I would love to be able to provide the answers for investors but the reality is that I along with every other "expert" really have no clue.

The truth is that no one can provide any definitive answer which unfortunately only helps to add fuel to the fear.  Our approach is to look at the fundamentals of investment markets through history and promote a cautious approach to investing using whole of market style trusts - See our Building Portfolios page for more detail.

Unfortunately the great amount of fear being experienced in markets brings out some less than scrupulous characters.  A few weeks ago I received an unsolicited offer from a group called Hassle Free Share Sales.  This generous organisation offered to buy my Woolworths shares from me.

(As an aside, some may ask why I hold shares when I promote a passive investment approach to investing.  These shares were the first shares I ever owned and were purchased in Woolworth's IPO in 1993 - so they have some sentimental value along with some significant capital gains implications if I were to sell them.)

Back to Hassle Free Share Sales - they offered to buy the shares for $14.45.  The market price at the time was $28.90.  It is now $26.08 - Friday's closing price.  They also stated that there would be no brokerage or stamp duty.

Thanks very much but no thanks!!!

What groups like Hassle Free Share Sales and others (including probably the most famous operator - David Tweed) are trying to do is prey on smaller investors who may be less sophisticated in their approach to share ownership.  These investors are the most vulnerable at current times.  They hear, and read all the fear thanks to the media but are less likely to have a financial advisor or even broker assisting them in their decision making.  This offer comes along and it seems an easy way of selling their shares.

Please don't do it!!!

If you feel you can not take the stress that you might be feeling at the moment and / or you feel you have to sell than you should take the time to get proper advice and sell your shares on the market at the best price you can, not through a shonky operator like this.

For more information on this topic take a look at the following links:

NSW Government Office of Fair Trading warning in December 2007 about Hassle Free Share Sales - Be wary of share buying offers

A recent article from Vanguard on the topic - Taking cruel advantage in a troubled market

ASIC's Financial tips and safety checks site - FIDO - Unexpected offers to buy your shares

David Tweed's Wikipedia entry - http://en.wikipedia.org/wiki/David_Tweed

Regards,

Scott Keefer

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the plight of mortgage funds in light of the governmant guarantee of bank deposits.

In particular, Scott compares some of the funds being mentioned at present - AXA, Perpetual & Challenger - with some failed investments of the recent past - e.g. Wespoint & Fincorp - concluding that the funds that are in the media at present have a much sounder model.  However they offer similar returns to those being offered by cash accounts which are now rated more highly.

Scott also takes a brief look at the impact of the government guarantee of bank deposits on listed fixed interest securities.

Click on the following link to read Scott's analysis - Last rites for mortgage funds?.

There is an understandable lure towards implementing a Self Managed Super Fund through which you can invest and control your superannuation assets rather than leaving it up to someone else.  An article I read today suggested that there were over 372,000 SMSFs in Australia as of early 2008 with 47,500 new funds registered in 2007.

So is it worth getting on the band wagon?

My response to that question revolves around three key determinants:

·         Costs,

·         Benefits, &

·         Responsibility

Cost

A key element in the decision making around any investment alternative is the cost of implementing and maintaining the strategy.  The article I was reading outlined the Australian Tax Office's annual return data for Self Managed Super Funds.  It suggested that the ratio of operating expenses to total assets for SMSFs were:

·         10.51% for funds with assets of up to $50,000

·         between 2.63% & 3.55% for funds with balances between $50,000 & $200,000

·         2.26% for funds with assets between $200,000 & $500,000

The 2008 Rainmaker Fee Review provides some perspective for these fees.  This review suggested that workplace super funds now average 1.41%.

What are the fees for a superannuation portfolio we would recommend?

Based on a 40/60 portfolio - 40% invested in defensive assets such as cash and fixed interest investments and 60% invested in growth assets such as Australian shares, international shares and property our fees come in at:

·         $50,000 portfolio - 1.66%

·         $200,000 portfolio - 1.34%

·         $500,000 portfolio - 1.18%

We feel that our fees are very competitive both against workplace averages but especially when considered against the SMSF averages mentioned above.

