View this online discussion and stay tuned to Market Watch for this year’s calendar of events.

The Australian market has fallen 50% from its highs, but has to rebound 100% to reach the previous level. So does that mean it will take 7-9 years or one economic cycle for recovery?

No. There are no certainties about how long it takes to recover from previous share market losses. In fact, if we look at bear markets since the 1970s (i.e. where the market has fallen by 20% or more over at least a two-month period), the recovery period, or how long it has taken to get back to the previous peak, can be as fast as a few months or take several years. Obviously how long it takes to recover from losses depends on what kind of assets the investor is exposed to. A recovery period as long as 7-9 years is rare. It’s also important to remember that selling out of a market after falls such as those we have seen turns paper losses which can be made back, into actual losses, which cannot.

Most market analysts are experienced and knowledgeable. Can you explain why no market analyst, certainly none I received information from, could see the storm clouds on the horizon in October 2007?

A good many did see storm clouds, and not just in October 2007, but indeed much earlier. Identifying storm clouds is one thing, but picking when those clouds are likely to dump on us, for how long, and in what kind of magnitude is considerably more difficult. The kind of tools that economic and market forecasters have at their disposal are not reliable enough to make these kinds of market calls and get them consistently correct.

A good many analysts including our own analysts and fund managers did see particular dangers and were able to avoid them. For example we had almost no sub-prime mortgage exposure, and a much lower weighting to listed property than our peers. However, no investor can ever hope to avoid every risk. Indeed we are not, and can never be in the risk avoidance business. Rather, we are in the risk management business. We need to take and manage risk in order to generate adequate long-term returns for investors.

Is it possible that a whole new financial structure will operate in the world to supersede the share market and where might this leave us?

This is an interesting question, to which the short answer is no. The share market is simply a snapshot of a whole collection of businesses that make a profit by providing the goods and services we need and want. Regardless of what happens on that market on any given day or year, we all need to be fed, clothed, housed, communicated with, entertained, travelled around, banked and insured. As long as we still need those things then companies will still operate, make profits, pay dividends, and re-invest the rest of their earnings back into their businesses. In doing so, the true value of their businesses (as opposed to their market price on any given day) will tend to gradually increase. Over time, the share market simply reflects this growth. Over shorter time periods however, the share prices of the companies listed on that market can be all over the place.

How long do you think it will take before share portfolios bounce back to 2007 levels?

There are no certainties about how long it takes to recover from previous share market losses. In fact, if we look at bear markets since the 1970s, (i.e. where the market has fallen by 20% or more over at least a two-month period), the recovery period, or how long it has taken to get back to the previous peak, can be as fast as a few months or can take several years.

Obviously how long it takes to recover from losses depends on what kind of investments you are exposed to. It’s also important to remember that selling out of a market after falls such as those we have seen turns paper losses which can be made back, into actual losses, which cannot.

With oil prices falling quite dramatically over the last several weeks, are we likely to see further falls or some sort of stabilisation in the price of oil?

Further falls in the oil price cannot be ruled out given just how weak the world economy is going to be for a good part of this year. Long term however, our best guess is that the world price of oil needs to settle at prices that are higher than those we became used to in the 1990s. The world is not running out of oil any time soon, but it will take an oil price above a certain level to ensure that those oil sources that are still plentiful have enough incentive to supply to market. That ‘certain level’ is not $150 per barrel, but nor is it $20 per barrel. Market estimates of that correct long-term level probably range between $45 and $80 per barrel, but it is a very inexact science.

General Advice Warning: These comments contain general information and may constitute general advice. They do not take into account any person’s particular investment objectives, financial situation or individual needs. They should not be relied upon as a substitute for financial or other specialist advice.

Before making any decisions on the basis of these comments, you should firstly, consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs and secondly consider the relevant Product Disclosure Document.

Opinions expressed constitute our judgement at the time of issue and are subject to change.

Have you any idea when the bounce may come?

