Friday, 16 May 2008

The Stock Market Strikes Back

Since hitting lows of about 5200 earlier this year, the Australia stock market seems to have rebounded. Today the All Ords is nudging towards 6000. This result vindicates Dollar Cost Averagers like me who continued to invest about $500 per fortnight every Thursday payday no matter how pessimistic the pundits were or how sharp the drops were. Some said things like, "With all the volatility, now is a bad time to invest in the stock market." These people would have missed out on an opportunity to profit.

While the blue line above shows the All Ords for the last three months, the red line shows the S&P500 (American stock market) for the past 3 months. It shows that the American market looks like it's heading for a recovery as well.

There are still uncertainties ahead. Nobody knows what long-term effect the sub-prime property crisis in America will have in the long-run. House prices are still going down in America. The IMF claims the Australian property market is overvalued by 25 per cent and that the risk of a severe correction (or crash) is high. Some people take out loans against their homes to buy shares. Most however take out loans against their property to buy even more property. This is what many Americans did before it triggered a house price crash.

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