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nelson mandela bay's family lifestyle
author:
john osmond
i need perspective
issue:
8, summer 2008
I need perspective, 'cos I'm facing the wall. I need perspective, 'cos I'm not that tall. I need perspective, heard the trumpet call. Don't trust my eyes, want to know where things fall. Peter Gabriel, "Perspective", 1978. Are we experiencing one of the worst financial crises ever? Many economists and market analysts are saying that the world is entering a recession. What does this mean for the man in the street? In general you and I will have the majority of our wealth invested in our retirement funds at work and the property that we own. As we come to the end of 2008 and face economic times that are much less than ideal, it is important to realize that we have experienced international financial crises like this before. If we exclude the current market turmoil, the JSE All Share Index has, over the last 50 years, experienced six severe draw-downs, which have resulted in capital losses in excess of 40%. The current market draw-down is significant and comparable with the previous 6 worst corrections seen in the last 50 years, insofar as the ALSI was more than 40% off its May 2008 highs towards the end of October. The pace at which the latest correction is taking place is comparable to previous corrections (except for the market crash of October 1987 which was far more acute). Within two and a half years of the commencement of the correction, 4 of the 6 corrections had made full recoveries to the level at its commencement. 3 of the 6 corrections reached their lows within 1 year of commencement, followed by strong bull markets thereafter. 2 of the 6 corrections took about two-and-a-half years to reach their low-point before a turn-around commenced. These six worst draw-downs, over the last 50 years, have ranged between minus 32.6% and minus 62.4%, with an average drawdown of minus 46.6%. Considering the figures above, you may come to appreciate that the current dynamics (although severe and very unpleasant) are not unusual. For the average investor following the current market turmoil, 22 May 2008 when the ALSI peaked, probably seems like an eternity ago, but if we consider the perspective of history, the 5 months till October is significantly short of the 13.3 month average duration for a draw-down. The June 1969 correction took about 2.4 years to hit the bottom and start correcting, and a further 2.4 years to record a new high. It is, however, worth noting that the JSE of today is not strictly comparable to the stock market of the past. Firstly, the index now contains heavyweight global companies such as BHP Billiton, Richemont and SAB Miller and is thus less SA-focused. Secondly, it could also be argued that despite a recent spike, inflation - and hence interest rates - can be expected to be anchored at lower levels than in prior decades, as a result of the adoption of inflation targeting. As a result, the extreme bear-case valuations of prior market corrections are probably not a likely scenario. Long-term equity returns are very rewarding in that they are the asset class which has shown an ability to best exceed inflation over time. Over the short-term, however, equity prices are prone to sporadic bouts of extreme volatility. Here are some conclusions to be drawn from the current situation we are experiencing: Equity returns are unpredictable over the short-term. Equity returns have been shown to best outperform inflation over the long-term (5 years plus) Equity markets are certainly not immune to corrections. Trying to time the tops and bottom of markets involves considerably more luck than skill. At current prices, the market is far more attractively valued than it was in May this year. If you are wondering what to do, here are some suggestions. If you have a retirement fund at work, do not switch into a more conservative portfolio or cash. By doing this, you will be realizing the loss in your portfolio value. If you have debt, use any spare cash or surplus in your budget to reduce your debt. Try to control the urges of blowing the 13th cheque or bonus. I know it is December and holiday and all of that, but rather use it to pay off debt. If you are debt free and have cash to invest or surpluses in your budget, now is a great time to invest. You should always consult with a financial planner to determine the correct investment strategy which should be aligned to your goals and objectives. Warren Buffet is quoted as saying that in volatile times, wealth transfers from weak hands to strong hands and winners keep their heads when others are losing theirs. These are volatile times, but with the right perspective, most of us could be the strong handed winners Buffet describes.
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