Smart Investment choices in a downturn market

When Markets crash a frantic “sell, sell, sell” is publicised across the world and the world looks in disbelief as brokers perform acrobatics over each other and the room resembles an animal enclosure, as they try to prevent investors losing all of their money on their investments. The shock of such a sight puts the whole economy in a state of panic and every small investor follows suit.

But a market downturn doesn’t have to be all doom and gloom. We have some tips on what investments are worthwhile in a slow market , where to invest and how much to invest:-

1) Whenever you are considering investing you need to ask yourself what extent of risk is acceptable to you. If your answer is none – well you still have choices but they become more limited.

You have to feel comfortable in where you are putting your money or the investment can cost you more in time and stress than it is worth.

At FORSYTHS we believe the number 100 can be a useful rule of thumb to calculate how much to put into safe investments.

How does it work? Well take the number 100 and subtract your age.

That will give you a figure that will give you peace of mind no matter how bad the economy.

If you are aged 20 then 80% of your investments could be put into growth investments. You are young enough to go through several investment cycles and will recover from most down turns.

However if you are 65 and retiring the formula would mean that 35% maximum should be placed in risk investments. That means that should the stock market or property market collapse by even 30% the most you would have at risk would be 10% of your lifes savings. Not likely to lose much sleep over that compared to losing 30% of your lifes savings.

2)  Say yes to shares. You need growth assets such as shares and property to reach your goals for higher monetary funds. The key is to balance these with more stable income producing assets.

3) Get stability in your investments by investing money in a high interest savings account. If you are getting less than 5% return then shop around as you may find a better provider.

4) The Investment Property Market. Finding the right place to invest within Australia can be a mine field. The following summary (Current 01 July 2013) can help identify the current trends for median priced houses and units.

While these will change as people seek cheaper housing or because changes in the job market, FORSYTHS keeps pace with the changes and can give an overview before you begin to look for an investment.

Place	Description	New Invest
Australia Wide		Y/N
Sydney	Positive but not high growth	Y
Melbourne	Not enough houses for demand. Footscray new developments to bring increased demand	Y
Canberra	Stagnant market	N
Newcastle	Highest unit vacancy of 2% in 5 years	N
Adelaide	Bottom of property values for median range	N
Gold Coast	Cheap is all investors looking for. Between 1-1.5km from beach higher growth likely in Broadbeach waters, Mermaid beach, Burleigh waters	Y/N
Perth	Average sales days is 54days. Big movements but houses are highly priced	Y
Darwin	Hot spot for growth over past 12-18 months. Short supply of houses for demand	Y
Queensland		Y/N
Sunshine Coast	Unit market thinly traded so future capital gain potential better than for houses	N
Brisbane	Price steady. Choose options close to transport hubs. Planned infrastructure in Holland Park, Tarragindi and Salisbury.	Y
Toowoomba	Positive value growth. East Toowoomba, Rangeville and Kearneys springs	Y
Emerald	3-6 year growth but heavily reliant on resource sector. Cheap houses can be picked up and renovated after floods.	Y/N
Harvey Bay	Best 4-6 year growth expected along Fraser coast is on Esplanade	Y
Gladstone	Abundance of competition. Vacancy of rentals to 5.9%	N
Mackay	Vacancy of rentals risen from 1.5% to 6.5% and is highest in Australia	N
Townsville	Steady market no significant growth	N
Cairns	Steady market no significant growth	N

 

5) Vendor finance in a nutshell, is when an investor cannot raise funds from banks or building societies but is able to buy the asset off thVendor finance can be particularly useful in an economy where interest rates are very low.

An example could be if a retired couple is earning say 3% on their $400,000 retirement savings then they would be getting $12,000 per year and having to live off the precious capital. However if they financed their son/daughters mortgage then they could be earning 5% or $20,000 per year.

If the same protections are in place( proper Mortgage documents) then every one wins except the banks.

6) Vendor finance can enhance the cashflow return from a residential real estate property in the region of 3%, over and above the net percentage rental return from a property.

As such, it may turn a negatively geared investment property (a return of 4%) into a positively geared property (a return of 7%), or make a newly purchased property cashflow positive from day one.

7)  Whether you have purposely negatively geared an investment property for income tax purposes you need to realise that a loss is still a loss to your personal income and in the majority of cases it would be better for your pocket to pay an additional tax amount and make a gain.

If the asset is making a loss the only justification for investing in that asset is if you think the eventual gain in income or asset value will be considerably more then the accumulated losses.

8) A share price drop of 50% is tempting but usually a value trap.

You have to adopt a conservative and objective fundamental approach when determining the actual true fair value of a company based on realistic earnings assumptions and only buy when the company can be purchased with a considerable discount compared to fair value.

It only takes a few bad investments to destroy the return of an entire stock portfolio and there are many value traps out there.e seller with more tailored terms which are agreed by the seller and the buyer.