Benefits

Fees are important but not the only criteria to consider.  Benefits from using a self managed super fund can range from the control it allows you to take of your own investments to what investments you can actually include within the fund.  For instance, under certain conditions you can include art work and even business property with the superannuation fund.  There are some clear rules about these more unusual asset classes including the sole purpose and arm's length test but a self managed super fund definitely provides other asset class opportunities.

If you are not interested, or do not see the value of holding these assets within your superannuation fund then this benefit disappears.

In terms of the control benefit there are other ways of having more control of your super without going down the SMSF path.

We employ an administration service for the majority of our superannuation and pension clients.  Using this service, clients through their financial advisor, are able to purchase a large range of assets within their fund including shares listed on the ASX.  They therefore take significant control of their portfolio.  No art work or business real property but not everyone has that compulsion.

We are open in saying that we would love the costs of using such services to be cheaper but with the rebate we receive from the provider we use which we pass on in full to our clients, we can keep overall costs below average SMSF and the workplace averages.

Responsibility

Unfortunately, with more freedom and control comes greater responsibility.  A lot more scrutiny is being placed on self managed super funds.  Anyone who is contemplating going down this path must be prepared to take on the trustee responsibilities that come with this.

Our preference is to use an administration service which will take on the trustee responsibilities for you including completion of tax and auditing requirements.  As long as the cost of this service is kept to a minimum we believe the benefits and peace of mind it provides clients is well worth it.

Self Managed Super Funds definitely have their place providing benefits to users and if well managed can even be quite cost effective. 

Our preference though, is to not recommend the use of SMSFs as an administration service can provide just us much control at lower costs without the trustee responsibilities.

If you wanted to discuss this issue in more detail please get in contact for a free no obligation meeting / discussion.

Regards,

Scott Keefer

In his latest article written for Alan Kohler's Eureka Report, Scott looks at six basic elements of a financial planning strategy all investors should consider.

In particular, Scott looks at:

1) Investing regularly over time (dollar cost averaging)
2) Repaying non-tax-deductible debt
3) Borrowing to invest
4) Salary sacrificing to superannuation
5) Transition to retirement strategy
6) Income planning in retirement

Click on the following link to read Scott's analysis - Financial planning's big six.

For the second blog of the week I want to refer to a piece written by Jim Parker, Regional Director, DFA Australia Limited.  Jim suggests there are 10 reasons to be cheerful about the global economy and the state of investment markets.  I am sure that neither Jim nor I want to be seen as flippant given the current market conditions but it is very easy to be bogged down in all the "Armageddon" type commentary surrounding us at present.  Jim's viewpoint provides a much more palatable outlook:

1. An awful lot of bad news is in the price. It is the nature of markets to assimilate new information quickly, which means that as we all sit around feeling gloomy, markets have usually moved on.

2. In bad times, demand for risky assets falls. So the compensation for taking this risk needs to adjust higher to attract investors. Lower share prices relative to fundamentals just means expected returns are higher.

3. Governments in the US, Europe, the UK and Australasia are pulling out all the stops to recapitalise their banking systems and get credit flowing again. The extraordinary response of risk assets to recent moves on this front shows how important confidence is in supporting markets.

4. Central banks have mounted a globally coordinated reduction in benchmark interest rates. Markets are priced for further moves. Insofar as banks pass on these lower borrowing costs, this will support business and consumer activity, buttressing the real economy.

5. Some governments are providing fiscal stimulus to bolster economic activity. Australia, for instance, recently unveiled a $A10.4 billion package. In the US, there is talk of a post-election stimulus plan.

6. Oil prices, which until recently were seen as a major threat to global growth, have retraced significantly. From late July until early October, crude oil futures fell by 45 per cent from a record $US147.27 a barrel.

