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Sent: 18-10-2011 11:17:03
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Resource sector investing: the importance of timingA How To Book Of Self Managed Super FundsA Land Of Confusion
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Resource sector investing: the importance of timing

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

The Australian resources market is heading for a record number of consecutive monthly losses. The history of similar losses suggests that decisions need to be made now to position portfolios for the next stage of the cycle.

With a fall of 13.4% in September the ASX 200 resources index has suffered its sixth consecutive monthly decline.

There have been only two occasions in 75 years in which the market has suffered a longer sequence of falls: over the seven months to May 1952 and over the eight months to April 1958. In those instances, the indexes fell by 26% and 30%, respectively.

The table summarises all the periods since 1937 in which the resources market has strung together a similar number of loss making months as we are currently facing. The size of the fall in the last six months is within the historical range of these earlier declines.

Duration of decline

% fall

% rise(1)

8 months to April 1958

-29.7%

+21.7%

7 months to May 1952

-26.1%

-0.2%

6 months to:

March 1942

September 1971

January 1991

November 1992

September 2011

-26.4%

-37.2%

-18.4%

-18.8%

-25.4%

+31.5%

+32.4%

+24.9%

+29.9%

1. Over the six months after the period of decline

There is a danger in reading too much into statistical histories such as these. Nonetheless, the temptation is hard to resist.

With only a single exception, in the six months following each of these loss making sequences, the market rebounded by at least 20%. The exception was the aftermath of May 1952. In this instance, the market was unchanged six months later but, within four months of it hitting the bottom, it had added 11.2%.

In other words, there have been double digit gains in every case within six months of the initial sequence of losses.

This history is perhaps telling us something we already know from other sources: markets turn quickly and some of the most attractive gains are to be had in the early part of a recovery.

Being absent from the market at this time puts a heavy burden on an investor trying for even average returns let alone something better.

That leaves investors with an awkward investment dilemma. They could begin positioning themselves now to take advantage of an upcoming recovery in the market. There is a risk in doing this. They expose themselves to possible short term losses as they attempt to raise the probability of participating in the later gains. Even if the historical bounce is intact, the market could still go lower first.

Alternatively, investors could put a high priority on capital protection and elect to wait. They could legitimately prefer to see consolidation of market gains before committing their capital in the hope of having a lengthy period of less volatile but more sustained returns later in the cycle. There is a risk to this course also. Further returns after the initial bounce might be limited or fail to eventuate entirely.

At the end of the day, the choice should reflect the risk tolerance of individual investors. On one point, however, there is no ambiguity. Investors need to be taking a decision now. Even trying to avoid the dilemma results in a de facto decision to forego the short term gains in favour of the "wait and see" approach.


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