Putting the investment odds in your favour
Managing investment uncertainty
Whether we like it or not, there’s a lot uncertainty involved in predicting the future. Despite the increasing availability of information, our ability to predict has not improved. This means that we have to learn to live with an element of chance when it comes to managing our investments.
You can manage this element of chance by managing the level of investment risk you hold. An appropriate strategy will consider a) how much risk is appropriate and b) how you will manage this risk exposure over time (or across varying market conditions).
In this article we look at another area of life where the need to manage elements of chance arises and make some comparisons on how we might apply this experience to investment management.
Baby boomers’ housing experience may not repeat
Baby boomers still borrowing to buy property
Over the six years to 2009-10 [1], baby boomers (those born between 1945 and 1964) continued to pour money into both owner occupied housing and other property. And they were happy to take on additional debt to do so.
The table below shows the change between 2003-04 and 2009-10 in the percentage of households, by age of reference person, where the homeowner has a mortgage.
Moneyball: a story of faith in an objective strategy
Evidence triumphs over anecdote
If you’ve seen the movie “Moneyball”, (or read the book by Michael Lewis), you may have picked up on some similarities between the issues faced in managing a major league baseball team and those faced in managing investment wealth.
If you’re not familiar with the movie/book, it tells the story of Billy Beane, a professional baseball manager of the Oakland A’s, a low tier baseball team in the US major league. To overcome the financial power of the top tier teams, he adopts an approach that focuses on buying the attributes that win games (rather than buying the specific players he thinks will win games).
Rather than replace a high profile, big hitter with another equally expensive big hitter, Beane looked for other ways to replace him. The team didn’t necessarily need another big hitter, they needed to replace the (statistical) attributes that they had lost (e.g. the average number of times he got on base per game). By looking at player selection in this way he gave himself the freedom to build a winning baseball team without the restrictions imposed by traditional methods.
The Allure of Gold
Gold as a safe haven
The allure of Gold, as a viable long term investment option, has shot to new heights in the past five years. While this is perhaps understandable given its status as a safe haven, should it be a fundamental component of an investment portfolio?
There is a lot of misunderstanding about gold, its role in the financial system and use within an investment portfolio. We aim to address some of these misunderstandings.
A Brief History of Gold
Gold first became a transferable form of money around 560 B.C. when gold coins (stamped with a seal) were used by merchants to simplify trade. The coins were valued according to their inherent gold content. In 1066, Great Britain developed the British pound (symbolising a pound of sterling silver) and other units of currency based on their inherent metal value. During this period, gold (and silver) represented the main means of exchange (i.e. money).
Borrowing to buy property within Super: Buyer Beware!
Just because you can doesn’t mean your should
Borrowing to buy property within a Self Managed Super Fund (SMSF) has been promoted by many within the advice industry as an exclusive opportunity you should seriously consider. And, while there can be occasions where this strategy makes sense, as a general rule the fundamentals just don’t stack up.
Back in 2007, the Government opened the door for SMSFs to borrow. The change was driven by the popularity of investing in instalment warrants (such as Telstra’s T3 offer). These investments had an element of gearing which created some confusion under the no borrowing restrictions of the Superannuation Industry (Supervision) Act. To over come this, the Government decided to remove the borrowing restriction.
DIY Financial Planning – The real costs may not be evident
DIY Financial Planning appears to be a low cost alternative
There are a lot of smart people who make some rather dumb choices with respect to their finances. More often than not this is driven by short term thinking and the desire to save an immediate out of pocket expense. There is often a failure to lift the eyes and see the bigger picture.
An example that highlights this is the use of superannuation. We’ve talked previously about the significant benefits of making pre-tax contributions to super. However, in this article we look at the benefits of making post-tax contributions to super.
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Is your investment risk strategy paying off?
Are you an intelligent risk taker?
Most investors accept the notion that risk and return are related and that those who are prepared to take on more risk will ultimately get rewarded for their risk taking. As we’ve seen with the implosion of some investments during the GFC, increased risk taking does not always guarantee higher returns, it simply exposes you to the opportunity for higher returns.
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Wealth Management: a risky business
Share and property investments are risky …
Most people understand that the returns of growth investments (i.e. shares and property) fluctuate considerably. If they didn’t prior to the Global Financial Crisis, they most certainly have a better grasp of that now.
But most don’t really have a good understanding of the potential range of variation of returns, without anything particularly unusual happening. And nor do they appreciate how dramatically the pattern of returns can affect long term wealth outcomes.
We use the Australian share market experience of the 25 years to December 2009 to shed some light.
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Investment Return Volatility – A Potential Wealth Hazard
Investment return volatility is poorly understood
Most investors understand that in order to increase their expected future return, they have to accept a higher level of volatility (or variability) in the value of their investment portfolios. But beyond that, they do not understand just how damaging volatility can be to their wealth aspirations.
The amount of volatility you expose yourself to affects your probability of achieving a desired wealth outcome. In this sense, it is a forward looking concept. And, as such, it is an extremely important factor to take into account when designing and managing any investment strategy.
But this article reveals some poorly understood aspects of volatility, by looking backwards. That even when you know actual returns and actual volatility, wealth outcomes may vary dramatically.
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Borrowing and Wealth Management
Attitudes to borrowing
We all know that many people have become very wealthy through the use of borrowing. These people are often lauded as brilliant entrepreneurs and we are encouraged to emulate their success. But the last couple of years have again starkly reminded us that borrowing also comes with considerable risk and, potentially, financial ruin.
Where does borrowing sit in a wealth management plan? There are many opinions:
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