is solid, not speculative. In other words, are the companies you are invested in making profits that will continue during poorer economic times.
  • Have you spread all your investments so they aren’t concentrated in a few stocks or a few investments?
  • Do you have a cash reserve for emergencies so you won’t have to sell shares whose values are down when the share markets fall?
  • If you have borrowed monies to invest, now is the time to reduce that debt, especially while interest rates are low.
  • If you are selling your business and using the proceeds to fund your retirement don’t put a lot or all of your money into shares, if you are going to be drawing on capital to fund your retirement expenses.
  • If you are just living off the dividend income from shares or re-investing the dividend income and are not looking to cash in your shares over the next five to seven years, you could ride out any short-term falls.
  • Income generating investments tend to survive better than those which aren’t providing an income or where income is low. What sort of income are your shares generating?
  • When share markets fall by 20% or more the economy may get affected. If this occurs how sound is your business? How will it withstand shock waves from a share market fall? What do you need to do to better protect it from such an event?

Share markets are less likely to fall when interest rates are low, as they have been for many years.  However, they become vulnerable when interest rates start to rise as they are doing in the United States (US) at the moment. Rising interest rates decrease company profits over time and provide investors higher returns on their cash compared with investing this money in shares.

There is also a bigger factor at play this time around. During the GFC, Central Banks around the world flooded investment markets with cash. This prevented an economic collapse and pumped up asset (share and property) prices. When this cash starts to be withdrawn, as is happening in the US at the moment, the very thing that drove prices up, starts to disappear. This could lead to share prices peaking and starting to drop.

I hope my forecast of share markets falling at some stage over the next few years is wrong. However, after nine years of rising markets, it’s time to prepare for a downturn. By the way, the catalyst for the next downturn may not be triggered by rising interest rates or cash being withdrawn by Central Banks; it could come from left field like the subprime mortgage crisis in 2008 in the US which very few people forecast.

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