Why it’s unwise to fear the financial doomsayers

SOMEONE is always saying that the end of the financial world is coming. Learning how to ignore them is a key part of long-term investment success.

Predicting financial collapses is big business for some people, so be wary of their claims. Picture: Supplied.

THERE was a report the other day claiming that Australia was six weeks away from a house price collapse.

Earlier this year a global bank warned investors to “sell everything” because 2016 would be a “cataclysmic year” for financial markets.

I often receive emails predicting that the next downturn-crash-Recession-Depression is just around the corner.

Anyone who believes these negative forecasts would be too scared to step outside, let alone think about investing money to improve their financial future.

Investing does carry risk, but those who spread their risk and stick with it for the long term have always done better than those who blindly follow the herd, or listen to the doomsayers.

Almost all of us have a stake in investment markets whether we like it or not. A majority of Australians’ super funds have at least half their money invested in volatile assets such as local and international shares.

Property is an investment and its prices rise and fall. Even safe bank deposits are investments — albeit slow-growing ones in recent years.

Peddling bad news makes sense for many of those who do it. Some speakers charge tens of thousands of dollars to tell you to prepare for the end of the world.

Others thrive on the short term rollercoaster that is financial markets, making money whatever way markets move. If markets were stagnant or grew steadily but predictably, professional traders wouldn’t have jobs.

Shares are simply a slice of a business. If the business is well-run and makes good profits over many years, it is going to increase in value no matter what the pessimists predict.

The huge swings we see in sharemarkets are a combination of professionals making profits on both rises and falls, and smaller mum-and-dad investors getting caught in the crossfire and worrying whether they should sell, buy or do nothing.

There will always be investment downturns. We recently experienced the second-worst in Australia’s history, during the GFC in 2008 and 2009 when our sharemarket’s value more than halved.

In March 2009, roughly the time many people sold out and gave up, shares started a slow climb higher. Today Australian shares are up 74 per cent on their March 2009 low but still need to climb 25 per cent to reclaim their 2007 record high.

Many of the investors who sold out during the GFC were retirees who switched their money to cash — only to watch bank deposit rates slide from 8 per cent to today’s levels of just above 2 per cent. Ouch.

Share investors who held firm benefited from the rebound, plus rising dividends for many stocks.

The calls for a collapse earlier this year have not proven true, and although we are now in the traditional danger months of September and October, most analysts do not see a massive GFC-like crunch coming.

When people talk about a looming property price collapse they mostly mean Sydney and Melbourne, where house prices have boomed in recent years. Many other capital city home values have gone sideways or backwards.

Adelaide has struggled with the nation’s worst unemployment rate — a common cause of property slumps — but its median house price has improved slightly.

Uncertainty for investors will continue in the years ahead, but that’s still no reason to sell everything and hide.