7. According to Dimensional research, the average duration of bear markets in the US from the end of 1965 until the middle of this year was about 14 months.  This one has now lasted just on a year. This is not to claim it is near an end, but the longer it goes on, the closer is the next bull market.

8. Someone is buying. It's important to remember that on the other side of the trade from all those people liquidating their portfolios and mutual funds are other investors who are happy to buy. While some are market timers, others see this as a long-term buying opportunity.

9. Unless you have sold your holdings, your losses so far are only on paper. Market recoveries after prolonged downturns tend to come in quick sudden bursts. All you need to do to capture those recoveries is to stay in your seat.

10. The sun will come up tomorrow. Anxiety over the market downturn is understandable. But there have been crises before. The world moves on and risk appetites have a tendency to reassert themselves.
    

Thanks for the upbeat assessment Jim.

Regards,

Scott Keefer

The first few blogs for this week will unashamedly be referring to articles written by a number of commentators and investors.  I am very open in saying that there are many others out there who are much wiser than I.

I kick off with an item penned by none other than the sage of Omaha Warren Buffett.  Buffett has been widely quoted throughout media circles saying that he is buying into equities at present, not selling out.  In this piece he simply and coherently explains why he is buying American stocks for his own personal account.  The article can be found on the New York Times website - Buy American.  I Am.

For certain Warren Buffett is not the fountain of all wisdom but I would sure rather "bet" on him compared to some of the market commentators who get bandied around.  In terms of a great old Australian saying - he has runs on the board.

Buffett is moving from a position of holding only US government bonds into holding 100% US equities within his personal account.  His argument goes like this:

Rule: Be fearful when others are greedy, and be greedy when others are fearful

Comment: Most certainly fear is now widespread but fears regarding the long-term prosperity of the nation's many sound companies make no sense.

Rule: He can not predict the short-term movements of the stock market.

Comment: What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.  So if you wait you may miss out.

Buffett then goes on to provide a brief history lesson of the last 100 years particularly mentioning the depression, World War II and the inflation raged 1980's.  All saw the stock market bottom well before good news arrived with the conclusion being that bad news is an investor's best friend letting you buy a slice of America's future at marked-down prices.

Finally Buffett comments on holding only cash in a portfolio and refers to it as a "terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."  Equities will almost certainly outperform cash over the next decade.

In conclusion he provides two great quotes:

"I skate to where the puck is going to be, not to where it has been." - Wayne Gretzky - probably the most famous ice hockey player of all time.

"Put your mouth where your money was.  Today my money and my mouth both say equities." - Warren Buffett

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the recent 100 basis points interest rate cut and looks at the relative attractiveness of Australian share and listed property yields.

In conclusion, Scott suggests that investors should be looking at their investment income needs and the best way to achieve them.

Click on the following link to read Scott's commentary - Yields the new king?

"The problem is leverage, clear and simple," was how one journalist summed up developments in financial markets, noting that markets were freezing up, liquidity was lacking and investors had become risk averse.

The onset of recession, a weak US dollar and sinking real estate made for a gloomy combination, wrote another.

The crisis had all the markings of the end of an era, observed a third, suggesting that it would take years to clean up the mess of debt and high-risk products left behind by the sharper operators of Wall Street.

The financial strains were accompanied by political tensions. In the US, the Bush administration was under attack over its handling of the war in Iraq, which had driven up oil prices, and its management of the economy.

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The following quotes were referred to by Jim Parker, Regional Director, DFA Australia Limited, in his monthly commentary piece for the Dimensional Fund Advisors website. 

All of those observations Jim referred to were made within a few days of each other in January 1991, more than 17 years ago.

A word of caution before proceeding, I do not want to downplay the seriousness of what is happenning in financial markets around the world.  It is a very difficult time for investors (& their financial advisors).  However, that being said, the majority of the financial press is feeding on the fear frenzy out there using lots of headlines like plunged, carnage, smashed and the like.  Sure things are very tough but their are other viewpoints.

