Any investors who have struggled to make money on the share market in 2016 can console themselves with the thought that they're members of a fairly large club.
As this column is written, the S&P;/ASX200 is stagnating just above the 5,300 mark, merely a whisker above the close of 5,295 on December 30, 2015. Calendar 2016 opened with a falling market, which reached a low of 4,765 on February 11.
The banks were largely responsible, with Australia and New Zealand Banking Group, National Australia Bank and Westpac Banking Corporation all hitting their lows for the year on February 12 ($22.18, $24.14 and $28.06 respectively). BHP Billiton shares were also down heavily through January and February thanks to the Minas Gerais catastrophe.
From February, the S&P;/ASX200 rallied. Since mid-April the index has been wandering between 5,200 and 5,600 for all but a few days. The high was 5,587 on July 31 and since then it has been broadly in gradual decline.
The best tactic for investors in this sort of market is to leave their portfolios in the safe and spend their time more usefully playing golf. Trying to trade the momentum can be not only a full-time occupation, but maddening.
Many traders, to cite an example, try to buy when the 30-day moving average is below the index and sell when it's above. But so far in 2016, the moving average has crossed the index 19 times. Any profit (if any) a trader made by playing the system would have been eaten by brokerage.
It's better to pick one or two stocks and try to follow their trends. And whatever investors do, they're likely to fare better in future in shares than bonds.
Investors who went to a financial advisor in the last couple of years probably have been advised to safeguard themselves by diversifying, and holding bonds as well as shares. Good advice while interest rates were falling, but dangerous now they appear to be bottoming.
The yield on US 30-year Treasury bonds climbed last week from 2.56 to 2.96 per cent. As the yield and the price of bonds are inverse to each other, that caused a slump in bond prices.
UK 10-year gilts went from 1.13 per cent to 1.36 per cent. Back home, the yield on 10-year Australian government bonds rose by from 2.32 to 2.5 per cent.
Fortunately, the Reserve Bank has been holding the coupon rates on Australian bonds at relatively high levels which means the damage so far should be limited. Only three of the exchange-traded Treasury bonds are now selling below their $100 face value: the November 2020s, the May 2028s and the June 2039s.
The May 2028 bond is the worst-affected so far. It was issued at $100 on a coupon of 2.25 per cent and is currently selling at just under $95.
The good news is that the RBA is mainly concerned with holding down the $A, which means it may not raise rates in line with the US.
The bad news is that the Australian government is chronically in debt and will have to keep raising more as long as its budget is in deficit. So to attract overseas lenders, our government will have to keep its rates competitive with those of other countries.
Fortunately many of those countries are issuing bonds in negative yield, so they're even less attractive than Australia.
Nevertheless, the message remains that buying bonds at the bottom of the interest rate cycle is dangerous to your wealth.
Trevor Sykes is not a licensed investment advisor. Views expressed in this column are not a substitute for tailored investment advice. The author has interests in BHP, ANZ, NAB and Westpac.
AFR Contributor
