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Financial Happenings Blog
Tuesday, January 30 2007

We use the Dimensional investment funds, as a sophisticated and powerful investment approach.

I often have a hard time explaining exactly the Dimensional advantage - what it is, how it works, the research behind it, the great minds (nobel award winners) who have fashioned this approach.

We have just pot together a document for clients that shows the power of the strategy, and I thought it worth mentioning the results of the 5 year returns, after costs.

If you had invested $100,000 into an Australian share index fund, that simply got the average return from the Australian sharemarket over 5 years (to the end of December 2006), your $100,000 would have growth a very healthy $200,000 (assuming dividends are re-invested).

The Dimensional funds focus on small companies and value companies as sources of additional investment returns.  If you had invested $100,000 in the Dimensional Small Companies fund it would now be worth $255,000.  If you had invested $100,000 in the Dimensional Value Companies this would have growth to $254,000.

That is the power of an effective investment approach, patience, and slightly above average market returns at work.





Posted by: Scott Francis AT 08:43 pm   |  Permalink   |  Email
Monday, January 29 2007

A theme of this blog is not to get too carried away with initial public offerings or share floats.

An article in todays Courier Mail provided a reminder of this.  Last year one of the bigger brisbane based floats was for RiverCity Motorways, which floated at 50 cents a share.  They are currently trading at 39.5 cents a share.

The pattern of the shares - which performed well after the float and are now underperforming is not at all unusual with floats - indeed it is a pattern identified in the academic literature that tracks floats (initial public offerings).  There are plenty of examples of recent floats that have underperformed after listing - think of Pacific Brands, Virgin Blue, Promina for a while, many of the recent listed investment companies and so on.  The secret is this - don't be blinded by the lure of a float as a sure thing. 

I am always impressed at the little details that the financial services industry uses in its bid to systematically defraud people of its money, and the word 'float' is a nice touch.  It sort of suggests an optimistic outlook - what could go wrong?  What could to wrong - ask initial investors in the RiverCity Motorways.




Posted by: Scott Francis AT 10:42 pm   |  Permalink   |  Email
Sunday, January 21 2007

The start of a new year brings will it all sorts of resolutions and forward planning, and nothing more exciting to an MBA graduate like myself that the opportunity for a little bit of 'corporate rebranding' (there you go - two weazel words in the one phrase - my MBA teachers would be so proud!).

So the decision was made by Scott Keefer (business partner) and myself to get a logo for the business.

And here is where it gets interesting.  The website sitepoint is a graphic design service that offers the chance for people to put forward a 'contest', with a prize, for the best design.  We duly submitted the description of what we wanted, details of the prize (US$125), and waited to see what we got.

We ended up with in excess of 60 designs, all interesting and some very good.  We were able to choose the best design to use in the business.

The advantage of this process is that we had a great diversity of designs, we got to provide feedback on designs during the process and we were able to select the one that best suited us.

A very interesting internet experience!  The winning design will be part of our website soon!




Posted by: Scott Francis AT 07:15 pm   |  Permalink   |  Email
Thursday, January 18 2007

Scott Keefer, my business parter at A Clear Direction Financial Planning, pointed out an interesting article from The Economist magazine. 

It showed a comparison of iPod prices in different countries in the world.  iPods are all manufactured in China by Apple. 

Comparing the cost of the same product in different countries is a way of comparing the purchasing power of different economies, and therefore future currency movements.  At the moment iPod prices in different parts of the world include:

  • Brazil - US$328
  • India - US $222
  • UK - $US195
  • Germany - $US192
  • China - US$180 (which is where they are manufactured)
  • Australia - US$172
  • US - US$149
  • Canada - US$144

CommSec, who are involved in putting out the index, are using it to suggest a 15% drop in the Australian dollar against the greenback. 


Posted by: Scott Francis AT 05:19 pm   |  Permalink   |  Email
Wednesday, January 17 2007

Here's a dirtly little secret for you. 