Our approach at A Clear Direction is that investors should be staying the course with their investments especially if they have a long investment timeframe before needing to draw an income from their investments or they have heaps of cash and fixed interest securities to rely on so that they do not need to be selling growth assets.  Another absolute key is to be extremely well diversified both across asset classes - cash, fixed interest, Australian shares, international shares and listed property - but also within those asset classes.

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So back to Jim's article.  The following is taken directly from Jim Parker's article.  It provides a much more positive perspective from which to be considering the current crisis. 

At that time (January 1991), the Anglo-Saxon economies of the US, Canada, the UK, Australia and New Zealand were all either in or flirting with recession.

The recession came on the heels of an era of financial excess, as exemplified on Wall Street by the junk bond king Michael Milken and in the movies by Gordon "greed is good" Gekko.

In the US, excessive and imprudent lending for real estate had contributed to the failure of hundreds of community-based 'savings and loans' institutions, triggering a multi-billion dollar government bailout.

In the United Kingdom, consumers who had leveraged themselves heavily to real estate suffered a severe blow when rising interest rates pushed house prices sharply lower, both in real and nominal terms.

In Australia, too, market deregulation had given way to an era of increasingly reckless lending by financial institutions, which until that point had had little experience in managing risky commercial loans.

The consequence in Australia was the failure of a number of major financial institutions, including the state banks of Victoria and South Australia, the Teachers' Credit Union of Western Australia, the Pyramid Building Society, merchant banks Tricontinental, Rothwell's and Spedley's and the Estate Mortgage trust.

Examining the causes of the early 1990s bust in the Anglo-Saxon economies, a Reserve Bank of Australia governor later observed that any boom built on rising asset values and financed by increased borrowing had to end.

At that time, the crisis seemed intractable and insoluble. Journalists and economists talked of systemic breakdown and a global challenge for market capitalism, much as they are now.

Now, while no two market crises are ever the same, it is fair to say there are parallels between today's downturn and the events of early 1990s, particularly in the damage caused by excessive leverage and insufficient oversight by many financial institutions of the risks they were taking on.

For those who lived through that period as investors (or even market commentators), you might recall the sense of doom and gloom and the over-riding fear in the financial markets at that time.

The important point is that markets worked through that period of dislocation and uncertainty to emerge stronger. Indeed, the early '90s recession was followed by a stellar decade for equities, one that would have passed by those who had given up in 1991 and hunkered down in cash.

This is not to predict that today's markets are ripe for a similar Phoenix-like revival, but it is a sage reminder that nothing lasts forever and that if you want the returns available from risk assets, you need to stay in your seat.

The risk of not doing so is highlighted in the tables and chart below. They show the returns over a near three-decade period (Jan, 1980-Aug, 2008) for four broad indices?two of relevance to US investors (the S&P-500 and MSCI EAFE) and two for Australian investors (the S&P/ASX-200 and the MSCI ex-Australia index). All returns are in local currency terms.

You can see in the tables and chart that had you missed the six best individual months in that period, the growth of wealth in a portfolio invested in the S&P-500 would have been half of what it would have been had you stayed invested. The results for the other indices are similar.

Bear in mind that six months represents less than two per cent of the period under study. So you can see how difficult market timing can be.

Market Returns: Jan 1980-Aug 2008

Dimensional Returns program; returns are in local currency terms

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In concluding, I want to stress the importance for each individual investor to consider their personal circumstances and situation.  Sure, history might suggest that you should stay invested in growth assets but your emotions and stress levels might be telling you otherwise.  If you are troubled by what is happenning to your portfolio the best thing to do is get in contact with a financial advisor you trust.

Regards,

Scott Keefer

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the workings of the Future Fund to provide insight into how you should be approaching your investment philosophy.

In particular, Scott looks at the Future Fund's investment strategy, exposure to global shares and global real estate, and the slow building of the fund over time as an example of sound practice for self managed super fund holders.

Click on the following link to read Scott's analysis - Inside the Future Fund.