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Financial Happenings Blog
Tuesday, July 19 2016

Terrorist attacks in France, coup attempt in Turkey, war in the Middle East, refugee crisis in Europe, BREXIT, a looming devisive presidential election in the USA, political deadlock in Australia ... with issues like these dominating our daily news feeds it is very easy to get depressed about the outlook for Australia and the world.  However,  it is not all doom and gloom especially if we take the time to look at some of the progress the world has made over a longer frame of time.

Jim Parker from Dimensional Fund Advisor has recently penned the following article reminding us all of some more positive developments.  Well worth a read and some reflection!!

Posted by: Scott Keefer AT 09:35 am   |  Permalink   |  Email
Thursday, December 17 2015

A common discussion I have with new clients or existing clients adding funds into an existing portfolio is the issue of market entry risk.  This is the risk that you purchase investments at a peak only to see values fall after entry.  A strategy to moderate this risk that I canvas with clients is to spread out this market entry risk through either investing an immediate amount and then dollar cost averaging the remaining funds over a year or two or simply dollar cost averaging over a set period of time.

Jim Parker in his latest article for Dimensional sets out some thinking around this issue including the dollar cost average method I often use.

December 17, 2015

The Deep End
Vice President

Have you ever seen a child standing tentatively at the edge of a swimming pool? She's torn between her desire to join the gang in the water and her fear of diving in. In committing to the market, investors can be like that.

You can always find a reason for not investing. "Perhaps I should wait till after interest rates rise?" goes one line of the thinking. "Or maybe I should delay till there's more clarity on China? Or hold back until after earnings season?"

Emotions and assumptions usually underlay this indecision. The emotion can be anxiety about "making a mistake" or fear of committing at "the wrong time" and suffering regret. The assumption is that there is a perfect time to invest.

Obviously, the ideal solution would be to enter the market just as it bottoms and exit the market right at the top.

But the reality is that precisely timing your exit and entry is close to impossible. If it were easy, millions would be doing it and getting very rich in the process. Instead, the only ones who tend to consistently make money out of market timing are those who write books about it.

The financial media certainly love market timing stories. For one thing, there is always some event or variable they can peg it to—like a decision on interest rates or upcoming earnings or a chart indicator. For another, the idea of timing the market is a powerful one and tends to get readers' attention.

For example, one high-profile US forecaster in early 2012 predicted a 50-70% equity market decline over the following two-to-three years. It was to be a replay of the 2008-09 crisis, he said, but with an even deeper recession.(1)

That turned out to be a bad call. Global equity markets, as measured by the MSCI World Index, delivered a total positive return in Australian dollars of 93% from the end of 2011 to the end of 2014. (2) In USD, it was 53%.

Others advocate more elaborate timing strategies. For instance, one recent academic paper suggested the stock market delivers better returns relative to Treasury bills in the second, fourth and sixth week after each of the US Federal Reserve's policy-setting meetings in a given year. (3)

The idea here is that the Fed leaks information about its interest rate intentions in such a predictable way that, even without the information, savvy investors can make money by just buying stocks in certain periods.

While these theories can be fascinating, it is arguable how many of us have either the time or inclination to try them out. And even if we did, this does not take account of the costs of all the required trades or the possibility that as soon as we implemented the idea it would be arbitraged away.

So ahead of a central bank meeting, some would-be investors fret about whether they should hold off until they see how the market reacts. Others already invested worry whether they should take their money out.

The truth is that for long-term investors, these issues should be irrelevant. What matters is how their portfolios are structured and how they are tracking relative to their chosen goals. Markets will go up and down, security prices will change on news and it makes little sense to second guess them.

But while no one yet has come up with a consistently successful strategy for timing the market to perfection, there are some things that everyone can do to help ease the anxiety they feel about investing.

One is to realise that it does not have to be a choice between being 100% in the market and 100% outside. Ideally, an investor should stick to their strategic asset allocation—be it 70/30 or 60/40 or 50/50 equity/bonds.

Another is that this strategic allocation can be combined with periodic, disciplined rebalancing, in which the investor shifts assets from well performing asset classes to those less favoured. This is a good way of controlling risk without necessarily trying to time the market.

A third option is that there is nothing wrong with investors taking into account the returns they have already enjoyed and adjusting their asset allocations if they are on course to meet their goals. So, for example, for some investors it might make perfect sense to lock in returns after a good period and put the money into short-term fixed income if that meets their needs.

