The Australian sharemarket, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), could crash at any moment.
Yep, that's right. A finance guy telling you the market — your money — could sink today, tomorrow or whenever.
It's hard to say — and hear. But it is true.
Any moment now.
You might think I'm being a doomsayer or preaching about things which I do not understand.
But we humans have a habit of complicating things. Shares are no different.
Some of us think we need a new supercomputer or membership to a website which runs special charting software that 'predicts' share prices.
Others think mathematical equations exploit weaknesses in 'the market'.
However, at the end of the day you need only remember two things about share markets:
- Good things take time – there has never been a get-rich-quick scheme that was sustainable; and
- Shares are simply part ownership in a business
The second point is very important. Just imagine if you owned 10% of a local, quality, bakery. Would you use fancy charting software to predict its price?
Or would you simply focus on the business and its outlook?
I know how I would rather invest my money. I buy businesses, not shares.
Looking at the bigger picture. The ASX 200 — or "the market" according to the "experts" on TV — is just 200 companies.
Even trying to predict the direction of human emotion, the price of 200 companies and the value of the businesses themselves is outrageous. I know many of the experts on TV. I have interviewed Australia's best fund managers.
I'm telling you, none of them could predict 'the market'.
That's because the fewer the investments we make, the smarter we will look over time. Candidly, fewer decisions mean fewer mistakes.
The best investors I've ever met have portfolios with no more than 30 positions which they hold for years. Meaning, they need just a few new investments each year.
Foolish Takeaway
An "expert" might look at the history of the market to see that the share market crashes (a 20% drop) every seven to 10 years. They might also discover that 75% of the past four severe market downturns begun in years with 7's at the end (87', '97, '07). But does that make them any more informed?
Hell no!
Here's your tried-and-tested strategy:
Keep three months of living expenses in cash (or up to six months if you are the only breadwinner). Expect market crashes. Don't act like you are a smarter than you are. Keep it simple.
When you can do that it won't matter what "the market" is doing.
