Are we near the end of a bull market?

In this week’s Sunday Times, Chris Needham states that “Nobody knows when this rampant bull market is going to end, but investors at current lofty levels seriously need to weigh up the risks they are taking. Fund managers say the risk is that the local stock market is so high that investors buying into it now will essentially see no real return [i.e. returns in excess of inflation] for many years. The danger of being out of equities, however, is that they will miss out on even more good returns.”

The Dow Jones Industrial average also cracked the 13000 market for the first time in its history this week.

So what does one do now? At Silke Financial Services our view is that the equity market is a great long term investment. But at current levels of the equity market locally and abroad does one fully invest in the market at current levels? For the long term, yes, its a great idea to apportion a part of your wealth to equities but on a shorter time horizon, tread with caution.

Indeed that there some areas of our stock market that should perform well into the foreseeable future. Take the 2010 Soccer World Cup in South Africa and all the sectors that should boom which are related to this event.

Silke Financial Services’ approach is as follows:

For long term monthly unit trust investors in equity funds continue with your debit order investments. If the stock market does plunge you will be buying units at much lower prices and this should reward handsomely over the long term.

For lump sum investors with a time-horizon of 3 to 5 years consider funds with a low equity weighting to provide a stable, yet inflation-beating return. Take advantage of compounding. Take a look at this table which illustrates the point.

How compounding works

Year 1

Year 2

Year 3

Year 4

Year 5

Avg

Fund 1 (High Equity)

0%

30%

0%

12%

-25%

3.40%

Fund 2 (Medium Equity)

30%

-15%

10%

7.50%

-5.00%

5.5%

Fund 3 (Low Equity)

12%

10%

12%

13%

12.5%

11.9%

Fund 3 confirms our current view at Silke Financial Services as one of caution when investing a lump sum over the medium term. On this basis we advocate an equity allocation of a maximum 25 to 30% in current market conditions. Built into this equity portion is an offshore component to take advantage of the relatively strong rand to take advantage of a declining rand into the foreseeable future.

Note that the above does not constitute advice and is to used for information purposes only. Silke Financial Services accepts no liability whatsoever for persons utilising these comments in order to make investment decisions.

Ken Silke
E-mail: ken@silke.co.za