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Financial Happenings Blog
Tuesday, September 30 2008

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

In this edition of our email newsletter it would be remiss of us, given the extremely volatile market conditions being experienced on investment markets, to avoid discussing what is being widely referred to as the Debt Crisis.  Last week we made a presentation to interested clients, via meetings and teleconferences about the current situation.


A copy of the presentation can be found on our Seminar Presentations page on our website.


The following is a brief summary of the discussions.




The debt or credit crisis started with the selling of mortgages to people who could not afford them.  They were sold by salespeople on commission.  These loans were then sold on to other financial institutions. As such the initial lenders were not worried about the credit worthiness of the borrowers because they were just selling the loans on to other institutions.


Now these loans were non-recourse loans.  If the borrower could not pay back the loan the lender could take back the property from the borrower but without any further claim on the assets of the borrower.   Property prices have fallen significantly in value so that the value of the assets are now much less than the original loan values.


These loans were bundled together, sometimes with further borrowing, into various products including Collateralised Debt Obligations (CDOs).  In Australia some superannuation funds, local councils and banks invested in CDOs.


The problem has now become that no-one trusts anyone in debt markets.  If these CDOs can cause an investment bank to fail then no-one wants to lend money to an institution that might have significant exposure to them.




Where to from here?


We do not want to diminish what is happening in any way.  This is a very serious financial problem; however there have been others that have gone before.  The media enjoys reporting fear and greed which makes it all the more difficult to focus on the fundamentals.


In terms of Australian banks, the banks in the USA that have fallen have been investment banks.  Australia's banks are better capitalised, our government's credit rating is AAA and can raise cheap debt if necessary, the Reserve Bank has not had to 'prop up' any institutions and the official cash rate is 7% giving them room to cut rates if growth slows.


In terms of the real economy:

  • Unemployment is at historical lows (less than 5%)
  • There is no serious expectations of a recession
  • The economy is forecast to continue to grow (albeit at a slowing rate - which is not a bad thing in that it keeps inflation under control)
  • An International Monetary Fund (IMF) study suggests Australia is well placed to weather the global economic downturn
  • Even in the USA the 'real economy' seems to be surprisingly strong, unemployment is reasonable, consumer spending strong - and against forecasts they seem to have avoided a recession up till now (although that may change in the future).

The Bailout which is being hotly debated in Washington (& all over the world), will potentially improve the situation by removing "toxic" debt out of the companies making it easier for companies to "trust" each other and lend and borrow with certainty.  Our Fascinating Financial Fact section sets out the details of the plan.  However it is not a magic pill and what seems to be really needed is a floor under house prices in the US. 


What is already priced into the value of shares?


There is an obvious desire to sell shares, and put the money into cash at such a difficult time.  However, the price of shares at the moment must reflect a great deal of fear - from the USA problems and the reporting of this as a 'crisis'.

The value of shares at the moment would likely reflect:

-         The probability of a USA recession

-         Continued problems in credit markets

-         A slow down in company earnings


All this being said, it is a very difficult time on investment markets and a really good time to get in contact with your financial advisor to discuss how it impacts your individual circumstances.

Posted by: Scott Keefer AT 11:01 pm   |  Permalink   |  Email
Tuesday, September 30 2008

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.



Scott Keefer

Posted by: Scott Keefer AT 10:49 pm   |  Permalink   |  Email
Tuesday, September 30 2008

In the latest edition of the Sound Investing podcast, published by, 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 12th 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.

  • volatility is to be expected,
  • times like these reinforce the need to plan and diversify,
  • have money available on a short term basis for cost of living needs, which is different from long term investing funds
  • staying invested to take advantage of the long term market up trend, 3 out of 4 years the market is up

Paul takes issue at Fidelity's final conclusion that an active management approach backed by "thorough research" sets Fidelity apart.   Actually this is less important than ever, all you are getting is an additional fee.  Index fund managers are getting better returns because of lower expenses not thorough research.


