Provision Newsletter

How do you go about choosing a restaurant, a new car or, or a dishwasher? Chances are you begin by looking online at consumer ratings and asking friends for their opinions.

Understandably, we look for shortcuts when making decisions and a common shortcut is to assume that past performance will continue in the future.

Certainly, it makes sense when buying a new vacuum cleaner to place weight on rankings for past reliability and the past experiences of other consumers.

Because the decision-making shortcut of relying heavily on past performance works well in most areas of our everyday lives, it is understandable that many investors would apply the same shortcut to buying and selling investments.

A Vanguard research paper, Reframing investor choices: Right mindset, wrong market, emphasises that the decision-making shortcut of relying too much on past performance “often falls short when it comes to making investment decisions”.

While past performance can have some predictive value with non-financial decisions, the link between past and future investment performance is “tenuous at best”, the paper emphasises.

To highlight the trap of relying on past performance when making investment decisions, other updated Vanguard research looks at performance of actively-managed Australian share funds over two consecutive five-year periods.

The majority of once top-performing funds for the first five years (ending December 2012) did not remain in the first quintile for the second five years (ending December 2017). However, if past performance was a reliable guide to future performance, most of the once first quintile funds could be expected to remain top performers.

Flows of capital in and out of investments suggest that a high proportion of investment cash flow is driven by past performance. “Momentum investors”, as they have been called, buy investments when prices are rising and sell when prices are falling. In other words, they are driven by past performance.

Further, the top-performing asset classes often do not remain the top performers in the next year.

How can you try to avoid basing your investment decisions on past performance?

“First and foremost, one must recognise and understand that the decision process that serves well in most areas of decision-making does not work in investing,” Vanguard’s paper on reframing investment decisions comments.

It suggests that investors shift their focus from past performance by relying on a straightforward, four-part decision-making process.

These steps are: develop a long-term financial plan to reach clear and appropriate goals, create a broadly-diversified portfolio across asset classes, minimise investment costs and periodically rebalance your portfolio.

Rebalancing a portfolio keeps it in line with its strategic asset allocation and is a disciplined way to respond to changing market prices.

Investors often assume that an investment that has outperformed in the recent past will continue to do well. And they often assume that an investment that has underperformed in the recent past will continue to underperform. Both assumptions are unreliable.

Please contact us on |PHONE| for further assistance .

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Source : Vanguard August 2018  

Money can make us anxious no matter how much we manage to save. 

Investors who succeed in building large portfolios and those with much more modest portfolios often share the same worry of whether they are saving enough – despite the difference in their wealth.

For instance, a New York Times article, I’m rich, and that makes me anxious, quotes a retired banker as saying: “I have more money than I had ever imagined, but I still worry – do I have enough if I live longer than I thought?”

This in turn leads to another question, how can an investor – no matter the size of their investment portfolios – reduce their anxiety about money?

A straightforward answer is to become as informed as possible about good personal finance/investment practices and try to realistically estimate how much you will need to save for your intended standard of living in retirement.

Here’s a few things to think about:

Anxiety-reducer one: Think about your retirement income years ahead

In April, Smart Investing began a series of blogs about how to create a “retirement roadmap”. Tips include setting your goals for retirement and then calculating how much you require to achieve those goals.

Hopefully, this logical approach will reduce anxiety about whether you are saving enough.

You may decide to ask a professional adviser to help assess how much is enough to save given your circumstances. And superannuation and retirement calculators, such as on ASIC’s MoneySmart website, may assist in working out how much retirement income your expected super savings may produce.

Anxiety-reducer two: Follow sound investment principles

A strategy for reducing your anxiety about money is to follow the fundamentals of sound investment practice.

These basics include setting an appropriate asset allocation and diversification for your portfolio; having concise, clear and realistic long-term goals; minimising investment costs; and avoiding emotional investment decisions. While investors can’t control the movement of investment markets or the emotions of other investors, these disciplined steps are under the control.

Anxiety-reducer three: Undertake thorough estate planning

A key way for many of us to ease anxiety about money – whether our savings are large, small or somewhere in between – is thorough estate planning.