The short answer is that no-one knows. What we can say is that share market recoveries tend to happen before economic recoveries. In other words, waiting for better economic news as a sign of better times for the share market could mean you miss the bounce when it happens.

What will recover quicker the Australian share market or the international share market?

In this kind of environment, the local market is likely to take its lead from offshore movements. That’s not to say we cannot recover without a lead from offshore, it’s just that you would not want to bank on it.

How do we know when Australia enters a recession?

A recession is popularly defined as two consecutive quarters of falling Gross Domestic Product or GDP. However in my opinion, that definition is too simplistic. A better definition of a recession is a sustained decline in output and employment across a majority of industries in the economy. To make that call, we need to look at a range of indicators, including employment, retail sales and manufacturing output.

The Melbourne Institute of Applied Economic and Social Research (within the University of Melbourne) identify the start and end of Australia’s recessions using a broad range of indicators, as detailed on their website.

What impetus or catalyst do you foresee that will start the move out of recession?

If an Australian recession occurs this year, which is a real possibility, then the best ways to summarise the catalysts for recovery would be in terms of policy and confidence. Over time, expansionary policy settings (lower interest rates, higher government spending and/or lower taxes) do tend to work. They don’t work immediately, but they do work. Confidence is another key ingredient. While lower levels of confidence do not necessarily signal a recession, and higher confidence does not necessarily mean a recovery, if consumers and businesses become confident that the future will be brighter, this can and does have an impact on their spending decisions.

In the case of a US recession, the answer is largely the same, except for one important factor. Lower interest rates only work effectively if banks and other financial institutions are willing and able to extend credit. For now, that is not happening in the US. But eventually it will.

General Advice Warning: These comments contain general information and may constitute general advice. They do not take into account any person’s particular investment objectives, financial situation or individual needs. They should not be relied upon as a substitute for financial or other specialist advice.

Before making any decisions on the basis of these comments, you should firstly, consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs and secondly consider the relevant Product Disclosure Document.

Opinions expressed constitute our judgement at the time of issue and are subject to change.

Is salary sacrifice a good idea in these times as I want to retire in a year?

Regardless of market conditions, salary sacrifice is a tax effective way to save for retirement. This is because your super contribution is taxed at a maximum rate of 15%, instead of your marginal income tax rate which could be up to 46.5%*.

There could also be advantages to investing in super when markets are down. This is because share values are cheaper, so you can buy more with your contribution and capitalise on this when the market recovers.

You should see a financial adviser to work out whether salary sacrifice is the best way for you to boost your retirement savings. If it is, they will also be able to advise on what investments you choose to generate sufficient income for your retirement.

Having just retired, should I reduce my monthly payments in the short term?

If you draw less money from your pension, you’ll be leaving more money in your account to benefit from any upturn in the market. However it will, of course, mean you have a reduced monthly income, so you need to be comfortable that you have enough to live off. Speak to a financial adviser, as there may be other things you can do with your investments to help you through this period of market turbulence.

When you speak about long term do you mean 10-20 years? If so, then surely you should not be selling investments to a 50 year-old, as there is little point in being rich at 70 years old.

It’s important to remember that you are not just investing until you retire, but for the additional 20 or more years you could spend in retirement – a long-term time horizon by anyone’s standard. It’s therefore important to hold growth assets (like shares) in your portfolio as these investments have the potential to deliver higher long-term returns and so help you ensure your money lasts as long as you do. If you would like to review your investments, speak to a financial adviser.

I am 30. Should I ante-up and switch my balanced super into a geared growth fund if much of the recovery comes in the first 12 months?

Switching your super to a more aggressive fund would benefit you when the market recovers. However the trouble is we don’t know if we have reached the bottom of the market yet. The best strategy is not to make investment decisions based on short-term market cycles ― as this could make any losses worse. It is generally best to have a long-term investment strategy and stick to it regardless of what the market’s doing. To find out which investment strategies suit your goals, time horizon and risk profile, speak to a financial adviser.

