Share investing – A darkening outlook?



The world economic outlook according to many observers is less bright now than, say, six months ago but what the impact on investment markets will be henceforth is anybody’s guess. The International Monetary Fund has recently announced an expected reduction in world economic growth, the US-China tit-for-tat tariff increases are now actually affecting world trade with anaemic signs of any resolution, US interest rates are still on an upward trajectory and domestically falling residential property prices in our major cities are hurting consumer confidence and likely future spending. It is interesting to note that investment markets normally anticipate these kinds of mood changes and react well ahead of any actual economic effects.

Nowhere else but in share markets are these changes most clearly reflected. The US and our own share market started their falls in October and by the end of the year our market had suffered a fall of about 7% since the beginning of last year (and considerably more from its peak in late August). So, what to do now? Have we seen the worst or will markets keep deteriorating? We don’t know and it would be foolish to guess or indeed, we think, to reposition our investments according to any guesses.

Sticking to looking at share markets, and we have to confess that for several years now we have been favouring share market investments, we should perhaps re-affirm why we invest in shares. Traditionally we do so for long term growth, growth that in Australia has been on about par with residential property over the long term. But for the last several years we have also invested in shares to generate good dividend income, better income than can be achieved from interest bearing investments such as bank/fixed term deposits and even from residential property.

The price we pay for this is greater volatility, share prices vary substantially from time to time which can be nerve racking and engender a feeling amongst many that share investing is equivalent of gambling, a conclusion with which we firmly disagree. This is provided you primarily choose to invest, for the longer term, in large, well-established companies, that you are able to invest enough to hold a well-diversified portfolio of shares covering a range of market sectors and including internationally based companies.

The volatility on the downside is certainly disconcerting and requiring a measure of ‘discipline’, particularly as history shows that falls when they occur are more sudden and steeper than the eventual rises that hitherto have always followed and produced new highs. But dividends do not vary at all as much as share prices. Since the global financial crises now more than ten years ago our domestic share market has had falls of more than 15% from top to bottom on three occasions, in 2011, 2015 and now. But there have been virtually no falls in dividend levels from a diversified quality share portfolio. Whether or not dividend levels will fall as a consequence of the current market correction is not yet clear, but our expectation is that they will not decline but if anything, rather increase.

Thus, whilst not being able to predict the short-term fluctuations of share markets our only sensible advice is to stay the course, take advantage of opportunities thrown up when good shares become cheaper, if you can, and trust in long term recovery and, in the meantime enjoy a fairly steady flow of dividend income. Of course, no investment is risk free and shares certainly carry more risk than e.g. bank deposits and that’s why the returns should be higher.