US markets finish flat, some points on writing your own investment strategy - ASX futures up 20 points

A drop in retail sales yesterday put the boot into an Aussie stock market that had a very whippy morning, falling just shy of 150 points from its session high to its close. That was a very bearish end to the day; however, it didn't ultimately foreshadow a particularly gloomy night, with US markets rallying 1% following the ~2% lead given by European markets, before settling to finish fairly flat.

Today I've focused on ASX 200 market behaviour, where we've seen it approach the 5,000 mark, once again. On today's first chart I've shown the 'double bottom' that punctuated the 2011 equity market lows, before the ASX chopped its way higher into its early-mid 2012 highs. On the second chart, I've shown the current formation, which has the potential to become a double-bottom, but we don't have evidence of that happening yet. If the market rallies into the close today, the evidence of buying support above 5,000 would be confirmed once again and we would begin to more closely analyse the establishment of a major medium-term low.  

The last chart today contains the ASX 200 in black with a US S&P 500 volatility futures (VIX) overlay. When we look at the comparable periods of volatility in 2010 and 2011, they don't necessarily suggest that we should expect to experience heightened volatility, rather they suggest a period of sustained volatility should be expected. These are two very different things and by repeating myself a little with regard to current volatility, I am suggesting to all investors that they should structure their expectations in a way that accepts this. Typically, investors fear uncertainty. But if you can at least train your mind to expect volatility, you should be able to remain focused on an outcome that you find satisfactory.

As many of you know, Rivkin handles new and existing self managed superannuation funds for members (phone 1300 548 546 if you'd like us to set one up for you). Every time a new member opens a fund, that member becomes a trustee of a trust and must articulate what the investment strategy for that trust is. While this is a legal requirement for super funds, it should be a practise that every investor engages in. Why? Well, if you have a simple investment strategy to act as a guiding star for you when the seas get rough, you'll always be able to look up from the gloom and remember what it is that your job as an investor is. For example, you might have an investment strategy that starts as simply as a few criteria bullet pointed on a sheet of paper, "To invest in up to 20 ASX 200 stocks; Maintain a maximum portfolio weight of 6% in any individual stock; Target an annual average dividend yield of 6% or greater, excluding franking credits; Target a maximum loss in any one stock (including accumulated dividend value) of 25% before I automatically sell that holding," for example.

If you have something like this (and remember, you can always add criteria, add other asset classes and restructure it later), you'll at least have a cheat sheet to reference when you come up against this uncertainty that all investors dread. Over the past two weeks, you could have looked at your strategy and said, "Ok well even if half of my stocks are affected by dampened sentiment and on average their earnings fall by 20%, then that equates to a potential drop in earnings of 10% for the portfolio and--assuming payout ratios are maintained--that will see my portfolio yield drop from 6% to 5.4%, before franking." The more systematic and logical you can make your investment process, the better equipped you will be to handle volatility and remain focused on whether your portfolio is doing the job that you ask of it.

If you are considering setting up an SMSF or you're an individual investor who would like to make a start on a formal strategy, email and we will send you a sample Investment Strategy document. Please note that Rivkin offers general advice only, so the document should be used as a template for illustration purposes only.

Source: Rivkin, Saxo Bank

To view the Rivkin economic calendar and Global Markets matrix, members can click here.

This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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This article contains information about foreign exchange contracts, which are considered complex financial products. Please click here to read ASIC's foreign exchange trading article before considering an investment in foreign exchange contracts. 

This article contains information about CFDs, which are considered complex financial products. Please click here to read ASIC's "Thinking of trading contracts for difference?" document before considering an investment in CFDs.
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