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Financial Planning Newsletter – July 2011

Andrew Clarke

The global economy is continuing its expansion, but the pace of growth slowed in the June quarter. The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries have both contributed to the slowing. The banking and sovereign debt problems in Europe have also added to uncertainty and volatility in financial markets over recent months.

A key question is whether this more moderate pace of growth will continue. Commodity prices have generally softened of late, though they remain at very high levels. Despite the challenging international environment, the central scenario for the world economy envisaged by most forecasters remains one of growth at, or above, average over the next couple of years.A number of countries have tightened monetary policy but, overall, global financial conditions remain accommodative and underlying rates of inflation have tended to move higher.

Australia’s terms of trade are now at very high levels and national income has been growing strongly, though conditions vary significantly across industries. Investment in the resources sector is picking up strongly in response to high levels of commodity prices and the outlook remains very positive.  A number of service sectors are also expanding at a solid pace. In other areas, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect.

The impetus from earlier Australian Government spending programs is now also abating, as had been intended. A gradual recovery from the floods and cyclones over the summer is taking place, though the resumption of coal production in flooded mines continues to proceed more slowly than initially expected.

The recovery will boost output over the months ahead, and there will also be a mild boost to demand from the broader rebuilding efforts as they get under way, but growth through 2011 is now unlikely to be as strong as earlier forecast. Over the medium term, overall growth is still likely to be at trend or higher, if the world economy grows as expected.

Mind vs Emotions

It takes a crisis like the GFC to really see how emotion can overrule logic when it comes to our investment decisions.

Constant media coverage about falling share prices and declining fund performance helped to create enough panic among investors to cause them to sell up and invest in cash. The move may come at a cost in the longer term.

The problem is that while cash doesn’t suffer from the same ups and downs as shares and other investments, there’s a price for that peace of mind.

You lose the advantage of already being in the market when confidence and prices recover. It means that you may have sold when prices were low and, to get back into the market, you may be buying at levels higher than you’d like – far removed from the adage ‘buy low, sell high’.

Question your decisions. Are you making a choice based on emotion or informed financial analysis? You should always be able to provide a sound justification for your decision.

Set your investment goals. Your financial adviser is a good place to start.

Keep informed. Read a range of balanced economic analysis, such as that produced by reputable research houses (eg Standard & Poor’s) or organisations such as the Reserve Bank of Australia. Learn to sort fact from sensationalist media articles. Your financial adviser is a good source of high-quality financial information.

Diversify your portfolio. Diversification can assist in avoiding investment biases by helping you to see your portfolio as a whole, and part of a long term strategy. Investing through a managed fund can also help you avoid becoming attached to certain stocks and can be an effective way to diversify if you don’t have a huge amount to invest.

Seek advice. Professional financial advice is critical to investment success. Financial advisers have access to a range of material not available to individual investors. When you are making investment decisions, your financial adviser can help by offering guidance and a balanced viewpoint.

For more information, email Rob Camilleri » rcamilleri@aitken.com.au