Yet another option is dollar-cost averaging. This is a method where an individual invests small amounts of an available pool of cash into the market over a period, rather than investing a lump sum in one go.

A useful contribution on this subject comes from Ken French, Professor of Finance at the Tuck School of Business at Dartmouth College. In his role as an academic, Professor French says the optimal decision is to invest it all at once. But while this might give an individual the best investment outcome, he says it might not be the best investment experience. (4)

This is because people tend to feel regret more strongly when it results from things they did do than from things they did not. So, for instance, it feels much more painful to buy stocks now and see the price go down than it is to neglect to buy stocks and the price goes up.

Professor French says that by dollar cost averaging, people can diversify their "acts of commission" (the stuff they did do) as opposed to their "acts of omission" (the stuff they didn't do).

"The nice thing is that even if I put my finance professor hat back on, it's really not that damaging to your long-term portfolio to just spread it out over three or four months," he says. "So if you as an investor find that's much more tolerable for you, you're not really doing much harm."

So, in summary, it's always difficult to choose exactly the right time to get into or out of the market. For instance, it would have been nice to get out in late 2007 and back in around early March 2009.

But most mortals are unable to finesse it to that degree. The good news is that there are other options than just staying out of the market altogether and plunging back in.

These include maintaining a long-term strategic asset allocation in the first place, periodically rebalancing, taking money off the table if retirement goals are on track and dollar-cost averaging if that provides comfort.

(1) “Get Set for a Crash, Forecaster Says”, Globe and Mail, 10 January, 2012.

(2) MSCI World Index (net div, AUD), Returns Program

(3)  “Want to Play the Market? Count the Fed Leak Weeks: Study”, Reuters, 21 November, 2015.

(4) Fama/French Forum, “Dollar Cost Averaging”, 23 June, 2009. 

Posted by: Scott Keefer AT 03:36 am   |  Permalink   |  Email
Thursday, October 24 2013

It has been a number of months since we updated the website with Scott Francis' articles published in the Eureka report.  We have now caught up and welcome you to take a look at these pieces - 17 in total.


Posted by: Scott Keefer AT 03:54 pm   |  Permalink   |  Email
Monday, April 29 2013

No matter what your opinion is on where investment markets will go next, one area of agreement is that markets have been volatile in recent years.   Nobel Prize Winner – William Sharpe – has recently provided his thoughts on investing in a turbulent market for the Stanford Graduate School of Business where he is a professor emeritus of finance - William Sharpe: How to Invest In a Turbulent Market

We think highly of Sharpe’s work and it forms a major part of the investment philosophy we use to develop investment portfolios for clients.

So has Sharpe’s views changed since the GFC started in late 2007?  
In a word, NO.

In the Stanford article Sharpe provides an overview of his four pillars of investing -
Diversify, economize, personalize, and contextualize.

In a nutshell these pillars are:

– invest in a broad range of shares and bonds – preferably all of them.

– keep costs low.

– make invest decisions that are most appropriate for your own situation.

– the price of an investment reflects the average opinion of investors about its future.  You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it.

Sharpe provides some really important concepts that in our opinion should be the basis for developing a successful investment philosophy.


Posted by: AT 08:42 am   |  Permalink   |  Email
Sunday, January 20 2013
APRA have recently released the rates of return for Australia’s 200 largest superannuation funds and it does not make great reading for Bookmakers Superannuation Fund. It has performed the worst over the past 5 years and second last over 9 years.

We became aware of the fund back in 2006 when a potential client was seriously looking at using the fund after some positive reporting including from Alan Kohler.  To be fair the fund had provided some strong returns in the years to 2005 and had a low fee basis. (The fund became publicly available in September 2004.)

Unfortunately if you had joined the fund after it went public the results have been disappointing.  If you serch for why returns have been poor a major reason was that the fund had a heavy exposure to investments held with MFS which failed in 2008.

This story reminds me of the Legg Mason Value Fund in the US.  For 15 straight years through to 2006 the fund outperformed the S&P 500 index.  In the five years later following it trailed the S&P 500 by more than an average of 7% per annum.

The clear message from both of these stories is to be very careful "chasing" active fund managersand advisers who report strong historical returns.  History also shows us that keeping this performance going is extremely difficult.  If you get in at the top of the wave you are potentially heading for a huge dumping.

The following editorial piece was published in Monday's Advocate newspaper by Peter Mancell, the Managing Director of FYG Planning Pty Ltd, in Peter's capacity as director of the Mancell Financial Group and director of FYG Planning.

