Well, that’s the end of another year.
Will next year be any different? We’ll let you know our thoughts on that in a moment.
But first, let’s remind ourselves how this year shaped up…
As we wrote in the December issue of Australian Small-Cap Investigator:
“Before the start of the year, I thought investing in 2011 would be hard.“Turns out I had no idea just how hard.”
2011 has been the year of market volatility.
The U.S. S&P 500 has traded between a high of 1,363 in April… to a low of 1,099 in October… That’s almost a 20% range from top to bottom.
The Aussie market tells a similar story: a high of 4,971 in April, through to a low of 3,863 in September… that’s a range of 1,108 points, or over 22% from top to bottom.
As for the Aussie dollar, the year has been just as eventful. As high as USD$1.10 in July… to as low as USD$0.95 in October.
Finally, we couldn’t review the year without looking at gold.
In Aussie dollar terms, gold traded as low as $1,321 in February, and climbed as high as $1,806 in August… almost a $500 range.
We could carry this list on. Almost any tradeable asset you look at has plumbed the depths and reached the heights at some point this year.
In short, this has been a market for two types of investor: the speculator and the spectator.
Volatile markets are a speculator’s dream. As it rises one day and falls the next… if you’re quick, smart and (dare we say it) lucky, you can make many times your money buying and selling.
Of course, the best markets are when it rises for several days and then falls. It gives you extra time to get set and then lock in the gains… if only it was that simple!
Top traders know speculating isn’t easy. And that you can’t win on every trade. Slipstream Trader, Murray Dawes had a terrific year buying low and selling high. But even he didn’t have a 100% perfect record.
The same goes for fundamental investors too. We haven’t gotten everything right in Australian Small-Cap Investigator. The important thing is to understand the risks… and know when to get in and when to get out.
Speculators understand these risks. They know they’ve got to take a small hit if they want the chance to clock up big gains.
And with the market staying volatile – up one day, down the next – the New Year looks set to be a great time to buy certain stocks while they’re cheap. Our preference is small-cap stocks, simply because they offer big rewards for a small amount of risk.
But what if you don’t want to speculate? The only other choice in this market is spectating…
You can keep your money out of the market and watch from the sidelines if you want to. Although, we’d advise against it.
Why? Because if you’re a spectator, the only place to stick your cash is in the bank. Trouble is, while we suggest you have a big bank account, you won’t earn enough interest to keep you ahead of the game… especially with deposit rates falling.
Look, cash is great as a safety net.
It provides stability and comfort in a choppy market.
But it’s not the path to wealth. And thanks to inflation, it’s not even the solution to maintaining your wealth.
So in order to get ahead you’ve got to take risks.
Sitting on the sidelines watching the markets won’t get you anywhere.
And neither will buy-and-hold investing. Remember, this year buy-and-hold investors have taken a big hit… especially those who bought near the top of the market.
We’ll admit, spectating is fine for short periods. After all, speculating takes more effort than spectating. Just as playing football is harder than watching football.
But if you’ve spectated waiting for markets to calm down, you’re set for disappointment. What you’ve seen in 2011 is set to repeat in 2012… and our bet is 2013 won’t be much different either.
So don’t get too comfortable watching from the sidelines. Because at some point you’ll need to speculate in order to get ahead… and the sooner the better.
Bottom line: if you wait and watch, the best you can expect to make is 4% on a savings account (perhaps less if bank interest rates fall further). With official inflation at 3% and real inflation much higher, bank interest rates aren’t high enough to keep you ahead of inflation.
Keep cash in the bank for security. But speculate to stay several steps ahead of the threat of inflation.
Cheers.
Kris
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