Don't ignore the economic clock in the COVID-19 era

Are you focused more on income or capital growth in your portfolio? Chief Analyst Dale Gillham examines how you can use the economic clock principle and what it takes to be a smart investor.

When looking to grow an investment portfolio, I often find that investors blindly follow the herd looking for the best bang for their buck. I also find that investors are focused on income rather than capital growth from their investments, but smart investing is about the total return you receive.

Many are asking in the current COVID-19 environment where they should be investing, and, in my opinion, the answer is simple. As the renowned Warren Buffett famously states, ‘buy in doom and sell in boom’. Traditionally investors turn to property as their preferred investment, but when looking at the recent research, depending on the area where you want to invest, property prices are forecast to be flat or down.

Furthermore, in this low interest rate environment and uncertain recessionary market, property prices may be subdued for quite some time. So, is this the right time to be buying property or should you stay away?

To understand where and when you should be investing, I always recommend investors consider the investment clock or what is otherwise known as the economic clock. I say this because smart investors diversify their investments across several asset classes including property and shares among other investments.

The idea is to look for opportunities in asset classes that are underperforming and likely to move with the next phase of the economic clock. In short, you are looking to buy just before the asset begins to rise not after it has already risen. Sadly, too many investors are indecisive when it comes to investing and jump from one investment to another hoping to get into the next best thing after it has already risen strongly.

Right now, the investment clock has ticked well past property as an asset class and, therefore, now is the time to start looking at gaining exposure in this area. In regards to the share market, many sectors have been underperforming for quite some time that may present some great buying opportunities for the astute investor.

Remember, understanding when the right time to enter an asset is very important, as you want to gain a solid return from both income and capital gains. That said, what is even more critical is knowing the right time to exit. In my experience, investors tend to hang onto poor performing asset classes or hang on way too long in the hope they will perform better. As Buffett states, ‘sell in boom and buy in doom’, which means buy when assets are priced low and sell when they are high because this way you will avoid the ugly rollercoaster ride that the majority of investors endure.

So what are the best and worst-performing sectors this week?

In contrast to last week, the All Ordinaries Index has been slightly bullish, and, as such, nearly all sectors are in the green. Materials has been the big performer up over 6 percent with BHP and S32 rising strongly together with a number of other miners. Next is last week’s worst sector, Energy, which is up over 5 percent, followed by Information Technology up nearly 3 percent. The worst performing sectors include Financials, which is just in the red, followed by Industrials and Consumer Discretionary, both of which are currently up around 1 percent.

Looking at the ASX top 100 stocks, the best performers include Incitec Pivot, up over 15 percent, followed by Ampol, up around 10 percent, with Santos and BHP both up over 8 percent. The worst performers include Resmed, down over 8 percent, Scentre Group and Flight Centre, as they are both down over 5 percent, followed by NAB, down over 3 percent.

So what’s next for the Australian share market?

This week seems like déjà vu, given that over the past few weeks the All Ordinaries Index has tended to trade higher earlier in the week only to fall away on Friday. Last Friday, the market fell nearly 2 percent, eroding all of the gain from earlier in the week. Therefore, it will be interesting to see if the Australian market can hold up and close above 6,200 points this week.

As I have mentioned previously, the market has been moving cautiously and this week is no exception given that it has risen strongly for two days and been indecisive or down for two days. There is an old saying that the amateurs open the market and the professionals close it, therefore, where the market closes at 4pm today will be critical in understanding how it unfolds next week. A high close means the market will likely trade up while a low close means the slow drift down will continue.

For now good luck and good trading.

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