I recently walked by bus a stop early one morning. Nothing strange about that.
What I saw though stopped me in my tracks.
A man, around 75 years of age, still in the clothes he slept in, was savouring a meat pie and a coffee from the 7-Eleven across the road.
He was OK, but a long, long way from enjoying a home-cooked meal in his own home.
We bang on and on about the stock market, and, to be honest, many people’s eyes glaze over when you mention companies and valuations.
However this man is a living, breathing example of why you need to start paying attention to the market and why it’s important for you, NOW!
The stock market, and other investment classes are there to help you live a ‘comfortable’ retirement.
I know it’s a long way away, but if you ignore it now, or think it’s not for you, you’ll regret it, big time.
So, let’s get our heads around what’s happening to the stock market now, and whether or not you should throw some money at it, however small an amount.
The stock market: Some broad brush things to start
If you had said to me a few years ago, in 2019 Australia’s stock market would be pushing record highs, I’d have scoffed.
So, the joke’s on me.
I would have tried to convince you until I was blue in the face that China’s debt-laden economy was on the brink of collapse, the eurozone was headed for disaster, and Australian interest rate were on their way up.
Now, while China’s economy is slowing, the Middle Kingdom is still sucking up Australia’s raw materials at a breath-taking pace, the eurozone is being supported by ultra-low interest rates, and Australian interest rates are also very low, and heading lower still.
It’s the kind of environment supportive of rising share markets, not one that would drag the markets down.
So, let’s dig a little deeper and find out more about why the share market is trading higher, and whether it will last.
The stock market: It’s a complicated beast
Here’s the rub, the share market is an awfully complicated beast.
It rises and falls based on the perceived value of each individual company.
Working out the value of each company is an incredibly difficult task.
It involves finding the company’s present value, based on forecasts of how much money it’s likely to make in the future. You need a very solid grasp of maths to be able to do that.
However, it’s not just for the finance nerds.
It’s OK to think ‘big picture’ too.
Much of the market is made up of banking and mining stocks.
There’s also a number of healthcare and utilities (like gas and electricity companies).
The general direction of these stocks is pretty straight forward to work out.
The stock market: Can these stocks push higher?
The short answer is: yes.
To push higher, we’re going to need to see the price of iron ore push higher.
That would boost the share prices of two of the biggest market players: BHP Billiton and Rio Tinto. Think big unknown here is whether or not China will continue to buy-up Australia’s iron ore.
As far as the banks are concerned… well, the banks remain incredibly profitable, so, unless there is a major domestic financial crisis, the banks will continue to offer solid returns.
Healthcare, utilities and consumer staples (like Woolworths and Wesfarmers) will ‘always’ offer good value. You’re not going to make a squillion on these stocks but they will offer better returns than cash in the bank. They may also offer a dividend, and will weather market downturns better than most.
So, at an individual stock level, over the longer term, based on recent history, you’d be wise to take an interest in the stock market’s blue chip stocks.
The stock market: Monetary policy influence
What about other forces influencing the market?
Monetary policy: two words that mean very little to most people!
The fact remains though that, based on the Reserve Bank governor’s latest speech, interest rates are going to be lower for longer.
That has two broad implications: firstly, more folks are going to move away from stashing their money in bank accounts, and switch to the share market to park their cash; and secondly, those who invested in 10 year bonds (10 years ago) are going to continue switching out of their bonds and move into the share market.
Both trends mean stocks could push higher from here.
The stock market: Meanwhile over on Wall Street
Keep one eye out for Wall Street too.
Australia is what they call a “sheep market”: it follows Wall Street.
I suspect that as long as Donald Trump remains president, he will continue to put pressure on the US Federal Reserve (equivalent of the Reserve Bank) to keep downwards pressure on US interest rates.
That will have the effect of inflating the US share market, and, you guessed it, also inflating the Australian share market.
So, keep your eye out on what the “US Fed” – as they say – is doing, and how that’s influencing the Dow Jones Industrial Average (equivalent of the ASX200).
Stock market fall
The stock market has ups and down, just like any other market.
A number of analysts are warning a stock market correction could be just around the corner. That’s because it’s around record highs, and when that happens, a ‘herd’ mentality creeps in – making the market vulnerable to big swings. People get nervy.
I’m going to make it really simple. You have two choices right now: wait for it to correct, and then buy up some stocks at a cheaper price; or buy now, and ride it out.
The worst thing that could happen is that the stock market crashes after you’ve just invested heavily and you’re at or near retirement. Those folks should seek very detailed financial advice.
So enough of saying finance is confusing or too hard. It’s time to take an interest – whether to help you save up for a home deposit, or for your retirement, or to make sure you’re not just paying the bank for the privilege depositing your money in an account (with fees and low interest that’s exactly what’s happening now).
According to ASFA, A single person needs $545,000 at retirement, and a couple $640,000, for a comfortable retirement, presuming they are healthy and own their own home by the time they stop work.
Cash at the bank and superannuation, especially for single mums, may not get you there.
Obviously, sometimes, falling on hard times is unavoidable, and welfare is there to assist those people, but if all that’s standing between you and generating more wealth is a little more understanding and some proactivity – please call your financial advisor, or give an online broker a call.
The stock market is there for everyone, not just a few people in suits.
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