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Don’t confuse economic forecasts with investment strategy
The experts all agree …
On the face of it, the “Business Day” section of the “Sydney Morning Herald” of 29 September 2010 was full of valuable insights into the future that astute investors could not ignore. Reporting on the proceedings of the high powered Forbes Global CEO Conference and Goldman Sachs global macroeconomic conference, it included such headlines as:
“Prices for commodities, food set to ‘rise sharply’”;
“Signs point to $A parity”
“Time for All Ords to break with the Dow”
“Captains of industry pull in one direction”
Should past performance affect your willingness to take investment risk?
Past investment performance is seductive
It’s a difficult task being a good investor. You’re keen to celebrate when your investments perform well, yet you’re also looking for opportunities to acquire new exposure when prices are low. Unfortunately, good investment performance and low prices rarely go hand in hand. This creates an ongoing dilemma for wealth accumulators – do you want your investments to go up or down in the short term?
Many investors are reluctant to invest new money in asset classes that show poor recent performance, instead preferring to increase their exposure to the better performing asset classes. This seems to be a logical thought process, but is it conducive to the achievement of your wealth accumulation plans?
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Is there a bond market “bubble”?
Investing in government bonds is attracting a lot of attention 
Herding or “running with the pack” is one of a number of well documented psychological biases that inhibit our ability to make rational investment decisions that are not in our objective long term interest. And so are “hindsight bias”, “prediction addiction” and “overconfidence”.
We may currently be seeing them all interact on a global scale in the fixed interest or bond markets. An article in “The New York Times” of 21 August 2010 reported that a “staggering” $33.12 billion had been withdrawn from domestic equity funds in the first seven months of 2010, with many investors now “choosing investments they deem safer, like bonds”.
“The Economist” of 19 August, 2010 observed that falling US bond yields had delivered “bumper returns to investors” and inflows of $191 billion to bond funds. The same article also noted that “Some go so far as to call the market a bond bubble”.
Active versus Passive Investing: The “Alpha” Bet
What is “Alpha”?
In investment terminology, “alpha” refers to the level of outperformance of a portfolio relative to an appropriate benchmark. Of course, everyone would like to achieve returns in excess of their benchmark. But you’re advised to have a good grasp of the cost and chance of achieving alpha before you decide to chase it.
There are two broad approaches to investment management: active and passive. An active approach seeks to add value, or alpha, by over weighting exposure to securities that are believed to be undervalued and under weighting those believed to be overvalued. The obvious aim is to perform better than a strategy that simply holds all securities according to their market weight (i.e. benchmark portfolio).
Do You Really Want Your Investments To Increase In Value?
It depends on your wealth accumulation “stage”
Nearly everyone who purchases an investment, be it shares or property, wants to see it immediately rise in value. And the more the better. It justifies the investment decision and makes the investor feel wealthier.
However, while it might make you feel good, it may not be in your best interests for investment markets to rise strongly. What you want to happen depends heavily on your wealth accumulation “stage”. This is assessed by comparing how much you expect to be able to commit to investment markets in the future (i.e. your projected surplus or future capital) with your current net investment wealth (your net worth less your lifestyle assets).
If most of your wealth accumulation is ahead of you, then rising investment markets mean that you will be buying into those markets at increasingly higher prices. Your money does not go as far.
The Mechanics of Managed Funds: Tips and Traps
Managed funds: a time tested financial innovation
Managed funds (or their U.S. mutual fund counterparts) are the primary vehicle for the majority of individuals’ investments in share and fixed interest markets and, to a lesser extent, property markets. By pooling the funds of many investors, they offer a number of potential benefits (compared with an individual investing directly in the relevant asset class).
These include:
* Diversification across a broad range of individual investments;
* Economies of scale and reduced transactions costs; and
* Access to professional fund managers.
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Are You A Speculator Or An Investor?
The difference between speculation and investment
What are the key differences in behaviour that help define the distinction between speculators and investors? What do your behaviours say about you?
Speculation has been defined as the assumption of risk in anticipation of gain. Compared to investing, it tends to be associated with higher risks and achieving quicker and larger gains. It generally involves a “bottom up” approach that treats each risk as separate and distinct. It includes elements of stock selection, market timing and forecasting.
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Don’t fall in love with your employer
Surely, I’m better off investing in my employer’s shares
Many employees hold shares (and/or rights to buy shares) in their share market listed company employer. The interest may have been acquired as part of their remuneration package or as compensation for sale of a business to the employer. Or, perhaps, the employee was optimistic about the prospects for the employer and bought its shares as an investment.
Often, there are restrictions imposed on dealing in the shares, at least for a specified period after acquisition, so the employee has no alternative but to retain the position. However, even when there are no restrictions, many employees continue to hold and, over time, build substantial (but minority) interests in their employer.
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Have you protected your most valuable asset?
You insure your car, don’t you?
Most people insure their motor vehicles, their homes and their home contents. These are valuable assets that, in the event of various catastrophes, they want to be able to replace or repair without significant financial loss.
But when it comes to what is many people’s most valuable asset – their ability to earn future income – they are woefully positioned to cope financially with catastrophe. Research completed in 2006 indicated that only 55% of Australian families had any life insurance, with an even lower 31% having income protection.
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Borrowing to Invest or Super?
I don’t want to lock my money into super
Two alternative strategies that many investors consider are:
• borrowing to invest (i.e. entering into a gearing strategy), outside super; and
• increasing pre-tax contributions to super and investing in the superannuation environment.
Which is best? The comparison is not straightforward, but is often hijacked by raising the issue that your money is “locked away” in super. For those some years away from being able to access their super, this is often a compelling point in favour of gearing.
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