Last Saturday, 4th October, Scott Francis joined Warren Boland's "Weekends with Warren" program on 612 ABC Brisbane.  The major topic covered was personal finance strategies in the context of the "Credit Crisis".  The 6 strategies considered included:

1. Pay Down 'high interest' non - tax deductible debt (eg store cards and credit cards)
2. Regularly Investing in Growth Assets
3. Borrowing to Invest
4. Making Additional Mortgage Repayments
5. Salary Sacrificing to Superannuation
6. Income Planning for Retirement

Click on the following link to be taken to a summary of the material covered in the segment - Personal Finance Strategies in the Context of the "Credit Crisis"

Scott Francis has provided commentary towards an article written by Melanie Christiansen and published on page 10 0f Saturday's Courier Mail - 4th October 2008 - Panic could prove costly.

In the article, the following comments were attributed to Scott:

"Another financial planner, Scott Francis, said the situation might be worrying for those close to or newly retired, but he said for cashed up younger investors, there was "a little stench of opportunity'' in the air".

"I think this is a really exciting time for people far enough away from retirement not to be threatened,'' he said.

THE current financial market turmoil presents an "exciting'' opportunity for well-placed investors.

Instead of worrying about reduced values and selling shares when prices are low, he urges investors to take advantage of the situation.

"The price of shares now reflects all the fear and uncertainty, so you're potentially selling at a really bad time,'' he says.

"I think this is a really exciting time for people far enough away from retirement not to be threatened.''

Mr Francis says it is important to remember that shares should not just be judged on their values, but also the "pretty attractive income stream'' from dividends and also their franking credits.

He also advises people to stick with their superannuation, despite recent falling returns.

"Right now, it's distressing that the value of super is falling. But the nice thing if you are far enough away from retirement, you're still buying more assets at significantly lower prices than you had to pay 12 months ago.''

But he would encourage more people to take control of their super, rather than simply accepting the fund's default holding.

I have come across an online article published on Kiplinger.com that provides a really great summary of the approach taken by Dimensional Fund Advisors - This is Rocket Science.  It refers to the US operations of the organisation but the commentary is also a fair representation of the Australian based funds offered by DFA.

The key points in the article were:

• The board of DFA contains Nobel prize winning economist Myron Scholes along with University of Chicago finance professor Eugene Fama
  
  
• The DFA philosophy boils down to the relationship between risk and return:

·         Riskier stocks - small companies & those considered undervalued - produce higher returns on average over time.

• They use an index based approach but are different from index funds in that they employ pragmatic tactics:

1.             Flexible approach to indexing

a.       E.g. no REITs in the small company trust

b.       E.g. no recently listed companies in the small company trust

2.             Buying and selling shares based on momentum

a.       DFA believes that a stock that's moving dramatically one way or the other tends to stay in motion for a while

                                                                     i.      This means they won't buy a share that spirals down into the small company buy zone nor will they automatically sell a share that soars out of the small company range

3.             In the emerging markets arena they avoid whole countries that might otherwise be included in an Emerging Markets Index.  The main example at present is Russia because of an absence of strong property rights.

• DFA also offer modest operating costs.  The maximum fee on the funds that we use is 0.76% on the Emerging Markets trust.  The lowest fee is 0.25% on the Australian Large Company trust.

Dimensional funds make up a core part of the investment portfolios we recommend to clients.  We are impressed with the academic research that has gone into developing their strategies and also the relatively low cost alternative they create for investors.

If you wanted to see how we incorporate them into our investment philosophy take a look at our Building Portfolios page.

Regards,

Scott Keefer

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the performance of Listed Investment Companies.

Scott reports that they have, on average, underperformed the market average over the 5 years lead up to the end of June 2008.  They have also under-performed over the 1 year bear market period to the end of June 2008 - a time when some market participants suggest that LICS should outperform.

Click on the following link to read Scott's analysis - LICs show their mettle.

The latest edition of our fortnightly email newsletter was sent to subscribers on the 30th of September. 