Scott Keefer

Posted by: Scott Keefer AT 01:21 am   |  Permalink   |  Email
Thursday, September 25 2008

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


Modest lifestyle - single

Modest lifestyle - couple

Comfortable lifestyle - single

Comfortable lifestyle - couple

Housing - ongoing only




















Household goods and services




















Personal care





Gifts and/or alcohol and tobacco




Total per week





Total per year





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.

Scott Keefer

Posted by: Scott Keefer AT 07:00 pm   |  Permalink   |  Email
Wednesday, September 24 2008

 This morning I have listed to a podcast from 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, 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.



Scott Keefer

Posted by: AT 08:42 pm   |  Permalink   |  Email
Tuesday, September 23 2008

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 - 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.



Scott Keefer

Posted by: Scot Keefer AT 07:08 pm   |  Permalink   |  Email
Sunday, September 21 2008

Last Wednesday the Sydney Morning Herald published an article looking at fixed interest investments - To have or to hold


Fixed interest investments are rarely high on the agenda of the media or backyard BBQ discussions but it is times like now that highlight the need for more focus on fixed interest investments.  For us, fixed interest investments are about reducing the volatility in portfolios and smoothing out returns in portfolios.  They are mostly boring, consistent performing investments but in times like these the value of fixed interest investments can not be overstated.  The average monthly investment returns from the main indices since the beginning of 2008 to the end of August are outlined below:




Average monthly return


UBS Warburg 90-Day Bank Bill Index


Fixed Interest

UBSA Composite Bond Index 0-5 Years


Australian Listed Property

S&P ASX 200 Listed Property Accumulation Index


International Listed Property

UBS Global Real Estate Investors ex Australia Index


Australian shares

S&P ASX 200 Accumulation Index


International shares

MSCI World ex Australia Index



Annual returns to the end of August were:




Annual return


UBS Warburg 90-Day Bank Bill Index


Fixed Interest

UBSA Composite Bond Index 0-5 Years


Australian Listed Property

S&P ASX 200 Listed Property Accumulation Index


International Listed Property

UBS Global Real Estate Investors ex Australia Index


Australian shares

S&P ASX 200 Accumulation Index


International shares

MSCI World ex Australia Index



On both time periods we can see that cash and fixed interest have well and truly out performed the growth asset classes.  But not all fixed interest offerings are the same.


Unfortunately some investors don't just use cash and fixed interest securities to reduce portfolio volatility, they use these investments to chase returns.  The Sydney Morning Herald article highlighted some distressing returns with the article suggesting fixed-interest funds have lost about 8%.  These styles of funds are not the boring but safe fixed-interest investments most peoples associate with.  They are aggressive funds that use names such as "high-yield", "diversified credit" and "multi-strategy income" and invest in such things as collateralised debt obligations, asset-backed securities and mortgage-backed securities, as well as emerging market debt and non-investment grade corporate debt.


It is now well publicised that these investments have been at the centre of the crisis on financial markets.  Some well know funds which have come unstuck include Absolute Capital, Basis Capital and City Pacific.  Investors were encouraged to invest because these funds promised share-like returns with supposedly less risk.


Our approach to fixed interest is worlds apart from this aggressive approach.  We focus on high quality securities that produce reliable consistent returns over time.  Our preferred investment in the fixed interest area of portfolios is the Dimensional 5 Year Diversified Fixed Interest Trust.  The Trust uses a variable maturity approach which involves no interest rate forecasting.  This approach seeks to identify the countries and maturity ranges with the highest expected returns and generally increases country allocation or extends maturities when the expected returns are significantly higher for a country or for longer term securities. It invests in A1+ short term securities and AA or higher rated long term securities.  Take a look at Dimensional's quarterly update for more information.  The one year return after fees has been 7.46% to the end of August (0.35% above the relevant index.)


Another fund that we do not currently use but worth a look is the Vanguard International Credit Securities Fund (Hedged) mentioned in the Sydney Morning Herald article.  It is invested in over 8,500 securities issued by government owned entities, government guaranteed entities and investment grade corporations.  The one year return has been 6.99% after fees for the wholesale version.