Your estate planning should aim to ensure that your wealth efficiently passes to beneficiaries in exactly the way that you intend.

As investors build their wealth, their concern about what happens to their deceased estates tends to rise. Think about whether to take professional estate-planning advice for your circumstances.

In regard to super, look at whether to nominate preferred beneficiaries or make binding death benefit nominations. And it is a fundamental that you understand who is legally entitled to receive your super benefits. 

PLease contact us on |PHONE| for assistance .

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Source : Vanguard  July 2018 

Fear is a factor in many of our investment decisions.

Now, that’s not always a bad thing because fear can be an effective motivator that overcomes another great emotional roadblock for investors – procrastination.

Fear can come in many shapes and flavours for investors. There is the fear of not having enough saved for retirement that can provide the positive impetus to put together a long-term savings plan, that means forsaking some short-term spending in the interests of providing a more comfortable lifestyle once the regular salary stops arriving in the bank account.

Then there is the fear of missing out on a great investment opportunity. It’s no secret that Australian’s have long had a well-documented love affair with property, yet fear is still a factor. What is interesting is how the nature of this, in relation to residential property, has shifted significantly in recent months.

If we rewind six to 12 months, the biggest fear investors talked about was the fear of missing out, or rather being locked out, of the property market. A particular concern for younger investors looking to get into the property market was simply affordability.

ASIC last month released a report into the quality of advice given to self-managed super funds (SMSFs). While it was not the main focus of the report, a strong theme that came through from investors who had recently set up their SMSF was that a key motivator was to use the SMSF as a way of accessing their super savings to buy into the property market.

The pitfalls and risks in setting up an SMSF to buy a single investment property is a separate topic for another day. However reading through the case studies in the ASIC report provides a clear narrative of a cohort of investors who are frightened of being locked out of the property market by seemingly ever increasing prices, and are being motivated to use vehicles like an SMSF to get into the game.

The ASIC market research – a combination of qualitative interviews and online surveys – was done mid-2017. If we fast forward to July 2018 a scan of property pages in the mainstream media in Sydney and Melbourne tells a quite different story.

For a start, auction clearance rates are well down on a year ago due to a number of factors including banks tightening lending requirements for investors. In the last quarter of 2017 the auction clearance rate was around 65 per cent. Last week it was in the low 50s – one of the lowest rates for the past decade according to Fairfax Media.

In a relatively short space of time the fear factor has shifted dramatically. From the fear of missing out, potential buyers are now regularly quoted as fearing that they will pay too much and are keeping their hands firmly down, which means auction rates slump further … and so the cycle goes.

For those people who believe that property never goes down in value, now is an interesting time with major capital cities all reporting declines in value. All markets – property included – move in cycles and investor sentiment plays its role in driving that.

Timing markets of any type in the short run is extremely challenging. That’s why one of the best tonics for market-driven fear is having the discipline to do a long-term financial plan that sets out your personal life stage goals, diversifies your investment portfolio across a range of asset classes to offset risk, and gives you the luxury of knowing that when one asset class is pushing your fear button, the others are helping keep you on track and sleep well at night.

Please contact us on |PHONE| we can assist you plan your financial goals.

 Source : Vanguard July 2018 

Perhaps the most common trap for share investors is to concentrate too much on the daily movements in share prices.

In the rough and tumble of investment markets its very easy to get distracted: by talk of the next best thing that will make you rich, by the ever-present predictions of an imminent crash, by the worry list that constantly surrounds investment markets relating to growth, profits, interest rates, politics, etc.

The investment world is far from neat and predictable. The well known advocate of value investing, Benjamin Graham, coined the term “Mr Market” in 1949 as a metaphor to explain the share market, but it also applies to most other investment markets. Sometimes Mr Market sets sensible share prices based on economic and business developments. At other times he is emotionally unstable, swinging from euphoria to pessimism. Mr Market is highly seductive – sucking investors in during the good times with dreams of riches and spitting them out during the bad times when all hope seems lost.

This is particularly the case at present where noise around President Trump – often set off by a late night tweet – can set off market volatility and where this can be magnified by digital media in which it seems everyone is vying for attention leaving the impression we are in a constant state of crisis and volatility.

