A more complete view of share market performance

190116.Share returns

The share market “news” you’re hearing may be misleading

The four months to 31 December 2018 saw a nasty fall in both Australian and global share markets. As measured by the S&P/ASX200 Price Index, the Australian share market fell 11.3% over this period. At an end December 2018 level of 5,646.40, financial commentators couldn’t help themselves adding to the gloom by noting that the index was 15.7% below the all-time high of 6,700.6, recorded on 26 October 2007.

The implication is that the Australian share market was still well below pre-Global Financial Crisis (“GFC”) levels, despite the passage of over 11 years. A further conclusion that might be implied is that the share market isn’t a great place to invest. While not claiming the past 11 years has been the best experience for investors, the focus on the 26 October 2007 S&P/ASX200 Price Index peak as a benchmark is potentially misleading, for at least two reasons:

  1. The peak may have represented an extraordinary level, rather than what could be considered “normal”; and
  2. The “Price” index doesn’t measure the total return from share investing, capturing only changes in the prices of shares and completely ignoring the impact of dividends.

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Your emotions complicate investment decision making

Your emotions complicate investment decision making
Lifestyle asset decisions have a heavy emotional content

It’s not always clear what’s a lifestyle asset versus an investment asset. Recent discussions with a client regarding a proposed holiday house purchase raised some interesting issues not only in relation to this matter but regarding investment assets, more generally.

In this case, the client expected that the holiday house would be available for rent for most of the year, with the family using it only for a couple of weeks during peak holiday periods. Based on previous net rental income figures, the return on the property would exceed the current cost of borrowing.

The client’s reasonable view was that because of the anticipated net income, the property should be regarded as an investment asset rather than a lifestyle asset. Further, given the likely reliability of that income, he questioned whether it could be considered as an alternative to holding low yielding, high credit quality, defensive assets.

We were not comfortable with the “defensive asset” alternative idea, given that prices of holiday homes fluctuate considerably and, in poor markets, there is often little liquidity. However, a typical response to this view is that there is generally no intention to ever sell a holiday home. Often, it’s regarded as an asset for the family to enjoy and, potentially, to be passed on to the children.

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Do You Really Want Your Investments To Increase In Value?

It depends on your wealth accumulation “stage”Do You Really Want Your Investments To Increase In Value?

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.

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The Mechanics of Managed Funds: Tips and Traps

Managed funds: a time tested financial innovationThe Mechanics of Managed Funds: Tips and Traps

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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