The author of the famous book A Random Walk Down Wall Street, Dr Burton Malkiel, has recently visited Australia on a promotional tour for investment fund manager Vanguard.  Malkiel is a board member of Vanguard's parent entity in the US.  Before going any further, to be totally transparent I should make it clear that we recommend the use of some Vanguard funds in building investment portfolios for clients.  Unfortunately he did not visit Brisbane on his tour as I would have loved to have listened to his views.

Now that I have gotten that disclosure out of the way...

During his visit he conducted an interview with Alan Kohler which has been published in the Eureka Report - Why it's so hard to "beat the street".  In the interview Kohler broaches a range of issues with Malkiel including Warren Buffett's position on index funds, why personal investors should use index funds as the core of their investment portfolios and why investors are very unlikely to "beat the market".

Malkiel re-iterates a great quote that has been made by him in the past - a "chimpanzee with a dart" could do better than active managers, "although not only portfolio managers but the chimpanzees got angry at me for being compared with active portfolio managers."

Not only does Malkiel come out strongly in favour of using index funds, he also talks favourably about the "value" effect that we have identified as one of the three factors of investing.

I really encourage you to take a look at the article - Why it's so hard to "beat the street"

Regards,
Scott Keefer

Last November we transferred our client referral program over to support the work done by KIVA - a micro-lending agency.  For every new client that comes to us thanks to the referral of a current client we add an extra $50 into the account we hold with KIVA.  From this account we are able to loan funds to small business enterprises in struggling areas ofthe world.

Our first loan of US$300 has recently been paid back by Tik Yun, a 60 year old female farmer from Cambodia.  We have added another $50 thanks to a recent referral and have today placed another loan with a village bank in Khsom Village, Cambodia.

The bank consists of twenty-nine members. Mrs. Ly Chan is the Village Bank President. She is a 38-year-old married woman with four children, all of whom are studying in state school. Her husband, Mr. Sopha Mao, is a farmer in the local village.

She is a fish-seller, so she buys fish to re-sell in the village. Her business is doing well, but she would now like to expand the business. Unfortunately, Mrs. Ly Chan has insufficient money to purchase more fish; thus, Mrs. Ly Chan is requesting a loan for this purpose.

If you would like to find out more information please go to Our Lending Page hosted on Kiva's website. 

If you would like to know a little more about how KIVA works take a look at the following summary of what KIVA does our go to their website - http://www.kiva.org/

Kiva's mission is to connect people through lending for the sake of alleviating poverty.

Kiva is the world's first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world.

The people you see on Kiva's site are real individuals in need of funding - not marketing material. When you browse entrepreneurs' profiles on the site, choose someone to lend to, and then make a loan, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates and track repayments. Then, when you get your loan money back, you can relend to someone else in need.

Kiva partners with existing expert microfinance institutions. In doing so, we gain access to outstanding entrepreneurs from impoverished communities world-wide. Our partners are experts in choosing qualified entrepreneurs. That said, they are usually short on funds. Through Kiva, our partners upload their entrepreneur profiles directly to the site so you can lend to them. When you do, not only do you get a unique experience connecting to a specific entreprenuer on the other side of the planet, but our microfinance partners can do more of what they do, more efficiently.

Kiva provides a data-rich, transparent lending platform. We are constantly working to make the system more transparent to show how money flows throughout the entire cycle, and what effect it has on the people and institutions lending it, borrowing it, and managing it along the way. To do this, we are using the power of the internet to facilitate one-to-one connections that were previously prohibitively expensive. Child sponsorship has always been a high overhead business. Kiva creates a similar interpersonal connection at much lower costs due to the instant, inexpensive nature of internet delivery. The individuals featured on our website are real people who need a loan and are waiting for socially-minded individuals like you to lend them money.

We encourage you to take a look at this great enterprise.

Regards,
Scott Keefer

The Australian's Wealth supplement published today contained a really useful article outlining the simple but central rules of investing - 10 golden rules for successful investment.

The rules were:

1. Invest regularly
2. Stay the course
3. Diversify
4. Avoid get rich schemes
5. Regular reviews
6. Get the structure right
7. Borrow to invest
8. Look long term
9. Seek professional advice
10. Spend less than you earn

The article provides a good summary but in our opinion would benefit from a re-jigging of the order of items.  We would also suggest the removal of borrowing to invest as we do not consider that this is necessary for investment success.  Borrowing to invest increases the risk of a portfolio.   Sure, if the returns from the investment are greater than the cost of the loan it will be a successful strategy.  If not it can be a good way to destroy value.  Many do not need to take on this extra risk to reach what is a successful result.  Therefore it should not be included as a rule.

Finally we would include the need to keep investment costs low to round out the list.

Our order would look more like this:

