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Financial Happenings Blog
Wednesday, April 29 2009

This is the question on every investor's lips (or was at least until the Swine Flu has entered centre stage.)  A presentation made by Robin Bowermen, Principal and Head of Retail at Vanguard, for Smart Company subscribers did not answer the question directly but did provide some useful insights and data for investors to consider.

No surprises that Bowerman suggests that nobody really knows when the bottom has been reached until way after the fact and therefore there is significant risk involved with sitting out from investing in growth assets such as shares and missing what has historically been strong positive returns after the bottom has indeed been reached.

The presentation covered the following points:

  • Market decline has been both faster and deeper than other post-war bear markets
  • In Australia it has been more prolonged than other post-war declines
  • With unprecedented volatility
  • The appetite for risk has collapsed
  • Be careful missing out on the beginning of the upturn
  • Dollar Cost Averaging over at least a 12 month period provides a useful approach

There are two methods to view the presentation:

Presentation Slides and Recording
Presentation Slides only

NB - If you want to listen to Robin Bowerman's presentation you may be required to download some extra software to allow this to work,  If you have any problems viewing the material please do not hesitate to be in contact.

Scott Keefer

Posted by: Scott Keefer AT 01:10 am   |  Permalink   |  Email
Monday, April 27 2009

The more positive conditions being experienced in equity markets since the beginning of March is starting to shake investors into action. For those who hold investments, including superannuation, that they would prefer to get out of and switch to an alternative investment care needs to be taken that you understand the risks and costs involved with this decision.


Of the two concerns, monetary costs are the easiest to quantify and are made up of the brokerage costs to sell your current investments and then buy new investments.  If you are using managed funds these costs are known as the buy'sell spreads.  Depending on how you hold the investments, e.g. through superannuation or an administration service, there may be other administrative costs involved.  For instance, the asministration service we use for client super and pension portfolios charges a $20.50 fee for every once off sale and purchase of an investment.  These costs should be fairly clear and transparent.

Risks involved with switching

The risk involved with switching investments is not so simple to quantify.  The key risk here is out of market risk.  This is the risk that between the time you sell down one investment and purchase into an alternative investment, the market price increases in value and you therefore miss out on this increase.

Of course if markets fall in value then by being out of the market will work in your favour.

To put some numbers to this risk I have tracked the daily movements in the ASX200 since the index reached its low in early March.  A minimum amount of time between selling one investment and having the funds from that sale available for a new investments is approximately 3 days so this is why I have chosen a 3 day rolling periodalong with 5 and 10 day periods.  The table below sets out this data:

Rolling 3 days Rolling 5 days Rolling 10 days
9-Mar 0.29%
10-Mar 0.95%
11-Mar 1.88% 3.12%
12-Mar -0.27% 2.56%
13-Mar 3.39% 5.00% 6.24%
16-Mar 0.10% 3.22% 6.05%
17-Mar 3.09% 6.58% 8.19%
18-Mar -0.10% 3.09% 6.21%
19-Mar 0.98% 3.97% 7.46%
20-Mar -0.42% 0.46% 3.65% 9.89%
23-Mar 2.44% 3.00% 5.99% 12.04%
24-Mar 0.84% 2.86% 3.74% 11.93%
25-Mar 0.82% 4.10% 4.66% 10.87%
26-Mar 1.03% 2.69% 4.71% 12.17%
27-Mar 0.70% 2.55% 5.83% 9.48%
30-Mar -1.85% -0.12% 1.54% 7.53%
31-Mar -0.62% -1.77% 0.08% 3.82%
1-Apr -0.07% -2.54% -0.81% 3.85%
2-Apr 2.81% 2.12% 0.97% 5.68%
3-Apr 1.51% 4.25% 1.78% 7.61%
6-Apr 0.56% 4.88% 4.19% 5.73%
7-Apr -1.34% 0.73% 3.47% 3.55%
8-Apr -2.34% -3.12% 1.20% 0.39%
9-Apr 1.44% -2.24% -0.17% 0.80%
14-Apr 2.22% 1.32% 0.54% 2.32%
15-Apr -0.14% 3.52% -0.16% 4.03%
16-Apr 0.75% 2.83% 1.93% 5.40%
17-Apr 0.03% 0.64% 4.30% 5.50%
20-Apr -0.20% 0.58% 2.66% 2.49%
21-Apr -2.43% -2.60% -1.99% -1.45%
22-Apr -0.25% -2.88% -2.10% -2.26%
23-Apr 2.04% -0.64% -0.81% 1.12%
24-Apr -0.82% 0.97% -1.66% 2.64%
27-Apr 0.52% 1.74% -0.94% 1.72%
Max 6.58% 8.19% 12.17%
Min -3.12% -2.10% -2.26%
Av 0.52% 1.59% 2.56% 5.07%

What the table tells us is that if you were out of the market for the best 3 day period you would have missed out on a 6.58% upswing, the best 5 day period a 8.19% upswing, 10 day period a 12.17% upswing.