Peter regularly publishes opinion pieces in The Advocate and I thought this one was well worth republishing here.  In this week's piece Peter talks about the Bookmakers Superannuation Fund along with a really interesting story out of the UK where a cat has beaten stockbrokers in a stock picking challenge over a 12 month period.

I hope you enjoy the article.


Bookies Finally Lose, While Cat Beats Brokers
Given the self important and often overpaid nature of the finance industry, each week often throws up at least one irony.
Last week there were two.
Firstly, APRA released the rates of return for Australia’s 200 largest superannuation funds.
The number one fund over the past five years was the Challenger Retirement Fund, while over nine years it was Goldman Sachs/JBWere’s corporate staff fund.
Of course as interesting as who finished first, is who finished last.
For those who’ve lost a little too much money on the horses over the years, they’ll be interested to know the Bookmakers Superannuation Fund came last over five years, and second last over nine years!
Between June 2008 and June 2012 the Bookmakers Superannuation Fund failed to have one positive yearly return.
I don’t know what their strategy is, but by the looks of it they might have done better ‘investing’ at the racetrack!
Secondly, the news out of England that a cat named Orlando managed to beat stockbrokers, fund managers and a group of schoolchildren in a stock picking challenge.
At the start of 2012 each group invested a hypothetical £5,000 in the FTSE (UK share market); the groups were allowed to revise picks every three months.
Orlando picked his stocks by throwing a toy mouse onto a numbered grid, while the experts used their knowledge.
After 12 months, Orlando’s portfolio had grown to £5,542, the experts’ portfolio to £5,176, while the schoolchildren’s portfolio fell to £4,840.
While the schoolchildren finished last, they did perform the best in the final quarter which led to some misplaced optimism from their deputy headmaster, Nigel Cook.
“We are happy with our progress in terms of the ground we gained at the end and how our stock-picking skills have improved,” Mr Cook said.
Despite his students being shown up by a cat, Mr Cook still missed the point of the exercise.
Stock picking remains futile and you can’t ‘improve your skills’ at it because no one can predict financial markets with any certainty.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, This information is general in nature and readers should seek professional advice specific to their circumstances.
Mancell Financial Group
First Floor, 10 Wilson Street, Burnie TAS 7320| Tel: (03) 6440 3555| Fax: (03) 6440 3599 | email | Web:
Mancell Financial Group ABN 29 009 541 253 is an Authorised Representative No. 226266 and Credit Representative No. 403187 of FYG Planners Pty Ltd, AFSL/ACL No. 224543

Posted by: AT 08:30 am   |  Permalink   |  Email
Thursday, January 10 2013
I came across this really interesting article published by the Economist looking at who they claim to be the biggest con-man in history - Financial crime: The king on con-men

The article looks at a fascinating example from the early 19th century in London where investors were conned into investors in bonds for a fictitious Central American settlement Poyais.  Well worth a read if you are interested in 

The practical element from the article that caught my eye looked at why people fall for fraud.  It refers to research out of Boston University by Tamar Frankel based on the study of hundreds of financial cons.  The research suggests that the following are recurring traits of victims:

- Excessively trusting
- Have a high risk tolerance
- Have a need to feel exclusive or part of a special group

The article also refers to other research suggests that victims tend to:

- Harbour dissatisfaction with their current economic status
- Desire not to be left behind
- Feel envious of economic neighbours

This all leads to greedy or risk investing.

Many of us shake our heads when we hear of others being trapped by financial fraudsters and ask how could someone fall for the outrageous claims they make. Reading the list of characteristics might lead many of us to rethink our perceived safety from financial fraud. We could easily fit into the class of potential victim.

So what's the investment lesson?

A key to avoiding making the same mistakes as financial fraud victims of the past it is really important to carefully question any investment that you get into.  Look for total transparency and not a black box where you really don't understand what you are investing in and finally seek trusted professional advice before jumping in.


Posted by: AT 11:21 am   |  Permalink   |  Email
Tuesday, January 08 2013
Happy New Year!!  I hope that 2013 will be a happy, healthy and succesful year for all readers of this blog.

The start of a new year encourages reflections on what happened in 2012 and what is likely to happen next.

Weston Wellington, from Dimensional Fund Advisors in the US in his latest commentary piece reminds us that much of what was predicted for 2012 didn't happen:

  • The plunge off the so-called fiscal cliff was averted.
  • The euro zone did not fall apart.
  • China’s economy and stock market did not crash.
  • The bond market did not implode.
  • The re-election of President Barack Obama did not derail the US market.
  • Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.
It goes to show that trying to predict the future for investment markets is near impossible.  This proposition is backed up by a myriad of historical and contemporary research showing the great difficulty in being successful with an active approach to management of your investments

So if you are prone to try to make such predictions and consequently make big bets with your investment portfolio, go away,  have a cuppa and then come back to your investment portfolio with the objective of a building a portfolio structured for the long term and not on the latest whim.