To summarise, fixed interest securities are about smoothing out returns in portfolios, especially crucial in times like now.  It is important to have a well diversified exposure in high quality offerings.  Take a look at our Building Portfolios page for more details about how we incorporate fixed interest securities into our recommended portfolios.



Scott Keefer

Posted by: Scott Keefer AT 05:29 am   |  Permalink   |  Email
Saturday, September 20 2008

In the latest edition of the Sound Investing podcast, published by, 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 19, 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:


Savvy Investors


Paul Merriman comments that there is nothing unusual about what's going on.  Every time we have one of these periods of significant downturn people tend to panic.  Investing in the stock market is about taking risk.


Savvy investors have money in thousands of investments, across dozens of industries and diversified internationally and have a portion of portfolio in bond funds (fixed interest)


Savvy people know that they focus on what they can control:

- Expenses

- Asset class

- Asset allocation

- Taxes


Guest - Author of Irrational Exuberance - Dr Robert Shiller - Professor of Economics at Yale University


Professir Shiller suggests that the solution to the sub-prime crisis

- in the short run we need some bail outs

- in the long run - need to prevent getting in this situation again - democratise finance - allow investors to get better advice


Professor Shiller is promoting subsidised investment advice, as too many advisors are salespeople (including mortgage brokers and real estate agents) suggesting a Medicare style system for good financial advice is worthy of consideration.


What caused all the problems on Wall Street?


Don MacDonald comments that out of all active mortgages around the US, only a few are in foreclosure.  The numbers on Wall Street are implying a 50 to 75% default rate.  The market value of many of the mortgage backed securities are currently 25 to 30 cents on the dollar implying 2/3 are going to default.   No-one expects it to get that bad.  But there has been a perfect financial storm.


Don McDonald discussed the risk reward trade-off with borrowing to invest and shows how this pronciplehas translated to Wall Street where investment banks have borrowed a tonne of money to purchase these mortgage backed securities.  Unfortunately the assets have declined in value and the climate has moved from one of greed to abject fear.  There are no buyers of these securities and the prices have fallen.  It does not mean that these securities are worthless.  At 30 cents on the dollar means that 70% of mortgages have to default and that's not likely to happen.


Myth or Reality - How many stocks to be properly diversified?


The probability is that a portfolio with 10,000 stocks you are likely to make the same or more than a portfolio of 50 stocks.  Therefore the presenters comments that you should protect your portfolio against the risk of being too highly weigthed towards a particular industry or stock and rather take a really well diversified approach.


Paul's Investment Outrage - you can't ever know when the market is at its bottom.


All you are doing by trying to predict is selling low and buying high.


Scott Keefer 

Posted by: Scott Keefer AT 08:32 am   |  Permalink   |  Email
Thursday, September 18 2008

This morning I have read what I feel is a very useful piece on Vanguard's website - Just when you thought it was safe to go back in the water.

The article gives a brief summary of current happennings on the markets and concludes by asking what action, if any, should investors be taking?

It suggets the following courses of action (directly taken from the article):

  • Do nothing. Sit it out and wait for the upturn. The beauty of this strategy is that you stay invested so when the market recovers you will benefit from any upturn. History shows us that sharemarkets have suffered many setbacks over the years and recovered to higher heights. Check out Vanguard's updated interactive index chart for a long-term market perspective.

  • The truth is there is no right or wrong time to invest and being out of the market can cost vital performance. An AMP Capital report found that investors who stay in the market end up better off than those who flee. In fact, an investor with a $100,000 Australian share portfolio who stayed in the market over the last 10 years to 30 May 2008 would have ended up $179,544 better off than one who missed the best 30 days of sharemarket performance (based on the ASX 200 Accumulation Index to 30 May 2008).