The edition looked at the debt crisis, provided a summary of the bailout efforts of the US government as set out in the proposed Emergency Economic Stablization Act, provided a summary of the movements in markets over the past fortnight and looked at what to do in the current market conditions.  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 following is the lead article for the newsletter:

Financial Topic Demystified - Emerging Markets

Today I have read an article in the Australian newspaper looking at the topic of whether financial planners should also be the investment managers for clients - Financial advisers can be fund managers.  The article refers to a US industry expert who suggests financial advisors should stick to technical strategic decisions and keep away from the tactical investment management.

The article provides a retort to this argument suggesting the new breed of Australian advisors are better-educated, some now holding undergraduate university degrees, and are just as capable as analysts employed by fund managers to help clients make investment decisions.  Another interesting discussion mentioned by the author is the 2.4% average client management expense ratios for using the services of financial planners associated with the major banks and the pressure being placed on these fees thanks to not only industry super funds but also boutique financial advisors who want to cut costs for clients.  (This 2.4% includes adviser, fund manager and administration service or wrap fees.)

So where do we sit on these points?

Firstly we believe that advisors with the proper academic qualifications are quite capable of providing the best strategic and investment advice.  I hold a Masters degree in Financial Planning along with a Bachelor of Commerce while my business partner Scott Francis holds a Masters in Financial Planning, a Masters in Business Administration (MBA) and is now studying towards a doctorate (Phd) in the area of investment markets.  We believe a committment to the education process is essential putting ourselves in a good position to deal with both strategic and investment decisions for clients.

On the issue of fees, we are definitely in the camp of trying to force fees down.  Paying 2.4% is way too much.  Our fee on a $50,000 balanced investment portfolio is 1.6% (GST inclusive).  This quickly falls away to 1.28% on a $100,000 portfolio and 0.9% on a million dollar balanced portfolio.

We think these fees are pretty competitive but we also acknowledge that we would like to get them lower and are currently in the process of reviewing our cost base to see how we can reduce costs and pass this reduction on to clients in the form of lower fees.  More on this point in the near future.

In conclusion, we think that a well educated financial advisor can provide both excellent strategic planning advice along with excellent investment advice.  So when looking for a planner carefully check out their qualifications and also check out their fee structure.  Their educational background does not afford them the right to charge exorbitant fees.

Regards,

Scott Keefer

In the latest edition of the Sound Investing podcast, published by FundAdvice.com, Paul Merriman, Tom Cock and Don McDonald discuss whether your portfolio is built for the amount of risk you can handle, whether a well diversified portfolio only needs 20 stocks, the outrage if you choose to sell down growth assets now and a discussion of how today's global financial crisis happened and what to do about it.

One warning, the radio show is 51 minutes in length and will use up 23MB of download.

If these constraints are not a problem, I recommend you take a look at the latest podcast - Sound Investing - September 26, 2008

For those who have limited time and/or limited download capability the following is a brief summary of the more relevant material that was covered:

Riding out the storm, how is your portfolio doing?

Paul Merriman comments that being a successful investor is not only about the rate of return you need but what risk you are willing to take and make sure your portfolio is built that way.

Don McDonald commented that your emotions are your biggest enemy.  He also reflected that we never refer to markets as turbulent when they go up only when they are going down.  The reality is that this has occurred in years past.  In 1982, unemployment at 10%, interest rates at 20%, the market was down about the same as now.  On August 12^th the market turned around and was up by 40% at year end.

Back to the Basics

What is the worse thing that can happen to your portfolio.  Answer - let your emotions take control.  It leads to buying high and selling low.

Myth or Reality: When the news is bad, get out; When the news is good get in

Paul refers to these type of investors as the Dalbar Dummies - referring to the Dalbar study, going back 20 years showing investors receiving less than 50% of the index return because of the behaviour of selling at lows and buying at highs.

You need to learn how to invest mechanically.

Does the government intervention in markets affect the passive investing story?