Weston's full article can be found below.


January 5, 2013
2012: The Year It Didn’t Happen
Vice President

Judging by the headlines in the financial press, investors spent much of the past year anxiously awaiting one calamity after another that failed to occur. The plunge off the so-called fiscal cliff was averted. The euro zone did not fall apart. China’s economy and stock market did not crash. The bond market did not implode. The re-election of President Barack Obama did not derail the US market. The “flash glitch” in early August did not lead to further trading disruptions. Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.

Instead, the belief that owning a share of the world’s businesses is a sensible idea appears to be alive and well, despite suggestions from some observers that the “cult of equity” is dead. For the year, total return was 16.42% for the MSCI World Index in local currency, and 16.00% for the S&P 500 Index. Among forty-five global stock markets tracked by MSCI, only three posted negative results in local currency (Chile, Israel, and Morocco), and twelve markets had total returns in excess of 25%, with Turkey leading the pack at 55.8%. Although much of the financial news over the past year highlighted Europe’s fragile financial health, most of the region’s equity markets outperformed the US, including Austria, Belgium, Denmark, France, Germany, the Netherlands, Sweden, and Switzerland. For US dollar-based investors, results were further enhanced by a modest decline in the US dollar relative to the euro, the Danish krone, and the Swiss franc.

As is so often the case, earning the rewards offered by the world’s capital markets may have required a combination of discipline and detachment that eluded many investors.

2012 Index and Country Performance

Total return (gross dividends) for 12-month period ending December 31, 2012.

MSCI Index Local Currency USD
WORLD 16.42% 16.54%
WORLD ex USA 16.73 17.02
EAFE 17.89 17.90
TURKEY 55.80 64.87
EGYPT 54.66 47.10
BELGIUM 38.56 40.72
PHILIPPINES 38.16 47.56
THAILAND 30.84 34.94
DENMARK 30.37 31.89
GERMANY 30.07 32.10
INDIA 29.96 25.97
HONG KONG 28.01 28.27
POLAND 27.05 40.97
AUSTRIA 25.07 27.02
SOUTH AFRICA 25.07 19.01
COLOMBIA 23.87 35.89
SINGAPORE 23.54 30.99
NEW ZEALAND 23.28 30.38
CHINA 22.85 23.10
JAPAN 21.78 8.36
FRANCE 20.93 22.82
AUSTRALIA 20.77 22.30
MEXICO 20.09 29.06
PERU 19.73 20.24
SWITZERLAND 18.91 21.47
SWEDEN 17.11 23.41
USA 16.13 16.13
FINLAND 14.71 16.50
KOREA 12.89 21.48
TAIWAN 12.84 17.66
HUNGARY 11.86 22.79
INDONESIA 11.83 5.22
ITALY 11.72 13.46
NORWAY 11.63 19.70
UNITED KINGDOM 10.24 15.30
MALAYSIA 10.23 14.27
BRAZIL 10.14 0.34
RUSSIA 9.73 14.39
CANADA 7.46 9.90
IRELAND 4.66 6.29
GREECE 4.11 5.73
PORTUGAL 3.36 4.98
SPAIN 3.12 4.73
CHILE –0.14 8.34
ISRAEL –6.24 –3.91
MOROCCO –12.63 –11.48

Posted by: Scott Keefer AT 11:55 am   |  Permalink   |  Email
Thursday, November 15 2012
In my weekly scan of the internet I came across a really interesting summary of Investors’ 10 Most Common Behavioral Biases.

The article was a summary of a piece published in the Washington Post by Barry Ritholz, a columnist for the paper.

The importance of having an awareness and knowledge of these biases is to help protect yourself from making poor decisions that you will live to regret.  In a nutshell they include:

Confirmation Bias
– the act of coming to a conclusion first and then looking for evidence to support that conclusion.

Optimism Bias
– having over confidence in our own judgment above the judgment of others.

Loss Aversion
– losses hurt more than the joy of the same amount of gains.

Self-Serving Bias
– the good that happens is our doing, when things go against us it is the fault of someone else.

The Planning Fallacy
– the tendency to underestimate the time, costs, and risks of future actions but at the same time overestimate the benefits.