How to minimise Out of Market Risk?

The best way to minimise out of market risk is to have enough cash set aside so that on the same day as selling out of one investment you can be immediately buying into another investment and therefore not be out of the market.

If you don't have enough cash to achieve this but you have some cash, the next step would be sell down your investment in tranches bit at a time.  This increases your costs of making the switch but these costs might be minimal compared to the potential out or market risk.

Finally, if you don't have any cash available it might be that you spread out the switch to spread out the out orf market risk over a period of time and thius hopefully reducing the risk that you will pick the worst possible time to be out of the market.

Your strategy will really depend on the purpose for making the switch including the benefits you expect to achieve from making the switch.

The bottom line is thet any investor should take special care in transitioning from one investment to another at any time.  The recent data suggests that this is especially the case at present.

Scott Keefer

Posted by: AT 02:00 am   |  Permalink   |  Email
Sunday, April 26 2009
In a recent article published in Alan Kohler's Eureka Report, Scott looks at what can be learned from the recent collapse of Timbercorp.  In particular he looks at three issues:
  • The role that a credit rating place in a fixed interest offering;
  • Why a "subordinate" offering carries extra risks.
  • Why risk and return really are related.
Scott concludes that the rush to the safety of fixed interest investments should be tempered with an understanding of their risks. The current Timbercorp situation is a reminder of the potential dangers of some fixed interest investments, dangers that lurk below the attractive promise of a fixed income return and the repayment of capital at the end of the term.

To take a look at the full article please click on the following link - Timbercorp's fall reverberates.
Posted by: AT 10:42 pm   |  Permalink   |  Email
Sunday, April 26 2009

In my regular scanning of the financial media I have come across an interesting piece published on the Money Management website - Follow the money to the margin lending scandal - written by Paul Resnik and peter Worcester.  It is timely in that I am certain there are a number of more aggressive investors contemplating whether now is the time to be jumping into a margin loan.

The authors have taken a look at the previous 28 years of data on the Australian share market to see whether investors have been rewarded for taking on the extra risk of utilising a margin lending strategy.  Their conclusions:

"We think it is reasonable to expect rolling five-year returns of at least 5 per cent after tax to compensate for the risks of using a margin loan to purchase shares, but our data shows this outcome is not even close to being achieved on a regular basis in one of the best bull market runs in history.

Margin lending looks to be a gambler's strategy. With a less than one in four shot of success, it cannot be considered an investment strategy.

We would argue that the vast majority of investors are not natural margin lending clients. Our understanding of financial risk tolerance suggests that the majority of investors would be more comfortable with a more balanced portfolio.

At the very least, before taking on a margin loan, investors must have the risks properly explained to them so they can actively and consciously decide to take on those risks. Going forward this would be a minimum obligation for both direct and advised margin lending clients.

It's time for the education on the benefits and risks of margin lending to be independently delivered."

Our firm's approach is that investors should indeed be careful in using debt in order to build wealth, especially margin loans.  The key question to be asking is whether you need to take on debt to reach your financial goals.  If it is, then it is this firm's position that if an investors wants to use debt to build wealth they do so prudently, with low loan to value ratios and using debt with lower interest rates such as home equity loans or the like and loans with less devastating potential impacts than those provided by a margin loan.  We have all seen evidence of hte potentialdevastation throughout 2008 and the beginning of 2009.

Scott Keefer

PS - The same article was published in Alan Kohler's Eureka Report on the 16th April 2009.

Posted by: Scott Keefer AT 09:00 pm   |  Permalink   |  Email
Sunday, April 26 2009

Scott Francis has been quoted in a recent article written by Shant Fabricatorian for Alan Kohler's Eureka Report - Investors warm to index funds.  (A copy of the article can be found in the Eureka Report articles section of our website.)

Scott was quoted as saying:

"He argues that index funds harness the relative pricing efficiency of the market, so at least in theory, future prospects are already "built-in" to your buy-in price. "You can think of each [share] price as a very sophisticated research instrument that takes into account, and reflects, all the information known about that stock," he says. "And the reality is that no individual company is that big in the overall index, so [a poor company] doesn't have that big an effect on your overall investment."

Posted by: AT 07:00 pm   |  Permalink   |  Email
Monday, April 13 2009

The following data was contained in an online article written by Weston Wellington, Vice President of Dimensional Fund Advisors in the US.  I agree with his comments that we should not "bet" on this being the beginning of a recovery on share markets.   He is not in any way suggesting that this is the start of the next bull market rally but suggests it does provide another reminder of the risks involved with sitting out of the market.  His commentary:

"The sharp rally in stock prices over the last thirty days may or may not be the beginning of a new bull market. A number of analysts and market technicians have dismissed the surge in prices as too much too soon, and expect the downturn to resume in the near future.