  • If you have reservations about your investment strategy in the current investment climate it can be well worthwhile seeking the advice of a professional financial adviser. An adviser can sit down with you and talk you about your personal circumstances, investment goals and suggest the most appropriate strategy for your needs. This is especially important if you have a high growth strategy and are finding it difficult to sleep at night.

  • Drip feed your investments. Part of the beauty of compulsory super is that your money isn't invested all at once. Rather, a set amount is invested at regular intervals. This strategy, called dollar cost averaging, can help to average out market fluctuations over time. This is a strategy the self-employed can take advantage of as well.

  • Double check your risk profile. You may find that you overestimated your risk tolerance level when markets were more stable. Steve Utkus says investors can overestimate the odds and become overconfident in rising markets. Risk profiling is best conducted under the guidance of a professional financial adviser.
  • There is no surprise that I fully concur with the thoughts pointed out by Vanguard.  I particularly like the last point.  Now is the time to be reconsidering your risk profile.  Risk profiling is a difficult task.  When you are asked the question how would you feel if your investments fell by 10,20,30,40% it is difficult to provide an accurate response if you have never experienced such falls.  After 9 months (or more for listed property investors) of really tough conditions the question to be asking yourself is how have you gone handling not only the 25% or more falls on equity markets but also the significant turbulence (volatility)?

    If your answer is that you are finding it extremely uncomfortable it may make sense to ease back on your growth asset allocation.  Most likely this will have occurred automatically as growth investment values have fallen and defensive assets remained steady but produced income.  However a decision will need to made when rebalancing your portfolio whether to set your growth assets back at the original percentage level. 

    If your portfolio still has too great an exposure to growth assets it may have to be a gradual process to rebalance to a more defensive position as ideally you do not want to be realising losses and then see the market turn back up sharply.  One way would be to make sure you don't reinvest income and dividends as they come into portfolios, rather set these aside in cash and fixed interest security investments and by doing so rebalance your portfolio towards a more defensive setting.

    Please get in touch if you wanted to discuss any of these points in more detail.

    Scott Keefer

    Posted by: Scott Keefer AT 09:16 pm   |  Permalink   |  Email
    Thursday, September 18 2008

    The latest edition of our fortnightly email newsletter was sent to subscribers on the 16th of September.

    In this edition we take a look at the problem with investing using managed funds, provide a summary of the movements in markets over the past fortnight and look at whether you are able to time your entry into and out of risk premiums.

    We have included our fascinating financial fact for the fortnight that was included in the newsletter.

    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.

    Fascinating Financial Fact

    Westpac ASFA Retirement Standard


    One of the difficult questions faced by everyone is how much will be enough to live comfortably in retirement.  If you can answer this question you can quickly determine the approximate level of investments that will be able to sustain that cost of living.


    The Association of Superannuation Funds of Australia Limited in conjunction with Westpac release quarterly Retirement Standard updates.  The updates provide a guide to how much people will need to live on in retirement.  They separate their analysis into singles and couples and then provide a possible budget for someone to live modestly or comfortably in retirement.


    The latest release of data relates to the period up to the end of March 2008 and points out that food and petrol are driving up retirement costs.  In summary the annual expenditures for each category were:


    Comfortable couple

    Modest Couple

    Comfortable Single Female

    Modest Single Female







    Of course each person has individual needs that are not taken into account but it does provide a good starting point.


    The detailed budgets can be found at -

    Posted by: Scott Keefer AT 08:24 pm   |  Permalink   |  Email
    Monday, September 15 2008

    In August the Association of the Super Funds of Australia published a paper looking at the returns for the past financial year in context of historical returns - Super Returns - putting them into perspective.  The paper looked at balanced portfolio financial year returns over the past 15 years using data from Super Ratings.  (They also provided a table with the past 40 year data.)  The 2007/08 financial year returns have been by far the worst over that period - down 6.8%.  The next worse year was 2001/2002 with a negative 3.5% average return and then 2002/03 with only a 0.1% positive return.  The 2000/2001 year with an average return of 5.6% was the only other year in the 15 year period where returns failed to beat inflation (CPI).