Choice Paralysis
– too many choices lead us to doing nothing.

– the tendency to follow others.

We Prefer Stories to Analysis
– including the tendency to look backwards and create patterns to fit events and then constructing a story that explains what happened along with what caused it to happen.

Recency Bias
– the tendency to extrapolate recent events into the future indefinitely.

The Bias Blind-Spot
– the tendency not to take into account these biases when making decisions.

(NB - The link to the original article provides more in depth discussion of each bias along with links to further details.)

We can either trust ourselves to take into account these behavioural biases before making financial (including investment) decisions or we can look to professional help from financial advisers, accountants etc to provide a sounding board.

A good adviser can talk through the pros and cons from hopefully an unbiased viewpoint.  This might mean you still go through with your plan but it will have been put through and benefitted from a rigorous analysis along the way.

The decisions financial advisers counsel against making are often (if not more) important than the proactive advice they provide.



Posted by: AT 05:30 pm   |  Permalink   |  Email
Thursday, November 01 2012
I realise this is a bit of a strange title but I came across a fascinating article in the Wall street Journal which I had to share – Can you trust your stockjobber?. 

Researchers led by financial historian Larry Neal of the University of Illinois have replicated all the holdings and trades in the Bank of England, the East India Co. and the United East India Co., the Royal African Co., the Hudson’s Bay Co., the Million Bank and the South Sea Co. –the dominant companies at the birth of British capital markets three centuries ago.

The share registries survive, so the scholars were able to match virtually every investment with the person who held it – encompassing 5,813 investors during the 1690s and 23,723 by the end of the period.

These people included everyone from dukes and other aristocrats to “stockjobbers,” or brokers, along with merchants, apothecaries, glassmakers, drapers and goldsmiths – and up to 27% of them were women.

The researches concluded that investors were:

  • underdiversified, with 86% of them owning shares in only a single stock;
  • chased performance, with rising prices leading to higher trading volume;
  • underperformed the market as a whole, earning lower returns and incurring higher risk.

Women appeared to be more conservative than men.

The WSJ article then goes on to compare those investors with investors today suggesting there is very little difference as investors today:

  • underdiversify, holding an average of only three stocks;
  • chase performance, with rising prices leading to higher trading volume;
  • underperform the market as a whole, earning lower returns and incurring higher risk.

A lot has changed in the world over 300 years but human nature has not.  Smart investors can learn from the errors of history to better structure investment portfolios today:

  • be well diversified;
  • don’t chase performance rather invest in asset classes that haven’t been doing so well lately;
  • avoid an active management approach to investing.


Posted by: Scott Keefer AT 03:00 pm   |  Permalink   |  Email
Wednesday, June 27 2012
There is no doubt that being an investor in the share market has been troublesome over the past 4 1/2 years.  Here in Australia we are still well off the highs on the ASX of late 2007.  All the economic and investment news we read appers bleak (at best).  Why then should we persevere with holding company shares in this climate?

This very question has been raised by Weston Wellington (Vice President, Dimensional Fund Advisors) in his regular column- Down to the Wire.  Weston reminds readers of the "Death of Equities" call back in 1979 after a similarly difficult investment period.  What followed, not immediately but eventually, was one of the strongest bull markets in US history.

Please find a copy of Weston's article below.


June 26, 2012
The Death of Equities, Revisited
Vice President

A recent article appearing in the Financial Times caught our eye—or perhaps we should say ear. At first glance it was unremarkable—just one among dozens of recent think pieces suggesting that investors were losing interest in stocks as markets around the world continued to stagnate.

But the tone of the article sounded remarkably familiar. We dug out our copy of the "Death of Equities" article appearing in BusinessWeek on August 13, 1979, to have a fresh look. Similar? You be the judge:

BusinessWeek, 1979: 
"This 'death of equity' can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than ten years through market rallies, business cycles, recession, recoveries, and booms." 
Financial Times, 2012: 
"Stocks have not been so far out of favor for half a century. Many declare the 'cult of the equity' dead."

BusinessWeek, 1979: 
"Individuals who are not gobbling up hard assets are flocking to money market funds to nail down high rates, or into municipal bonds to escape heavy taxes on inflated incomes." 
Financial Times, 2012: 
"The pressure to cut equity exposure is being felt across the savings industry. … In the US, inflows to bond funds have exceeded equity inflows every year since 2007, with outright net redemptions from equity funds in each of the past five years."