To help investors avoid being seduced by Mr Market there are nine key things to bear in mind. I haven’t written on this for a while but here is my list of the nine keys to successful investing.

• Make the most of the power of compound interest. One dollar invested in Australian cash in 1900 would today be worth $236, but if it had been invested in bonds it would be worth $877 and if it was allocated to Australian shares it would be worth $559,281. Although the average annual return on Australian shares (11.8% pa) is just double that on Australian bonds (5.9% pa) over the last 118 years, the magic of compounding higher returns over long periods leads to a substantially higher balance over long periods. Of course the price for the higher returns from shares is higher volatility – evident in rough patches like the Great Depression, 1973-74 after Elvis appeared via satellite from Hawaii to when The Brady Bunch was canned, 1987 and the GFC – but the impact of compounding at a higher long term return is huge over long periods of time. The same applies to other growth related assets such as property. So one of the best ways to build wealth is to take advantage of the power of compound interest and this means making sure you have the right asset mix in your investment strategy. (Speaking of The Brady Bunch – their house in Studio City LA was recently “sold” for over $US2m by the one family who bought it in 1973 for $US61,000. NSYNC bass singer Lance Bass offered “WAY over” the asking price of $US1.9m and was accepted but then got gazumped by a Corporate Buyer (likely a studio) who wanted the house at any price. Assuming the sale price is $US2.1m which is conservative and there was a net rental yield of 3.5% along the way this implies a compound annual return of 11.7%pa!)

Source: Global Financial Data, AMP Capital

• Be aware of the cycle. Investment markets – bonds, shares, property, infrastructure, whatever – constantly go through cyclical phases of good times and bad. Some are short term, such as occasional corrections. Some are medium term, such as those that relate to the 3 to 5 year business cycle. Some are longer, such as the secular swings seen over 10 to 20 year periods in shares. Some are even longer like the 35 odd year bull market in bonds since the early 1980s. But all eventually set up their own reversal. The trouble is that cycles can throw investors out of a well thought out investment strategy that aims to take advantage of long term returns and can cause problems for investors in or close to retirement. But they also create opportunities.

• Invest for the long term. One of the best articles on investing I ever read was by a US investment guy named Charles Ellis in the 1970s who observed that for most of us investing is a loser’s game. A loser’s game is a game where bad play by the loser determines the victor. Amateur tennis is an example, where the trick is to avoid stupid mistakes and win by not losing. The best way for most investors to avoid losing is to invest for the long term. Get a long term plan that suits your level of wealth, age, tolerance of volatility, etc, and stick to it. This may involve a high exposure to shares and property when you are young or have plenty of funds to invest when you are in retirement and still have your day to day needs covered. Alternatively, if you can’t afford to take a long-term approach or can’t tolerate short term volatility then it is worth considering investing in funds that target a particular goal.

• Diversify. Don’t put all your eggs in one basket. A common approach in SMSF funds has been to have one or two high yielding popular shares and a term deposit. This could leave an investor exposed to a very low return or if something goes wrong in the share. Through last decade many Australian investors wondered why hold global shares as Australian shares were doing so well. But this decade global shares have been the place to be reflecting stronger growth and the fall in the $A which enhances the value of offshore investments. Trying to get such swings precisely right can be hard so the trick is to have a diversified mix. But also, don’t over diversify as this will just complicate for no benefit.

• Turn down the noise. After having worked out a strategy thats right for you, it’s important to turn down the noise on the information flow surrounding investment markets and stay focussed. The trouble is that the digital world we now live in is seeing an explosion in information and opinions about economies and investments. But much of this information and opinion is of poor quality. As “bad news sells” there has always been pressure on editors to put the most sensationalised negative news on the front page of newspapers but there was hopefully some balance in the rest of the paper. But in a digital world each story can be tracked via clicks so the pressure to run with sensationalised and often bad news stories has been magnified. Hence click bait and all the talk about fake news. President Trump’s tweets are adding to the noise with markets sometimes jumping in response. He recently tweeted that “Tariffs are the greatest!” only to tweet 12 hours later in relation to the European Union that “I have an idea for them. Both the US and EU drop all tariffs.” Now I kind of get what he is saying and much of his utterances are bluster designed to get what he wants, but such gyrations cause confusion for investors. 