    When we look at these one year returns it seems to make sense to question the appropriateness of investing in growth assets such as Australian shares, international shares and property which have been the cause of these years of poor performance.  However, taking a wider view of time periods provides quite a different perspective.  The paper proceeded to look at 5, 10, 15 and 20 year periods putting this issue into wider periods of perspective.


    Over the 5 year period leading up to the 30th of June of each year, the data showed:

    -          only in the period 1974 - 1978 did the average returns from balanced investments under-perform inflation.  For those who experienced this time, it was a very difficult time economically with high levels of inflation and poor share market returns

    -          in the periods ending 2003, 2004 & 2005 returns went close but still out-performed inflation


    Over the 10 year period leading up to the 30th of June each year, the data showed:

    -          the ten year period leading up to 1979 and 1982 saw average balance returns underperforming inflation

    -          all other periods provided above inflation returns with most well above


    Over the 15 year period leading up to the 30th of June, the data showed:

    -          all periods out-performed inflation


    Over the 20 year period leading up to the 30th of June, the data showed:

    -          all periods out-performed inflation


    The issue that stood out to me in the data is that we need to be careful assuming that growth returns will be better than inflation over a 5, 7 or even 10 year period, as not until we get to 15 year and 20 year periods do balance returns out-perform.


    For those with over 15 years until reaching 60 this should provide some comfort in investing in growth assets in superannuation.


    For those approaching closer to retirement more care needs to be taken to properly structure investments so that a period of poor performance in growth asset classes does not provide a significantly detrimental result or even cause you to delay retirement.  Our approach is to be very closely looking at income planning, making sure clients have at least 5 to 7 years of income requirements in retirement held in defensive assets such as cash and fixed interest securities.  This means that you should not need to sell down growth assets in times of depressed prices in order to sustain their cost of living.  (Unless you sell growth assets at depressed prices you do not realise losses and history tells us that growth asset prices will rebound.)


    A point to note here is that investing in a diversified superannuation fund or investment that does not segregate the account into distinct defensive and growth assets does not protect an investor from having to realise falls in growth asset prices.  When it comes to the time to retire, investors in non-segregated funds would need to sell down a certain number of units in order to get the income that they need.  In a balance account (40/60 split) this would require redeeming both defensive assets (40% of each unit) and growth assets (60% of each unit). Thus you would be forced to realise the poor prices for growth assets.


    In a nutshell, our take on this is that in the 15 years leading up to your preferred retirement date, we think you should start to focus on income planning.  In doing so you are building towards having the necessary amount of assets set aside in cash and fixed interest so that you are not forced to redeem growth investments at the wrong time and/or not having your retirement date dictated to you by investment markets.



    Scott Keefer

    Posted by: Scott Keefer AT 11:46 pm   |  Permalink   |  Email
    Tuesday, September 09 2008

    Users of our website, through our User Voice feedback forum, have requested that we regularly update the graphs outlining the performance of the Dimensional trusts that we use in building portfolios for clients.  In response to this feedback we have updated these graphs to reflect performance up to the end of August 2008.


    The graphs show positive returns in the Australia and international markets over August. In particular, the Global Small Company and Value trusts have seen the strongest performance.  It should be noted that a large part of the stronger performance in international investments in August has been due to the fall of the Australian dollar - down 8.4% against the US dollar, 3.2% against the EURO, 7.6% against the Japanese Yen and 6.2% against the Trade Weighted Index over August.

    Overall, the graphs continue to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist.  Please click on the following link to be taken to the graphs - Dimensional Fund Performance Graphs.

    For anyone new to our website, it is important to point out that we build investment portfolios for clients based on the best available academic research.  Take a look at our Building Portfolios and Our Research Based Approach pages for more details.  In our view, this research compels us to use the three factor model developed by Fama and French.  In Australia, the most effective method of investing using this model is through trusts implemented by Dimensional Fund Advisors (  We do not receive any form of commission or payment from Dimensional for using their trusts.  We use them because they provide the returns clients are entitled to from share markets.

