WAR! WHAT IS IT GOOD FOR?

It has been a particularly tough year for investors, with negative returns recorded by both global and domestic shares. The bursting of the "Tech Bubble", the fallout from the US terrorist attacks, the collapse of companies such as Enron, combined with the emergence of accounting irregularities and the continual uncertainty surrounding Iraq and North Korea have all had a significant impact on investor confidence and ultimately on global sharemarket performance. These international events combined with disappointing profit results of some of our locally listed companies also influenced the Australian sharemarket. Ironically, this was despite a resilient economy that recorded one of the strongest growth rates in the world.

All these factors have contributed to one of the worst years on record for sharemarkets. The major indices finished the year as follows:

For the US market this completes a 3 year losing streak - the first since 1939-41 and for Australia the largest annual decrease since 1994.

STICK TO YOUR STRATEGY THROUGH SHORT TERM FLUCTUATIONS - DON'T PANIC!

At times such as these, it is important not to lose sight of your long-term financial goals. If investors 'panic sell' part of their investment portfolio as a reaction to extreme movements in financial markets, they risk realising short-term losses instead of 'riding-out' the market downturn, which will have less impact on their portfolio over the longer term. In fact, a decline in sharemarkets often creates attractive investment opportunities for investors, as lower share prices allows access to the sharemarket much more cheaply. Unless your circumstances have changed, the basic foundation of a sound financial plan for the long term need not change, even if the markets do.

REMEMBER WHY YOU ARE INVESTING

Your investment strategy should take into account your individual goals, personal situation and financial needs. If you depart from your financial plan without adequate consideration of the long-term consequences, you risk not achieving your financial goals over the long term. After all, your overall financial plan (including your investment goals) is a long-term concern and you should not lose sight of your goals in an attempt to avoid short-term fluctuations in investment markets.

REFLECT ON HISTORY

While the impact of the tragic events of 11th September 2001 cannot be forgotten, history tells us that volatile markets are not uncommon and that markets will recover. Indeed, war is not necessarily a bad thing for equity markets. It all depends on the outcome and its longevity.

THE RICOCHET EFFECT

Though the stock market often takes an initial hit during a military crisis, it usually more than makes up for that in the months to follow. Here's how 12 such events played out:

*Change in Dow Jones Industrial Average through the crisis period.
**Change in the Dow over the 126 trading days following the immediate reaction.

Source: Ned Davis Research

Experts believe because talk of war has been front page news for nearly 3 months now, the market has largely factored in the immediate negative effect of the news of war. So, if war is imminent and history is anything to go by, there is a likely opportunity awaiting those with cash to invest.

So, to enhance and recover investment returns, remember some of the basics of sound financial planning.

• Invest to increase diversification, ie across countries and across industries
• Invest in growth companies
• Time in, not timing
• Seek out investments that provide good levels of income

Whilst predicting future returns is impossible, it's likely that conditions are now in place for your returns to rebound!

Geoff O'Neil - Director,
Authorised Representative Financial Planning & Life Pty Ltd,
A.F.S.L. No. 221629

date of article: 20 March 2003

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