They may well be right. On the other hand, even if this current rally ultimately fizzles out, it offers a preview of what the real thing might look like?a powerful upsurge against a backdrop of very discouraging news that leaves many analysts scratching their heads and market timers watching in frustration as they seek to identify the right time to go back in the water."

  March Low March Low ($) April 9 Close Change
Bank of America (BAC) 3/6/2009 3.00 9.55 218.33%
Citigroup (C) 3/5/2009 1.02 3.04 198.04%
Wells Fargo (WFC) 3/5/2009 8.12 19.61 141.50%
Harley-Davidson (HOG) 3/9/2009 8.20 18.02 119.76%
JP Morgan Chase (JPM) 3/9/2009 15.90 32.75 105.97%
KBW Bank Index 3/6/2009 17.73 33.81 90.69%
American Express (AXP) 3/6/2009 10.26 18.83 83.53%
JC Penney (JCP) 3/9/2009 14.18 25.42 79.27%
General Electric (GE) 3/5/2009 6.66 11.33 70.12%
Goldman Sachs (GS) 3/9/2009 73.95 124.33 68.13%
DFA US Small Cap Value Portfolio (DFSVX) 3/9/2009 9.61 13.93 44.95%
DFA US Micro Cap Portfolio (DFSCX) 3/9/2009 5.55 7.73 39.28%
DFA US Large Cap Value Portfolio (DFLVX) 3/9/2009 8.94 12.37 38.37%
Russell 2000 Index 3/9/2009 343.26 468.20 36.40%
DFA Emerging Markets Portfolio (DFEMX) 3/9/2009 13.38 17.85 33.41%
Nasdaq Composite Index 3/9/2009 1268.64 1652.54 30.26%
S&P 500 Index 3/9/2009 676.53 856.56 26.61%
DFA Large Cap Intl. Portfolio (DFALX) 3/9/2009 10.84 13.56 25.09%
Dow Jones Industrial Average 3/9/2009 6547.05 8083.38 23.47%


In US dollars. Source: Yahoo! Inc, Yahoo! Finance, in, accessed April 9, 2009. KBW data provided by Keefe, Bruyette & Woods, Inc. Russell data copyright © Russell Investment Group 1995-2009, all rights reserved. The S&P and Nasdaq data are provided by Standard & Poor's Index Services Group. Dow Jones data provided by Dow Jones Indexes.

Posted by: AT 06:00 pm   |  Permalink   |  Email
Tuesday, April 07 2009
In his latest article written for Alan Kohler's Eureka Report, Scott looks at how some self funded retirees may be aligible to receive some part Age Pension.
He concludes by suggesting that the Australian age pension system is relatively generous, and people facing large falls in portfolio values may be able to supplement their superannuation income with some part-age pension.

Further, there are additional benefits from both the Pensioner Concession Card and Seniors Health Care Card that have value for people in retirement.

To take a look at the full article please click on the following link - Benefits soften retirees' landing.
Posted by: AT 07:00 pm   |  Permalink   |  Email
Tuesday, April 07 2009
In a recent article published in Alan Kohler's Eureka Report, Scott discusses how a change in the way PAYG tax is calculated and levied offers some relief for DIY funds.
There is no change to the end amount of tax paid. However, for investors who "benefit" from this rule change, at least it will decrease your ongoing tax payments. To put it another way, you get to keep assets and cash in your DIY fund for longer, allowing the possibility that market values may improve before you are hit with another tax bill.
To take a look at the full article please click on the following link - DIY funds get a little good news.
Posted by: AT 03:40 am   |  Permalink   |  Email
Sunday, April 05 2009

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 March 2009.




The graphs show growth in monthly returns over March for the Australian ASX200, Small & Value segments of the market along with Emerging Markets in the global arena.  The Global Small, Global Value and Global Large companies (as measured by the MSCI World Ex Australia Index) only provided flat performance in March thanks mainly to the negative impact of the rising Australian dollar currency.


Over the long run, the graphs continue to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist:


Australian Share Trusts - 7 Year returns



7 Yr Return

to March 2009

Premium over ASX 200

Accumulation Index

ASX 200 Accumulation Index



Dimensional Australian Value Trust



Dimensional Australian Small Company Trust




International Share Trusts - 7 Year returns



7 Yr Return

to March 2009

Premium over MSCI World (ex Australia) Index

MSCI World (ex Australia) Index



Dimensional Global Value Trust



Dimensional Global Small Company Trust



Dimensional Emerging Markets Trust



NB - These premiums are higher than what we would expect going forward.


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 11:26 pm   |  Permalink   |  Email
Request for Information 
If you have questions, or would like more information, please go to our Contact page and leave your name and contact information.