    However, academic theory is nothing if it can not be implemented and provide the returns that are promised by the research.  Therefore, we like to provide the historical returns of the funds that we use to build investment portfolios.

    Please let us know if you have any feedback regarding these graphs by using the Request for More Information form to the right or via our User Voice feedback forum.

    Scott Keefer

    Posted by: Scott Keefer AT 09:02 pm   |  Permalink   |  Email
    Monday, September 08 2008

    Last week Scott Francis wrote an article for Alan Kohler's Eureka Report in which he looked at the annual and five year performance of the major Australian managed funds.

    Scott has found yet again these fund managers have under performed the average market return over the year with this under performance worse over a five year period.

    Click on the following link to read Scott's analysis - Losing your money, for a fee.

    Posted by: AT 12:20 pm   |  Permalink   |  Email
    Monday, September 08 2008

    In his latest article written for Alan Kohler's Eureka Report, Scott looks at how to determine a fair valuation for the price of Wesfarmer shares.

    He applies the dividend discount model which suggests that if Wesfarmers can produce an ongoing 4.5% annual growth in dividends, the current valuation of approximately $31 is reasonable.  However there are a number of other key issues in play such as economic growth and inflation, the way managers deploy capital, management of debt and the strategy for and market power of Coles.

    Click on the following link to read Scott's analysis - What price Wesfarmers?.

    Posted by: AT 08:08 am   |  Permalink   |  Email
    Thursday, September 04 2008

    I had the pleasure of joining a presentation from Mr Inmoo Lee (Ph.D.) a Vice President from Dimensional Fund Advisors in the United States.  Inmoo along with two other colleagues from Dimensional has conducted research into the relationship between risk premiums and business cycles looking at whether there are systematic patterns and if so whether investors can effectively access better returns utilising these patterns.  (The following is my own summary of the presentation and not that of the researchers.)


    Before getting to the results let's first step back and define a couple of key concepts.  For those who have followed our website and our underlying investment philosophy you will be aware that we subscribe to the academic research behind the three factor model as identified by Fama & French.  Fama & French found that there are areas of investment markets where risk premiums exist over the long term.  In particular, small and value companies, taken as a group, hold higher levels of risk for investors and therefore investors expect compensation for taking on that risk. i.e. higher risk leads to higher return in the long run.  (Take a look at our Investment Philosophy and Our Research Based Approach pages for more details)


    However, these risk premiums are not present all the time and over short run periods, small and or value companies may under-perform the index.  Currently the Global Value fund that we use in portfolios has underperformed the Large Company fund year to date but has out-performed over 5 years.


    Therefore, based on these presumptions which are supported by academic research, the question to ask is can you time your entry and exposure to the risk premiums so that you make the most of periods when the risk premiums are being realised and minimise the exposure when the risk premiums are not being realised and the index (and growth stocks) are performing better.


    What Inmoo and his colleagues have done is to look at business cycles as a source of prediction.  Let's stop here and break off for a brief economics lesson first.  The business cycle basically tracks the periods of expansion (growth) and contraction (recession) in an economy.  Throughout history economies move through this cycle moving from periods of expansion, reaching a peak and then contracting, reaching a trough from whence the economy starts to expand again.


    Intuitively we should expect that the risk premiums (expected future returns) are greatest at the bottom of contractionary periods (troughs) and worst at the top of expansionary periods (peaks).  The theory being that at the bottom of the market cycles, riskier investments such as small companies and out of favour companies (value) will be sold off the furthest.  Therefore the expected future return is the greatest as these investments are at relatively low prices.


    So theoretically, the best time to be buying into risk premiums is at the bottom of the business cycle and selling out at the top of the business cycle.  Inmoo's research actually found that some relationship did indeed exist with small and value areas of the US market out-performing the market going forward from the bottom of the business cycle and under-performing after the cycle reached the peak.


