The Top 10 Money Excuses

The Top 10 Money Excuses
The following article is courtesy of Jim Parker, Vice President, DFA Australia. It highlights that without a disciplined pre-conceived approach to making money related decisions, it is easy to justify actions that objectively may not be in your best interests.

People rationalise bad money decisions

Human beings have an astounding facility for self-deception when it comes to their own money.

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The Reality of Lifetime Annuities in Australia

The Reality of Lifetime Annuities in AustraliaLifetime Annuities: good product, immature market

If you’re looking for a way to outsource your investment, longevity and inflation risks, you’re in luck. There is a financial product (a lifetime (indexed) annuity) that allows you to achieve this aim. However, the market for these products in Australia is quite immature, which is not good news for purchasers.

The lifetime annuity market in Australia has been around for many years, yet its size has never been significant. In 2001, 1,927 lifetime annuities were sold for a total value of $166 million. By 2004, this had increased to 2,801 annuities worth $281 million.

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Index Investing: Naïve or Smart?

Index Investing: Naïve or Smart?

What is index investing?

Many investors shy away from index investing because they deem it to be too naïve for their investment purposes. There’s definitely a higher seduction factor associated with a bottom up, active investment approach. Yet the recent trend has clearly been towards index style investing (due largely to the dissatisfaction with actively managed investment alternatives).

An index is a statistical measure for determining the performance of a portfolio of constituent investments. Charles Dow created the first (“Dow Jones”) index back in 1896 to act as a proxy for the performance of the US stock market as a whole.

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Putting the investment odds in your favour

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.

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Baby boomers’ housing experience may not repeat

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.

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Moneyball: a story of faith in an objective strategy

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.

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The Allure of Gold

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).

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Borrowing to buy property within Super: Buyer Beware!

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.

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DIY Financial Planning – The real costs may not be evident

DIY Financial Planning – The real costs may not be evidentDIY 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?

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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