We are a financial planning firm, however:

  • We don't think we have any ability to pick shares that will perform any better than average.
  • We can't identify fund managers for you who will provide better than average returns.
  • We can't tell you whether Australian shares, international shares, listed property or direct residential property will perform best over the next 12 months.

Why on earth would you use us as a financial planner?

What if no-one in the financial services industry could do what we know that we can't  do - aren't they just charging ridiculous fees for promising something that they can't actually do?  There is plenty of research that suggest that no-one can pick outperforming stocks, time asset classes and pick better than average fund managers (if indeed any do exist!)

Here is an interesting quote that I came across about the fees charged by the financial services industry:

'We work in the most overcompensated industry in the world'.  Patrick Gedde.  Patrick is a renegade from the top echelons of financial services. For several years he served, first as Former director of quantitative research then CFO at Morningstar, the leading US company for researching and appraising mutual funds.  (Patrick went on to establish a financial planning practice that used index funds for portfolio contstruction).


There is a huge amount of scientific research that supports our ideas - and suggests those people representing that they can do these things are wrong - and charging a fat fee to be wrong!  Working with a financial planning business, and there are others beside ourselves, who base their business on the reality of how investment markets work provides a number of benefits for clients.  These include:

  • We know that fees are extremely important in getting successful financial outcomes - they have to be kept low!
  • We know that asset allocation is crucial - this is the most important portfolio factor to get right.
  • We know that trading has to be kept very low - keeping the portfolio tax effective.
  • We know that a long term approach has to be taken and will, in time, yield a good result.
  • We can build realistic expectations for clients, who will understand the need to stick to a long term plan to get good results
  • We know that STRATEGY is more important to a client than investments - we have to get that right!


Posted by: Scott Francis AT 06:04 pm   |  Permalink   |  Email
Monday, January 15 2007

I wrote an article published in yesterday's Alan Kohler Eureka Report.  The article is here

It highlites the most under-reported and powerful aspect of the coming superannuation changes - that is the ability to take a tax free retirement income stream if you are over the age of 60, while salary sacrificing your further superannuation contributions.  You should effectively be paying a top tax rate of 15%.

If you are 55 now, or soon, you should also check out how a transition to retirement income stream works for you.

In my opinion this is one of the most significant financial planning opportunities for people in years - read the article and then tell all your friends!



Posted by: Scott Francis AT 06:51 pm   |  Permalink   |  Email
Wednesday, January 10 2007

I happen to work about two blocks from my house.  Therefore I often go home for lunch.

Today I happened to go home and the Dr Phil show was on television.  The tennis was also on channel 7, and I mainly watched that, honest, but I did watch some of the Dr Phil show.

The show was about estate planning, and arguments between family members over wills and estates.  It was a pretty disturbing orgy of greed, and really showed the downside of not having estate planning details worked out.

There is, of course, more to estate planning that just keeping those people who are left behind happy.  A lot of the organisation is about structuring the transfer of assets tax effectively.  As a very simple example let us consider a wife who passes away, leaving a $300,000 estate.  This estate will produce taxable income of about $18,000.  If this is left to her husband, and assuming he is earning $45,000, the $18,000 will be taxed at a rate of 30% - meaning $6,000 of tax will be paid each year.  If the estate was left in the form of a testamentary trust, where the proceeds could be distributed to their three young children and taxed at adult tax rates, there would have been no tax payable at all.  A saving of $6,000 each year!

Keep in mind that estate planning is not about you, it is about the beneficiaries of your estate.  They are the people in this world that you care about

See a professional, pay a one off fee, get your estate planning details prepared professionally and then update them when your circumstances change (you have kids, get married, get divorced, receive an inheritance, retire etc).

The tennis was good as well.  I can't remember who won..............

Posted by: Scott Francis AT 11:07 pm   |  Permalink   |  Email
Tuesday, January 09 2007

One of the best books I read last year was 'Affluenza', a book written by Clive Hamilton and Richard Denniss.  It described the effect that the ever increasing desire to consumer was having on Australians.  It also talked about the powerful marketing strategies that large organisations used to get us confused about our 'wants' and 'needs'.  The big organisations benefit when we say things like, 'I need a new plasma TV', or 'I need a new car'. 