Markets are never solid nor stable one day at a time. You need to decide whether you have confidence in the long term success of the global economy.  If you have that belief in capitalism and that it will survive and grow and go through cleansing periods like now, which is normal, then every person should have a certain amount of fixed income and you stay within your personal risk tolerance and avoid the question are you doing the right thing.

They referred to the question what if the stock market has a period like the Japanese market through the 90s.  The response was that if you were in Japan during that period and invested internationally as long as investing in Japan you would have had a much better performance than by investing solely in the Japanese market.  The key, having an internationally diversified portfolio.

Paul's Outrage: Why Fidelity's .750 batting average might strike you out

Paul looks at a full page advertisement taken out by Fidelity to try to calm investor nerves in the US.  Paul agrees with most of the content.

Westpac and the Association of Superannuation Funds of Australia (ASFA) have released their latest national Retirement Standard - Westpac-ASFA Retirement Standard.  The report shows that petrol, health and food prices are driving up the costs in retirement.  The details are presented in the table below with the figures assuming retirees own their own home.

Budgets for various households and living standards

The conclusions set out in the media release were:

Over the year to the end of June 2008, Food costs were up 3.9%. Living the good life in retirement became more expensive, with the cost of take away food increasing by 6.5%, restaurant meals by 4.5%, milk by 12.1%, cakes and biscuits by 8.2%, snacks and confectionery by 5.3%, cheese by 14.2%, bread by 6.8% and poultry by 11.0%. As well, alcohol and tobacco prices were up 4.8%, health costs rose 4.8% and transportation costs were up 6.9%. Over the year the average price of unleaded petrol increased from around $1.25 per litre to around $1.60 per litre.

Over the last four years the costs of a comfortable retirement have increased in total by 11.9% and for a modest standard of living in retirement by a total of 13.1%. Basic budget items tended to have the largest cost increases.

The increases are confronting and show the importance of not just holding financial assets as cash and/or fixed interest as the returns from these style of investments may mean that your financial assets do not keep pace with the rise in expenditure.

I also find that the report helps those preparing for retirement determine the level of assets they will need to live comfortably.  Our rule of thumb is that retirees should be able to draw down on their financial assets at a rate of 5% in retirement.  For a couple who want to afford a comfortable lifestyle this would mean that they need approximately $1 million in financial assets (in today's dollars).  Of course retirement needs are different from one person to the next but the ASFA Retirement Standard is a useful starting point.

Regards,
Scott Keefer

 This morning I have listed to a podcast from FundAdvice.com providing their response to the current crisis - Coping with the Wall Street Crisis.  The podcast is 30 minutes in length and 15Mb in download size in case you wanted to listen to it yourself.

Some of the topics were not totally relevant to the Australian context but I wanted to pull out a few points that were.

These events are not unprecedented

Paul Merriman pointed out that we need to put the current situation into perspective:

• Remember the high interest rates of the early 80s
• Between 2000-2002 the US market was down twice as much as it is now
• In the 70s the US market dropped over 50% in response to the oil embargo problems

This is not to say that this is not a very serious situation but it is a situation we have to go through.  This point goes back to the whole question of risk and return.  Returns from share markets over time are greater than returns from cash and fixed interest securities because they are riskier investments.  As a trade-off for that risk, investors expect to be rewarded.  If they were not riskier and experience volatility in prices, returns should be more consistent to returns for other investments like cash deposits.

Emotions are your worst enemy

Your emotions can lead to making unwise financial decisions.  A quote from Paul Merriman:

"Your emotions are absolutely your worst enemy when it comes to dealing with money. People get way too excited when times are good. People get far too frightened when they are bad. In both cases, you will react irrationally based on some really bad information that is coming from within you. And the media is making money by driving those fears right now."

Be careful listening and watching the news media

The news media despise putting the current situation into perspective, they want to sensationalise the issue by using terms such as worst, or worse than to get attention to their story and by doing so sell more advertisements or subscriptions.

