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Income Solutions Pty Ltd

Comments from Principle Financial Planner, David Ramsay on recent downturn of capital values within the sharemarket

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Commentary on recent drop in capital values within sharemarket.

Date: Thursday, 20th March, 2008. Source: Income Solutions. Author: David Ramsay.

I’d like to communicate a few of my thoughts around the recent fall in capital values within the share market over the past month or so. This drop has been brought about by the normal reasons – Fear and Greed.

The greed of property speculators in the U.S., the greed of banks lending money to people who could not pay it back, and the greed of the mortgage brokers selling these loans.

Then there is also the greed of share market speculators who think the market is going to rise by 20% every year and over extend themselves – then at the first sign of negative returns, fear and panic set in. This was exemplified on the front page of The Financial Review on 23 January 2008 with the article “Fear triggers a scramble for the exits” [click to view image].

In the same newspaper appeared a small headline, “Sovereign funds warned on resource plays” [MS Word format]. When reading this article note the table showing the amount [click to view image] of money in these sovereign funds, totaling close to $3 trillion. These government-controlled funds are buying the blue chip companies of Australia, the U.S., etc.

A specific example appeared in the The Financial Review on 18th February 2008 with the article “Growing by leaps and bounds” [MS Word format], which discusses the Chinese government’s recent investment of $15.4 billion into Rio Tinto.

So once again we see history repeating itself with many investors fearfully selling off shares at the same time large investors are buying. The rich get richer and the poor get poorer.

It has been with great comfort that not one of our clients withdrew money because of the market fall and in fact many of our clients have done what these large sovereign funds did – invested more money.

Times like these highlight the importance of investing with a long term view and regularly reviewing your financial plan. If you would like to discuss your personal situation we encourage you to schedule an appointment with an adviser.

In addition, we also continue to run monthly seminars in our client learning centre which you are welcome to attend anytime. The seminar is a great resource which should add to your peace of mind and get you re-focused on your long term plan. Please check our seminars page for dates and times or simply call the office to reserve a seat.

I hope this information has been of interest to you and brings you further comfort during this time. Here are two additional resources I thought may interest you:


Yours Sincerely,

David Ramsay
Certified Financial Planner

The facts about capital value:

Over the 25 years to 2007 the Australian stock market has delivered a compound return of over 15%. With tremendous returns for investors over the last 4 years (28% in ‘04, 22% in ‘05, 25% in ‘06 and 16% in ‘07), in our view it is reasonable to expect that returns would eventually return to more normal figures of around 12% over the very long term. Research shows that over the last 19 years you only had to miss the best 27 days in the share market to reduce your return to that of a cash return; timing share markets is very difficult. View a graph of the last 27 years of annual returns [click to view image] for the Australian Industrials Index

The facts about income:

Income paid from Australian shares in 2007 was again greater than 2006 – the income continues to come in despite the capital values falling. February’s dividend was just recently paid and we’re looking forward to May’s dividend. View a graph of the last 27 years of dividends [click to view image] paid from the Australian Industrials Index versus the income paid from a term deposit.

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