Back to basics to weather the market storm

Finance experts say this is a time to get back to basics - if you haven't already - and focus on what you want from your investments, what you can do to weather upcoming storms, and old-fashioned fundamentals.

On the plus side, Australian households and companies are in better shape than they were before the global financial crisis. They have been reducing debt and saving rather than borrowing to chase speculative dreams. According to the Reserve Bank, margin debt has more than halved from its peak in late 2007, households are saving more than 10 per cent of their income, and gearing of listed companies is at lows not seen since the early 1980s.

The global financial crisis hopefully taught some valuable lessons: that debt is not an easy path to wealth, that you should never invest in anything you don't understand, and that there's no such thing as set-and-forget investments.

Cash flow has become more important as the prospects of making easy money through capital gains have receded.

The head of investment markets research at Perpetual, Matthew Sherwood, says the search for yield is paramount in uncertain times and investors should look for companies with sound business models, strong balance sheets and the ability to grow earnings and dividends in a difficult climate. While such investments still get hammered when markets panic, they generally recover more quickly and at least provide the certainty of a cash return.

Super fund managers say the worst thing to do is to panic sell when markets are falling. Australian Super reports switching to more conservative investment options by its members peaked in early 2009 - just at the bottom of the last market fall. Those investors crystallised their losses and missed out on the subsequent bounce back.

Indeed, savvy investors see falling sharemarkets as an opportunity to pick up bargains as good stocks are chucked out along with the bad.

But this takes nerve and judgment. An investment that is 20 per cent cheaper than it was a few months ago may not be cheap at all if its earnings prospects have also fallen or it was overpriced in the first place.

And in a bear market, you have to be prepared to watch prices fall even further.

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