BusinessWeek, 1979: 
"Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack." 
Financial Times, 2012: 
"With equity financing expensive, many companies are opting to raise debt instead, or to retire equity."

BusinessWeek, 1979: 
"We have entered a new financial age. The old rules no longer apply." —Quotation attributed to Alan B. Coleman, dean of business school, Southern Methodist University 
Financial Times, 2012: 
"The rules of the game have changed." —Quotation attributed to Andreas Utermann, Allianz Insurance

BusinessWeek, 1979: 
"Today, the old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared." 
Financial Times, 2012: 
"Few people doubt, however, that the old cult of the equity—which steered long-term savers into loading their portfolios with shares—has died."

When the first "Death of Equities" article appeared, the S&P 500 had underperformed one-month Treasury bills on a total return basis for the fourteen-year period ending July 31, 1979 (107.0% vs. 119.6%, respectively). Was buying stocks in August 1979 a smart contrarian strategy? Yes, but only if one had the patience to stick it out for years. Imagine the frustration of an investor who had been counseled to "stay the course" in response to the "Death of Equities" article appearing in August 1979. Stocks did well for a while, jumping over 27% from August 13, 1979, to March 25, 1981, when the S&P 500 hit an all-time high of 137.11. But by July 31, 1982, stocks had given back all their gains, and the S&P 500 was almost exactly where it had been nearly three years earlier. As of July 31, the S&P 500 had extended its underperformance relative to one-month Treasury bills to seventeen years (total return of 150.5% vs. 213.6%).

Imagine this same investor arriving at her financial advisor's office on Friday, August 13, 1982, with a three-year-old copy of BusinessWeek under her arm. Stocks had drifted lower in the preceding weeks, and the S&P 500 had closed the previous day at 102.42. "You told me three years ago to stay the course, and I did," she might have remarked to her advisor. "It hasn't worked. Obviously, the world has changed, and it's time I changed too. Enough is enough."

We suspect even the most capable advisor would have faced a big challenge in seeking to persuade this investor to maintain a significant equity allocation. For many investors, seventeen years is not the long term, it's an eternity.

Superstitions aside, stocks rose that day, with the S&P 500 advancing 1.4%. It wasn't obvious at the time, but August 13, 1982, marked the first day of what would turn out to be one of the longest and strongest bull markets in US history. The S&P 500 was 16% higher by the end of the month and went on to quadruple over the subsequent decade. The table below shows data for the S&P 500 on a price-only basis. With dividends reinvested, the return would be materially enhanced.

"Death of Equities" Anniversary
1st Anniversary August 12, 1983 58.3%
5th Anniversary August 12, 1987 224.5%
10th Anniversary August 12, 1992 307.9%
20th Anniversary August 12, 2002 782.4%
(Almost) 30th Anniversary June 19, 2012 1,225.9%

One of the authors of the FT article, John Authers, is familiar with the BusinessWeek article and wary of making pronouncements that might look equally foolish ten or twenty years hence. In a follow-up article appearing several days after the first, he appealed for divine assistance in his forecasting effort: "O Lord, save me from becoming a contrarian indicator." Nevertheless, after revisiting his arguments he remained persuaded that the climate for equities was too hostile to be appealing.

We should not use this discussion to make an argument that stocks are sure to provide investors with appealing returns if they just wait long enough. If stocks are genuinely risky (which certainly seems to be the case) there is no time period—even measured in decades—over which we can be assured of receiving a positive result. Nor should we seize on every pundit's forecast as a reliable contrarian indicator. With dozens of self-appointed experts making predictions, some of them are going to be right. Perhaps even John Authers.

The notion that risk and return are related is so simple and so widely acknowledged that it hardly seems worth arguing about. But these articles (and others of their ilk) offer compelling evidence that applying this principle year-in and year-out is a challenge that few investors can meet, and explains why so many fail to achieve all the returns that markets have to offer.


"The Death of Equities," BusinessWeek, August 13, 1979.

John Authers and Kate Burgess, "Out of Stock," Financial Times, May 24, 2012.

John Authers, "The Cult of Equities Is Dead. Long Live Equities," Financial Times, May 27, 2012.

S&P data are provided by Standard & Poor's Index Services Group.

Stocks, Bonds, Bills, and Inflation Yearbook. Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Posted by: AT 12:30 am   |  Permalink   |  Email
Thursday, April 19 2012

I have just sat down to a cup of coffee at Starbucks and began reading through some reports I downloaded over recent months.