It explains why in Australia, as the wealthiest generation ever, we are reporting that we actually have a lower quality of life.  This makes it such an interesting condition to consider - if we are working hard to be welathier than ever - but wealth does not make us happy - then why are we doing it?

This link takes you to the website of Jessie O'Neil, who discusses some of the issues surrounding affleunza.  Some quotes from her website include:


"Anyone--regardless of their net worth--
who belives that they must be rich, that more is always better,
is a self-condemned prisoner of the 'golden ghetto'."
-- Jessie H. O'Neill

Simply defined, Affluenza, is a dysfunctional relationship
with money/wealth, or the pursuit of it. Globally it is a back up
in the flow of money resulting in a polarization of the classes
and a loss of economic and emotional balance.

Posted by: Scott Francis AT 10:20 pm   |  Permalink   |  Email
Monday, January 08 2007

There is a fascinating story here about about the google float.  As it became apparent the company was going to float, senior management became concerned that suddenly large numbers of their staff would have enormous wealth, and would be targetted by the financial services industry.

To prepare their staff for this targetting, management organised a series of investment seminars with the greatest minds in investment and portfolio economics.  Here is what they were told:

Bill Sharpe - a nobel prize winner - said don't spend great slices of money trying to beat the market.  Just invest in a low cost index fund, which will provide guaranteed better than average managed fund performance - and concentrate on making google a better company.

Burton Malkiel - author of the famous book 'Random Walk Down Wall Street' and Yale and Princetown finance professor said don't try to beat the market, and don't believe anyone who says that they can. 

Famous investment commentator John Bogle was next.  His advice was to stay away from the 'giant fleecing machine' of high cost managed funds and financial planners.  Stick to a low cost index or passive strategy.

So there you have it.  Three great minds suggesting that the best approach to managing money is to focus on keeping costs low, your portfolio well diversified and being prepared to accept market returns.  This is the start of the philosophy that underpins out investment approach, and we develop this a little further using acadmic reseach that says small companies tend to outperform the market by about 2% and value by about 4%: so using an index fund, a small company index fund and a value company index fund infact results in above index returns - although it is still a passive strategy, just combining index style funds.

Posted by: Scott Francis AT 05:30 pm   |  Permalink   |  Email
Sunday, January 07 2007

A year on there is still little joy for Westpoint investors, a point bought home in an article in last weeks Australian Financial Review.

The bottom line is that many investors are struggling to have their cases heard by the compliants scheme - FICS - because their claim is for more than $100,000.  Those with less than $500,000 find the cost of litigation too expensive, and find that they have little place to go.

The Australian Financial Review quoted comments from the head of the Financial Services Complaints Scheme (FICS) that said she had noticed financial planners who had recommended Westpoint simply closing their practice and moving to work as an authorised representative of another financial planning practice.

The stories of investors that have been burnt through Westpoint, which we hear about through the press, seem to have been advised by grossly incompetent financial planners who should never be allowed to practice again.  This includes:

  • Financial planners ignoring the basic rules of risk and return, and suggesting a high return scheme like Westpoint could be low risk.
  • Financial planners encouraging investors to borrow against property to invest and still calling it a low risk scheme.  Borrowing to invest intentionally increases the risk and return of a portfolio.
  • Investors having most of their assets in the one investment company (Westpoint) and the one asset class (mezzanine finance).  This ignores the fact that they key tool investors have in reducing portfolio risk is diversification across asset classes.

Of course, some financial planners used Westpoint as 5 -10% of a clients portfolio, which is a much more reasonable approach - and one that has left clients much better off.

Cheers and best wishes for a great 2007 (expect to those disgraceful financial planners who filled up client portfolio with high commission paying Westpoint investments!).

Scott Francis

Posted by: Scott Francis AT 08:46 pm   |  Permalink   |  Email
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