This is definitely not the start of another global financial crisis. That was a credit event caused by billions of bad debts that resulted from irresponsible lending. The catalyst for the big falls this week was Chinese investors punting on the stock market using margin loans. As the market fell, shares were forcibly dumped to cover margin calls. The turbulence of the week has resulted in a string of emails asking whether to get out of the market, and if superannuation is still worthwhile.

For starters it would be extremely risky to exit the market after the huge falls we have just experienced – all you would be doing is converting a paper loss into a real one.

In any event, unless you have a direct shareholding, it is not possible to make a fast exit. Redeeming all or part of your portfolio requires forms to be completed and processing time to occur. Allow a week at the least.

And don’t confuse superannuation with assets such as property or shares. Superannuation is simply a vehicle that allows you to hold assets in a low tax environment. Anybody whose superannuation is invested in shares would have suffered a loss of value this week, but so would anybody who held shares in their own name.

The only realistic investment options are cash, property and shares. The Australian economy is flat, with jobs continuing to be cut and action by Green groups stopping infrastructure development

The fall in the share markets tends to make people feel poorer and less confident of spending, which will make economic conditions even worse. If this is true, the only direction for interest rates is down. It is really up to each individual to decide where they want to invest, but do you really think savvy investors will choose to move their money to term deposits paying 2% when they can get better than 6% franked from shares such as the banks and Telstra?

If stocks like this are held in a superannuation fund in pension mode the franking credits will take the effective yield close to 10%

That’s five times what you can get in term deposits!

The Aussie dollar got hammered too, but this has an upside as well as a downside. It will be great for exporters and the tourism industry and will cushion any falls in shares held by international managed funds.

If the international share values fall 4% and the Aussie dollar falls 4%, you will not have lost any value at all.
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Falling rates will push our dollar down further, which should make international equity trusts great performers for the rest of the year. So don’t be concerned about the current turbulence. Over the long term, share-based investments will still give great returns.

The above is general advice and readers should seek professional advice before making financial decisions. Feel free to contact Optima Partners.

Phil Nolis – Director

Optima Partners