I found HSBC’s The Future of Retirement Why family matters report very interesting especially as it looked at surveys conducted with 17,000 people across 17 countries but not Australia.  As I read I pondered whether the findings were relevant to Australian families and quickly came to the conclusion that the vast majority of findings would probably be consistent with responses from Australians.

The key findings for me were:

-       65% of men said that they make all or most of the financial decisions in the house without any input from others, compared to just 53% of women who said that they were the sole decision-maker.  This gender gap is apparent across all age groups.

-       The only area where women are more likely to be the sole decision-maker is in household budgeting. Even here, the gender gap disappears among those in their thirties, with younger men taking a stronger interest in this aspect of financial planning than older men.

-       Significantly, women are far more likely to stop working full-time when they have children (47%), compared to just 1-in-6 (15%) men. The onset of parenthood not only reduces women’s role in the workplace, it also reduces their role in making financial decisions in the home. When looking at financial decision-making, the gender gap is greatest among men and women who have children.

-       A major gender gap exists in financial planning: only 44% of women stated that they had a financial plan in place for their own or their family’s future, compared to 54% of men.

-       Married people plan ahead in greater numbers and experience a smaller gender gap when looking at who exercises financial responsibility – 55% of married women and 62% of married men have made a financial plan.

-       In spite of the changing financial needs throughout people’s lives, 60% of respondents have never sought professional financial advice to help them, relying instead on their own knowledge or that of friends and family.

-       The majority of households have a predominantly risk-averse attitude, and are more likely to forego the benefits of long-term investing in favour of security in the short term. This view is particularly prominent among women especially in Western countries.

-       (Somewhat surprisingly) Only 13% of men and 18% of women thought that investing in stocks and shares was extremely risky.

From their findings, the writers suggest 4 key points of action households can implement to improve future financial well being :

1. Share decision-making. It is important that household financial planning is shared and takes into account the family unit and the potential financial needs of spouses, children and any other dependent relatives.

2. Review financial plans in light of major life events. Financial planning should not be static. Family events like births, deaths and marriages should act as triggers to start or review the family’s financial arrangements.

3. Sense-check decisions with a professional financial adviser. Even where plans are put in place, they will contain gaps. Seeking professional advice can help to identify and plug any gaps that might arise.

4. Take a balanced approach to managing investment risk. Households should balance the need to protect their investments in the short and medium term with the need to generate an adequate retirement income in the long term.

These are pretty common sense steps for households.  If you would like to discuss details further or engage an adviser to work with you on securing your future financial well being please do not hesitate to get in cotact. 


Posted by: Scott Keefer AT 07:00 pm   |  Permalink   |  Email
Tuesday, April 03 2012
Many adherents to an active management approach to investing profess that you can successfully pick when to enter and exit markets so as to achieve a better result than the average market return.  The mantra rings true for a lot of investors – surely if you put enough research and effort into it you can beat the markets.

Each year Dalbar looks at this very issue by analysing the fund flows into and out of mutual funds in the USA.  (Mutual funds are like our managed funds here in Australia.)  They publish their results in the Quantitative Analysis of Investor Behavior (QAIB) report. -

The latest report has just been published and does not make good reading for the “Active Timers”.  The report shows that over the course of 2011, the average equity return for investors in equity market funds was negative 5.73%.  This sounds all right to Australian investors where the ASX200 returned negative 10.54% but in the US the S&P500 actually eked out a gain of 2.12%.

So the average investor underperformed the S&P500 index by 7.85%.  The report also showed that bond fund investors underperformed the Barclays Aggregate Bond Index by 6.50%.

The report goes on to show that over 3, 5, 10 and 20 year time periods the average equity investor has underperformed – a massive 4.32% per annum over the 20 year period.

Yet again the Dalbar study has shown that investors who have tried to pick the best time to enter and exit markets have failed to get it right.  You were much better off just holding on to the relevant index.

We in Australia may think we are smarter than the average American investor but my gut instinct suggests similar results would be replicated in Australia.



Posted by: AT 12:46 am   |  Permalink   |  Email
Wednesday, March 14 2012
I have just come across an article published by McKinsey & Company in October.  It looks at the ability of company executives to time share buy backs in the USA - 

The savvy executive’s guide to buying back shares

Many of us would expect that company executives have some kind of insider knowledge that would allow them to better time the purchase back of company shares.  Unfortunately the study undertaken by McKinsey suggested anything but such skill.  In fact, 77% of companies did worse in their timing of share buybacks compared to simply gradually buying back shares regularly over time.

Another powerful reminder of the dangers of trying to time entry into and out of share investments.