    Everyone should be getting excited now as there seems to be an opportunity to trade in and out of the premiums and thus achieve greater returns.  Unfortunately there is a big BUT.  A major problem is that it is very difficult to identify exactly when the business cycle reaches its peak and trough.  The National Bureau of Economic Research in the US has the task of doing just that.  They identified the last peak as being reached in March 2001.  Unfortunately they were only able to make this determination in November of that same year. i.e. 8 months later.  Similarly they identified that the last trough in the business cycle was November 2001 and this was determined in July 2003, some 20 months later.


    If an organisation which has this task as its primary focus takes so long after the fact to make a determination, what hope to make the determination beforehand.  This is the key problem.


    Now some might say well what does it matter if you miss the peak or trough by a month or two you should still end up with a better outcome.  Inmoo and his colleagues took this very consideration into account.  They found that if you missed your timing either coming in or going out the benefit of the timing decision was statistically non-existent.  Basically the conclusion was that you had to be lucky twice with your timing decisions.  You would have to pick the precise month going in to the risk premium and then precisely time the month when to get out of that area of the market.


    Yet again it seems the probability of greater performance is stacked against the "market timers".  A much better approach is to determine your ideal portfolio exposure to risk factors i.e. the market, small companies and value companies, and hold this exposure through time.


    If you would like more information about our approach to structuring investment portfolios please take a look at our Building Portfolios page.



    Scott Keefer

    Posted by: Scott Keefer AT 07:23 pm   |  Permalink   |  Email
    Wednesday, September 03 2008

    The latest edition of our fortnightly email newsletter was sent to subscribers on the 2nd of September.

    Investment markets have provided a glimmer of hope through August but the outlook remains anything but clear.  In this edition we stepped back to look at the reality of how investment markets work, provided a summary of the movements in markets over the past fortnight and looked at realistic medium term return expectations.  A copy of the section on the reality of how markets work follows.

    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 Reality of How Investment Markets Work

    We have all experienced or witnessed a torrid time on investment markets in recent times starting back with listed property mid 2007, carrying over into global equity markets and then Australian equity markets.  Emerging Markets have not been spared with some of these markets, China for instance, falling the furthest.  Fortunately, August has seen a slight rebound across the board but the verdict is still well and truly out on whether the worst is over.


    In such times we think it is really important to sit back and consider the reality of how investment markets work.  To assist with this we have put together a document setting out the five key realities.


    Reality 1 - Growth Assets Such as Share Investments and Property Investments are Volatile


    There are two groups of investments used in portfolios.  The first are 'defensive' investment assets which include cash and high quality fixed interest investments such as Australian government bonds.  The second group is generally referred to as 'growth' investment assets such as property and shares (both Australian and international).  The returns from these asset classes are volatile. In the last 30 years:


    • Annual Australian Share Returns have ranged between -29% (1982) and 74.3% (1980)
    • Annual Global Share Returns have ranged between -23.5% (2002) and 72.7% (1983)
    • Annual Listed Property Returns (Aust.) between  -36.3% (2008) and 41.3% (1987)

     (Year to 30 June, Vanguard Investments)


    Reality 2 - Growth Assets Have a Higher Long Term Expected Return


    Given that a good cash account provides a rate of return of above 7% in the current environment, why would you invest in growth assets at all?  The answer to this is that growth assets have a significantly higher expected return than cash or fixed interest investment. 


    • Average Australian Sharemarket Return since 1970 - 11.3% a year
    • Average Global Sharemarket Return since 1970 - 10.7% a year
    • Average Listed Property Return since 1987 - 10.1% a year
    • Average Cash Rate of Return since 1970 - 9.3% a year

                              (Year to 30 June, Vanguard Investments)


    Reality 3 - Volatility CANNOT be Avoided


    Wouldn't it be great if we could avoid the down times of investing in shares and property, and only invest in them when they are increasing in value?  Well it would be good, however it does not happen.  As an example, let's look at the biggest crash in recent Australian investment history, the 1987 sharemarket collapse where shares fell in value by more than 30%.  Just prior to the 1987 collapse, more money that ever before was invested in the Australian sharemarket.  The collective wisdom was that this was a better place than ever before to invest money.  The collective wisdom was absolutely wrong, as the sharemarket fall showed.


