nice summary from ak

http://www.asx.com.au/resources/newsletters/investor_update/20060613_watch_the_ball.htm

Watch the ball
Alan Kohler believes now is a great time to be an investor, provided you don’t lose sight of the bigger picture by chasing momentum.

This is a time for investors to relax and watch the game, and not be distracted by the turbulence in the stands. In fact, this is a great time to be an investor because good value is beginning to appear.

If you responded to our April warning that a significant correction was coming by selling and cashing up, and now want to time your re-entry, there's no need to hurry. This correction, in my view, is likely to be longer and more difficult than the one last October.

Last year's second correction lasted three weeks, starting with a violent 200-point drop in the S&P ASX200 in the first three days followed by a bit more than two weeks of choppy trading that removed another 100 points from the index. Total correction: 7%.

The market has moved 50 points, or more than 1%, each way and I think that is likely to be the pattern for months, not weeks. That's because commodities have not yet had the full correction that they are clearly due for and because there are undoubtedly at least several months of uncertainty about inflation and interest rates ahead.

The long-term picture for commodities and for stocks such as BHP Billiton and Rio Tinto remains very good, but the current prices for metals are unsustainable. They are the result of fund speculation driven by the high levels of liquidity in the markets and the search for returns. In the process, risk has been under-priced.

The volatility in commodity and equities markets during the past month or so is a result of investment funds re-pricing risk in the context of rising inflation, and that process may have only just begun. In fact, investors are likely to be reticent about committing themselves for some time, while markets are likely to remain volatile for months as speculative positions are unwound.

This is a time to remain focused on the fundamentals — cash flow, dividend yield, return on equity (ROE) over the long term — and to ensure that over the next few months the stocks in your portfolio have strong cash flow and ROE. Over the next few months, wise share traders will be selling into rallies; wise long-term investors will be buying high-quality stocks on the dips.

According to the recent Rusell/ASX Long-Term Investment Report (PDF 234KB), over the past 10 years, the gross return from residential property has been higher than for Australian shares, and that on an after-tax basis for those on the top marginal tax rate, the returns are identical. However, if you look over 20 years, although the gross returns from shares and property are almost identical (12.2% versus 12.1%) the after-tax return from property is 1.5% less than for shares, partly because of franked dividends.

But the key point is that over 20 years, according to this report, Australian shares have produced a gross return of 12.2% and 10.4% after tax. This is twice the return from fixed interest and three times the return from cash, but roughly the same as the returns from residential property and listed property trusts.

In other words, the absolute worst thing to do with your savings is to not invest them in assets: leaving the money in the bank or in fixed interest will cost you a comfortable retirement.

Which assets you invest in can be a matter of taste, although most people are overweight in residential property because of their homes, so their super should be in shares. And the benchmark return you should be keying into the superannuation calculator is 12% gross and 10% net — that's about what the ASX200 index has produced (including reinvestment of dividends) over both 10 and 20 years.

Of course, it's been a 20-year bull market because of the victory of the world's central banks over inflation following the Paul Volcker, post oil shock recession of 1982. The previous 20 years produced a long-term sharemarket return of about 7.5%, which was a real return after inflation of zero (the real return of past 20 years has been about 8%).

I know it's hard to think about the next 20 years in the midst of a violent bout of sharemarket volatility and correction, but this is exactly the time when you must. That doesn't mean you should just buy the index, although given the low fees of index funds and exchange traded funds, you could do worse. That would certainly be better than paying 2% fees for an actively managed fund that will be lucky to match the index anyway.

The best strategy is to build a small portfolio of high-quality, 20-year stocks and not try to time the market.

In my view you should focus on these themes:

* Believe in the long-term growth of China and India, and therefore the commodity super-cycle.
* Think about the impact of broadband internet on all businesses and all households.
* Be positioned for the ageing of the population and the dotage of the baby boomers (they're just turning 60 now).
* Be prepared for the next great shortage after metals — food.

The most important thing is to not be distracted from basic principles by chasing momentum.