Importance of Asset Allocation based on scientific research

Mark Metcalfe, a financial advisor from Merriman, Berkmann & Next - the firm behind FundAdvice.com, suggested that he is just as convinced of the benefit of asset allocation & diversification which is underpinned by peer reviewed white papers - academic research - which is based on long run historical investment data.

What to do now?

The key is have a disciplined approach and stick to it.  This means doing nothing or even adding more growth assets to your portfolio but definitely not make wholesale changes.

Paul Merriman also suggested that investors should understand where they are now and what their portfolio needs to provide for their future.  A financial advisor should be working with clients to do this and help make sure portfolios have built in an appropriate amount of risk for each client.

Don't pretend to know which way the market will go

One presenter paraphrased a quote from William Bernstein, the author of the Intelligent Asset Allocator.  There are three basic groups:

1. Those who don't know which way the market is going
2. Those who know they don't know which way the market is going
3. Those who know they don't know which way the market is going but pretend to know to justify their livelihood

Characteristics of Good Advisors

• offer an initial fee consultation,
• prepare people for the bad times
• advisors work together to service clients
• have an approach to investment based on the fundamentals of asset allocation based on academic research
• they don't pretend to know which way the market will go
• are a fee only advisory service, fees are separate from products
• they are available
• they have back up support
• advisors share their opinions on a client's situation with another advisor
• provide the right direction and give clients the best service

Some food for thought in what is a difficult time on investment markets.

Regards,

Scott Keefer

It would be a gross understatement to suggest that the current investment market conditions are very difficult.  (Some of my more colourful friends would add a few different adjectives in front of difficult.)  In my reading over the week I have come across an article coming out of the USA which I thought was worth sharing to try to add some perspective as to what investors should do.

The article comes from FundAdvice.com - Don't Dump Those Dogs.  It looks at the temptation to dump all the poor performing asset allocations and transfer into better performing assets.  The author of the article is an advisor for Merriman Berkmann Next which uses a very similar approach to our firm.  They recommend that their clients invest in U.S. large-cap, U.S. value, U.S. small-cap, U.S. small-cap value, U.S. real estate, international large-cap, international value, international small-cap, international small-cap value, international real estate and emerging markets stocks.

The article suggests that in any given week, month, year or decade some asset classes will shine and some will lag.  One of the problems for investors at present is that all growth asset classes have struggled over the past 12 months.  Does this mean that we should dump all growth assets and move to cash and fixed interest?

The author, Jim Whipps, suggests not:

"Market declines are a normal part of long-term investing. Fortunately, they don't last forever. It's tempting to think that a falling market will keep going down indefinitely (or that a rising market will keep going up indefinitely) and as a result of that to make emotionally based transactions (usually at precisely the wrong time). History has one piece of advice about that: Don't do it."

"If you get out of the market now, at some point you will want to get back in. That is tougher than you might think. If you wait until it is comfortable to re-commit, you will almost certainly have missed a big rally - possibly even the majority of the market's next upswing."

Jim goes on to look at some recent historical examples where jumping out of asset class dogs turned into missing out some significant rises in returns from these allocations.

These statements are easy to say but when you are in the middle (hopefully nearer the end) of one of the most significant downturns in investment markets the psychology of investing plays a much greater role.  In a recent blog I suggested that if the turbulence has been too great it may be worth reconsidering your risk profile and as cash comes into your portfolio from your investments not to automatically reinvest this cash but strategically consider what you want your asset allocation to be going forward and then structure any future investments to get you to that point.

All this being said, there are some positive signals out there with the USA bail out moves, organised activity on the part of central banks around the world including our RBA and as I write news is coming through that Warren Buffett is investing $5 billion into Goldman Sachs with the option of investing another $5 billion, one of the investment banks at the centre of the financial crisis.

I am definitely not suggesting we have reached the turning point.  All I am saying is that we can't be sure and after sustaining the 20% or more falls over the past 9 months I for one, sure do not want to miss a rebound when it comes.

Regards,

Scott Keefer