    Dalbar, a US financial services firm looks at the actual return investors in the US received from their managed fund investments.  Over the 20 years to the end of 2007 they found that US managed fund investors received a return of just under 4.5%, against a market average return (S & P 500) of 11.8%.  Why did managed fund investors receive such a terrible return?  Because they were trying to pick and choose when to invest and therefore avoid volatility - which seriously damaged their ending investment returns.


    Reality 4 - Growth Assets CAN Have Negative Periods of 5 Year Returns


    The collective wisdom in the financial services industry is that if you hold a growth investment for 5 years then you will get a positive investment return.  This is easy to disprove - currently most global share investments are showing negative 7 year returns.


    Reality 5 - Asset Allocation and Careful Income Planning is your Key Tool in Managing Volatility


    Using a mix of growth assets in a portfolio, including Australian shares, global shares, listed property trusts, global listed property trusts and emerging market funds, smoothes - but does not eliminate  - the volatility from growth assets.  Setting aside a number of years worth of cash needs in fixed interest and cash investments means that you will not have to sell growth assets in a market downturn.  Cash and fixed interest investments, which do not rise and fall along with the general market, also dampen the volatility of an overall portfolio.  The cash and fixed interest investments are replenished by the growing stream of dividends and distributions from the growth assets - eliminating much of the need to sell growth assets at any time.

    Posted by: Scott Keefer AT 10:47 pm   |  Permalink   |  Email
    Wednesday, September 03 2008

    Back on the 26th of July Scott Francis joined Warren Boland on his "Weekends with Warren" segment on ABC radio.  We have eventually caught up and posted Scott's notes from this segment on our website.

    In the segment, Scott looked at the topic investing for income.  He commented that "In really volatile times like these, investors often don't think about the income that their investments are paying to them.  Whether it be property, shares, cash of fixed interest, they often focus too much on the price of the investments.  However income can be a great investment benefit, and is actually more important in some ways to investors."

    Scott went on to look at the strategy of focusing on income when planning a portfolio.  Click on the following link to be taken to a summary of the segment - Investing for Income - ABC radio segment.

    Posted by: AT 10:39 pm   |  Permalink   |  Email
    Tuesday, September 02 2008

    Our page on The Reality of How Investment Marks Work has been updated to reflect more current data up to the end of June 2008. 

    This page provides a concise summary of some points that investors should be considering particularly in the difficult investment market conditions we are experiencing at present.  It is well worth a read.

    Scott Keefer

    Posted by: Scott Keefer AT 07:51 pm   |  Permalink   |  Email
    Monday, September 01 2008

    Each quarter, Westpac in conjunction with The Association of Superannuation Funds of Australia Limited (ASFA) publish an analysis of household budget requirements for retirees according to whether they are single of part of a couple  and in terms of the lifestyle they hope to keep - Modest or Comfortable.


    The latest figures released on the14th of August and relating to the March quarter 2008 - FOOD, PETROL DRIVE UP RETIREMENT COSTS - provides interesting reading for those planning for, approaching or in retirement.  I find the information especially useful for those struggling to know how much disposable income they will actually need in retirement.  The data suggests that rising food and petrol prices are placing an added burden on retirees.


    The report suggests that a couple living in retirement needed to spend $49,502 a year to maintain a comfortable lifestyle while a couple with a more modest lifestyle needed $26,851.


    Using our 5% sustainable draw down rate, a couple should aim to have $990,000 of financial assets (in today's dollars) to maintain a comfortable lifestyle in retirement or $537,000 to maintain a modest lifestyle.


    Check out Scott Francis' Eureka Report article - Tap your super, but how much? for a more detailed discussion of sustainable draw down rates in retirement.



    Scott Keefer

    Posted by: Scott Keefer AT 10:54 am   |  Permalink   |  Email
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