General Advice Warning: These comments contain general information and may constitute general advice. They do not take into account any person’s particular investment objectives, financial situation or individual needs. They should not be relied upon as a substitute for financial or other specialist advice.

Before making any decisions on the basis of these comments, you should firstly, consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs and secondly consider the relevant Product Disclosure Document. Opinions expressed constitute our judgement at the time of issue and are subject to change.

* Includes a Medicare levy of 1.5%

Watch this space for more Q&A from our panellists.

What in the market crisis today is different from the crash of 87?

The fall in share prices then happened much faster, and the recovery began sooner, although the recovery hit a snag quite soon in the form of the early 1990s recession.

The rise in share prices that preceded the 1987 crash was also much less soundly based. Prices had risen pretty much on ‘thin air’ – corporate earnings hadn’t risen anywhere near as fast as company share prices. This time round, the rise in prices was much more closely related to gains in company profits. However, the problem now is that the level of company profits doesn’t look sustainable – profits always tend to fall in even a mild recession, and markets seem to be factoring in just such a fall.

What is the technical definition of a depression?

My definition of a depression is a large and prolonged fall in output, employment, and prices. It tends to last some years rather than a few quarters. It also tends to have an element of self-reinforcement about it. Falling demand/spending leads to falling output and prices; falling prices encourage people to delay spending, which means further falls in output and prices, and so on.

The panel are assuming that the markets will continue upwards in the long run. How sure can you be of this given the rules of money management are likely to be substantially tightened following this crisis?

I think the environment we are going into will be one where investors are much more cautious, much more conservative than they have been over the last five to 10 years. In this kind of environment, investment returns are likely to be more modest than we saw from 2003 to mid-2007. However, this does not mean that markets won’t recover.

At the end of the day, the sharemarket is a snapshot of a collection of businesses. These businesses make profits by meeting customer needs, pay dividends out of that profit, and re-invest the rest back into the business to drive future growth. What this means, is the true value of businesses tends to grow over time. The price of those businesses on the sharemarket will inevitably be much more volatile in the shorter term, but over time, the sharemarket reflects the underlying growth in the value of those businesses.

Which market is dropping faster ― property or shares? Which one is more vulnerable?

It depends on what kind of property you’re referring to. Strictly speaking, shares are falling faster than physical property, but that’s not surprising. The price of shares and other liquid assets are priced every minute of every trading day, and shares have fallen very sharply in price. With direct, physical property however, prices can only be tracked infrequently. You only know how much your house is really worth when you sell it. There are a number of indices of house prices and other direct property values, but because of the nature of the assets those prices do not move quickly. For non-residential assets, investors have to rely on periodic valuations. In contrast, listed property assets are priced every minute of every trading day, and these have fallen very steeply in the past year.

Australian house prices have, in aggregate, been falling ― some areas worse than others. My own view is that house prices have much further to fall, and consequently, I would view them as being more vulnerable at present. In order to determine whether house prices are over or undervalued at any point in time, ask yourself this question. Can the average person, living in the average city, earning the average income, afford to buy the average house in that city? If the answer is ‘no’, then the market is probably overvalued.

97% of my portfolio is invested in an Australian Share Fund. Do you think I should diversify more to foreign markets?

As with any of these things, you need to get personal financial advice. That said, more diversification is almost always better than less, and having all your eggs in just the Australian equity basket isn’t ideal. The local sharemarket makes up only around 3% of the world market, which implies that 97% of the opportunities are somewhere else!

General Advice Warning:These comments contain general information and may constitute general advice. They do not take into account any person’s particular investment objectives, financial situation or individual needs. They should not be relied upon as a substitute for financial or other specialist advice.

Before making any decisions on the basis of these comments, you should firstly consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs and secondly consider the relevant Product Disclosure Document.

Opinions expressed constitute our judgement at the time of issue and are subject to change.