  Of course, economists like to say more is preferred to less but when it comes to information and opinion around investment markets this is not necessarily the case. There is little evidence that the ramped-up news flow is helping investors make better decisions and hence earn better returns. We seem to lurch from worrying about one crisis to another. This year is seeing the usual worry list with worries about: US inflation, Fed tightening, global trade, Trump and the Mueller inquiry, the US mid-term elections, Chinese debt, Italy, the emerging world, increasing tension with Iran, tech stocks, etc. Investing now seems like a daily soap opera – as we go from worrying about one thing after another. This is all leading to heightened uncertainty and shorter investment horizons which in turn can add to the risk that you could be thrown off well thought out investment strategies. The key is to turn down the volume on all the noise. This also means keeping your investment strategy relatively simple. Don’t waste too much time on individual shares or funds as it’s your high-level asset allocation that will mainly drive the return and volatility you will get.

• Buy low, sell high. What you pay for an investment matters a lot in terms of the return you will get. The cheaper you buy an asset (or the higher its yield), the higher its prospective return will likely be and vice versa, all other things being equal of course. So if you do buy or sell try to buy when markets are down and sell when they are up. Unfortunately, many do the opposite which explains the old saying that “flows follow returns”! Inflows to investment funds or markets are strongest after periods of strong returns and outflows are strongest after weak returns’ which is the wrong way around.

• Beware the crowd at extremes. At various points in time the crowd can be right and being in a crowd can feel safe. However, at extremes the crowd is invariably wrong. Whether it’s lemmings running off a cliff, or investors piling into Japanese shares at the end of the 1980s, Asian shares into the mid 1990s, IT stocks in the late 1990s, US housing and dodgy credit in the mid-2000s or most recently with Bitcoin which peaked last December just when everyone was talking about it. The problem with crowds is that eventually everyone who wants to buy will do so and then the only way is down (and vice versa during crowd panics). As Warren Buffet once said the key is to “be fearful when others are greedy and greedy when others are fearful”.

Source: Bloomberg, AMP Capital

• Focus on investments offering sustainable cash flow. Lots of investments have been sold on promises of high returns or low risk but were underpinned by hope based on hot air (eg, many dot com stocks in the 1990s) or financial alchemy (eg sub-prime CDOs). But if it looks dodgy, hard to understand or has to be based on obscure valuation measures to stack up then it’s best to stay away. There is no such thing as a free lunch in investing – if an investment looks too good to be true then it probably is. By contrast, assets that generate sustainable cash flows (profits, rents, interest) and don’t rely on excessive gearing or financial engineering are more likely to deliver.|

• Seek advice. Given the psychological traps we are all susceptible too (like the tendency to over-react to the current state of investment markets) and the fact that it is not easy, a good approach is to seek advice via an investment service or a coach such as a financial adviser, in much the same way you might use a specialist to look after other aspects of your life like the plumbing or your medical needs. As with plumbers and doctors it pays to shop around to find a service or adviser you are comfortable with and can trust. But its worth it in the end. Even I have a financial adviser to help deal with the complexity of investing.

Source: AMP Capital 7 August 2018

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.

Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar over recent months. In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June. These higher money-market rates have not fed through into higher interest rates on retail deposits. Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.

The Bank’s central forecast for the Australian economy remains unchanged. GDP growth is expected to average a bit above 3 per cent in 2018 and 2019. This should see some further reduction in spare capacity. Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector.

Australia’s terms of trade have increased over the past couple of years due to rises in some commodity prices. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years.

The outlook for the labour market remains positive. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. Employment growth continues to be faster than growth in the working-age population. A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent. Wages growth remains low. This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increased reports of skills shortages in some areas.

The latest inflation data were in line with the Bank’s expectations. Over the past year, the CPI increased by 2.1 per cent, and in underlying terms, inflation was close to 2 per cent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1¾ per cent.

Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, August 7th, 2018

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