1. Spend less than you earn
1. Before you can invest you need to establish and continue to build a capital base from which to invest
2. Seek professional advice
1. Unfortunately this seems a little bit of self-interest, but nevertheless good quality professional advice put in place early will pay for itself.  Professional advice should first look at the risk-free strategies such as reducing tax, getting structures right and then assist with identifying the actual investments
3. Get the structure right
1. It is important to look at where investments are placed in terms of superannuation or non-superannuation and in who's name
4. Look long term
1. Investing in higher risk assets such as shares and property requires a long term focus of more than 5 years.  There have been period through history where higher risk asset classes have had periods of negative performance for more than 5 years.
5. Diversify
1. The old saying rings true - don't put all your eggs in the on basket.  It is essential to invest across a range of asset classes and assets within those classes to avoid the risk of one or two individual asset collapsing and taking your whole portfolio with them.
6. Keep costs low
1. Unfortunately this was left off the list in the Australian article.  We see this as really important.  High costs eat in to the returns of investors and inevitably lead to poorer performance.
7. Avoid get rich schemes
1. Choice of investments should take into account the trade-off between risk & return.  If an investment promises high returns, make sure you understand the risk involved.
8. Invest regularly
1. Investing regularly not only builds the portfolio but also takes out some of the timing risk i.e. investing everything today and tomorrow the value falls sharply.  If you regularly invest over time, even if markets fall you will be buying new investments at lower prices.
9. Stay the course
1. Jumping in and out of investments is a great way to destroy wealth because research shows that  investors tend to buy at high prices and sell at low prices.
10. Regular reviews
1. Even though you should keep your follow your investment approach for the long term, circumstances will cause the need to re-assess the strategy such as a change in life circumstances or the need to re-balance after a period of strong growth in a particular asset class

Regards,

Scott Keefer

The latest edition of our fortnightly email newsletter was sent to subscribers on the 20th of May.  If you would like to be added to the mailing list please click the following link to be taken to the sign up page - The Financial Fortnight That Was Sign Up Page.

The financial topic discussed this fortnight was the importance of getting your asset allocation right.  The latest edition also contained the following Market Update:

Market Indices

Since our previous edition, Australian and global sharemarkets have both experienced positive movements.  The S&P ASX200 Index has risen 4.04% from the 2^nd to the 16^th of May.  It is now down 5.78% from the same time last year and down 6.45% for the calendar year (2008) so far.  The MSCI World - ex Australia, a measure of the global market, has risen 1.18% over the same period.  The index is down 7.91% from the same time last year and down 4.22% for the calendar year so far.

Emerging markets have also experienced positive movement with the MSCI Emerging Markets Index rising 2.78% since the 18^th of April.  It is up 18.44% from the same time last year but down 4.09% for the calendar year so far.

Property trusts have fallen since the 2^nd of May with the S&P ASX 200 A-Reit Index (formerly known as the Property Trust Index) falling by 4.65%.  The index is down 31.30% from the same time last year and also down 19.42% for the calendar year so far..  The S&P/Citigroup Global Real Estate Investment Trust (REIT) Index, a measure of the global property market, has fallen 0.68% over the same period.  It is down 16.56% from the same time last year but up 1.05% for the calendar year so far.

Exchange Rates

As of 4pm the 16^th of May, the value of the Australian dollar has had mixed movements.  It has risen against the US Dollar since the 2^nd of May being up 1.41% at .9449.   It is up 13.47% from the same time last year and up 7.18% for the calendar year so far.  Since May 2^nd the Aussie has risen 1.98% against the Trade Weighted Index now at 72.2.  This puts it up by7.12% since the same time last year and up 5.09% for the calendar year so far.  (The Trade Weighted Index measures The Australian dollar against a basket of foreign currencies.)

General News

Since our last edition the Australian Bureau of Statistics has released the latest employment data.  The unemployment rate has risen by 0.1% to 4.2% for April 2008.  At the same time the participation rate has risen by 0.25 to 65.4%

The Federal budget for 2008 was also brought down by Treasurer Wayne Swan last Tuesday night with the budget surplus sitting at over $20 billion.

During their tuesday evening program Channel 9's Brisbane Extra presented a segment on the use of Debit Cards. Scott Francis was interviewed for the program to provide some brief analysis of the use of debit cards and any traps to watch out for.

For a copy of the transcript of the program please click on the following link to the Nine's Brisbane Extra website - Debit Cards.

In today's podcast, Scott Keefer outlines some of the competing arguments for and against commission payments to financial advisers and looks at the much larger issue of ownership bias.

He suggests that the ideal approach for investors is to find an adviser who is free from both ownership and commission bias.

Please click the following link to be taken to this podcast - The Problem of Ownership and Commission Bias.

In today's podcast, Scott Francis looks at the budget from the perspective of how the business of government works.  He breaks down the numbers in terms of revenue and spending and makes some interesting insights.

Please click the following link to be taken to this podcast - Business of Government.

Today we have posted graphs for the Dimensional funds that we use to build investment portfolios for our clients.  They have been updated to include performance up until the 30th of April 2008.

Some interesting points to note:

- the month of April has seen a nice pick up in investment returns both in Australia and globally.  Take a look at the growth of wealth graphs to see this impact.

- the Dimensional Australian Value Trust has outperformed the ASX200 by 3.76% per annum over the past 7 years. (After fees)

- the Dimensional Australian Small Company Trust has outperformed the ASX200 by 4.51% per annum over the past 7 years. (After fees)

- the Dimensional Global Value Trust has outperformed the MSCI World ex Australia Index by 4.58% per annum over the past 7 years. (After fees)

- the Dimensional Global Small Company Trust has outperformed the MSCI World ex Australia Index by 6.07% per annum over the past 7 years. (After fees)

- the Dimensional Emerging Markets Trust has outperformed the MSCI World ex Australia Index by 14.22% per annum over the past 7 years. (After fees)

Some words of caution:

- past performance does not provide a good prediction of future performance

- the premiums on top of the market return that have been experienced are above what we would expect in the long term, value premiums should be 2-3% small company premiums 3-4% over the relevant market index.

If you would like to know more about how we use these funds to build investment portfolios please take a look at our Building Portfolios page.  This philosophy is based on strong scientific research - please take a look at Our Research Based Approach pages for more detail.

If you would like more information please be in contact.