Many Happier Returns

The end of the financial year in Australia always generates a fair degree of both reflection and crystal ball gazing as the nation's media and market pundits seek to position themselves as sages and seers.

And this past financial year ? one in which the global financial system faced its sternest crisis in decades - has really got the industry's collective brain cells working in overdrive. Just what will happen next?

On this score, there is a decent debate between several camps. At one extreme are those who think the foundations of a new bull market are being built. At the other are doomsayers who think the real carnage still lies ahead.

Between these two poles are those who think the worst is probably over, but that more volatility is in store. The disagreements here focus on the strength of the economic recovery and what will happen when governments and central banks start withdrawing the extraordinary stimulus from the system.

Still others are fretting about inflation and the risk that policymakers have overcooked the goose by cutting interest rates too far and by running up large public sector debt to keep demand ticking over while the business and household sectors sort out their own balance sheets.

This many-sided debate - and the above list of arguments is by no means comprehensive - understandably leaves many investors confused about how they should approach the new financial year.

The short answer to that question is that all those opinions and complexities and risks are reflected in the prices of securities. You can join the debate, of course, but you won't learn anything that the market doesn't already know.

And if you base your investment strategy on the basis of someone's opinion about the future, you may end up taking unnecessary risks.

To illustrate this point, it might be useful to reflect on what the various gurus were saying a year ago about the likely outlook for 2008/09.

In a financial year outlook published on July 1, 2008, The Australian newspaper¹ asked six prominent market analysts for their forecasts on the domestic equity market, crude oil, cash rates and the Australian dollar.

The table below shows the median forecasts of the newspaper's analysts and compares them to the actual outcome at the end of June this year.

2008 / 09 Analyst Forecasts

You can see that the esteemed panel got it wrong on all the variables, most notably on the cash rate, which the Reserve Bank cut from 7.25 per cent in September 2008 to historic lows at 3.0 per cent by April, 2009.

They were way too optimistic on the equity market, expecting Australia's broad benchmark All Ordinaries index to end the financial year around 6000. It ultimately ended about a third below their forecast level.

What's also remarkable is that the big danger point for the world economy a year ago was oil-generated inflation, but as the financial year wore on and prices collapsed, policymakers started worrying about deflation.

Now in the newspaper supplements, we are seeing a range of equally learned and plausible sounding forecasts for the new financial year. What do you think their chances are of getting it right?

The proper response to all of this speculation for investors is to ignore it and to remain as diversified as possible in their chosen asset allocations. The only thing that should shift them is a change in their life circumstances or goals.

Aside from a reversal in actual market fortunes, it's the one thing people can do to give themselves the best chance of happier returns in 2009/10.

¹'Worst for 25 Years and There's More to Come', The Australian, July 1, 2008