Posted by: AT 01:30 pm   |  Permalink   |  Email
Thursday, March 08 2012
If you had held cash during the past 4 years of equity market turmoil you would probably be pretty happy with yourself.  Some may even be contemplating staying in cash or at least a lot larger allocations of cash going forward.  Unfortunately just as there are risks when investing in shares, holding cash has its own key risk - preserving purchasing power.  The official cash rate at present is 4.25%.  With inflation running at 3%, probably higher for those in retirement, you can quickly see that cash is not offering much of a return above inflation.

Brad Steiman from the Canadian branch of Dimensional has looked at the tension between two key goals of most investors - Preserving Capital or Preserving Purchasing Power.  He has looked at data spanning back 111 years which is made available though the Dimson Marsh Staunton database.  The key conclusion is that the risks from investing in shares are discernible immediately whereas the risks from investing too much in cash, which is just as great a risk, may only be identified many years later.

Please find Brad's article following.

The Tradeoff: Preserving Capital or Preserving Purchasing Power

Brad Steiman, Northern Exposure

Director and Head of Canadian Financial Advisor Services and Vice President

Click on the following link to listen to a podcast of this article - podcast

Many aspects of life require careful consideration and balancing of the tradeoffs that arise from competing demands. For example, a common lifestyle tradeoff is working longer hours versus spending more time with your family. The competing demands within this decision are the income necessary to provide a suitable quality of life for your family versus the immeasurable benefits of quality time with your family. There is no right answer, but most people understand the tradeoff and attempt to find the balance that is right for them.

Successful investing and financial planning also require balancing tradeoffs. For example, a common investment tradeoff is that of risk and return. One of the competing demands is preservation of capital versus preservation of purchasing power. The former may allow for a better night's sleep during periods of heightened uncertainty and corresponding volatility, but the latter helps ensure you'll have a comfortable bed in the future when accounting for rising prices from inflation. Once again, there is no right answer, no "optimal" solution. Understanding the tradeoffs between preserving capital and preserving purchasing power will help investors find the balance that is right for them. This balance will depend on their definition of risk and attitude towards it.

Some investors may consider risk to be volatility. They have difficulty stomaching the daily ups and downs associated with investing in asset classes that experience significant price fluctuations, such as equities, because declining prices are often accompanied by predominantly negative headlines. Although information will be reflected in prices before one can react to it, this is little solace to investors who extrapolate the recent past into the future and see the bad news as an indicator of what's to come rather than a commentary on what has already happened. These investors yearn for short-term preservation of capital.

Other investors may define risk as a diminishing standard of living. They have long-term financial obligations, such as spending during their retirement years, and their primary goal is building wealth to meet those future expenses. They recognize that, while the cumulative effects of inflation are sometimes glacially slow or even undetectable in real time, inflation can be the silent killer of a financial plan. These investors desire long-term preservation of purchasing power.

Investing is relatively straightforward when the definition of risk and attitude toward it are so black and white. For example, you can virtually guarantee the preservation of capital by investing in the equivalent of Treasury bills as long as you accept the corresponding potential for the loss of purchasing power. On the other hand, you can preserve purchasing power by investing in asset classes with expected returns exceeding inflation, providing you accept price fluctuations that can temporarily impair your capital.

Unfortunately, in practice, investing isn't that simple. Individual investors rarely have black and white objectives or well-defined definitions of and attitudes towards risk. Some expect long-term preservation of purchasing power and short-term preservation of capital. Making matters worse is the tendency for the priority and relative importance of their competing demands to change through time, often in response to what's happened in the recent past.

Investors who succumb to the cycle of fear and greed end up chasing a moving target. Advisors can try to mitigate this destructive behavior by focusing investors on the tradeoffs that were made at the outset when determining their balance between assets that are expected to grow faster than inflation and those that stabilize the portfolio and reduce its fluctuations. So if an investor is now fearful and therefore more focused on capital preservation, it is time to reframe the tradeoffs by emphasizing why growth assets were in the portfolio to begin with and how the so-called "riskless" asset (i.e., bills) can actually be extremely risky in the long run.

For example, Table 1 contains annualized returns from Australia, Canada, the US, and the UK for more than a century. Bills only slightly beat inflation before tax, but this small return advantage can easily disappear on an after-tax basis.1 Nonetheless, the table clearly demonstrates that equities have delivered returns exceeding both bills and inflation by a wide margin, even when accounting for taxes.2

Table 1: Annualized Nominal Returns (1900–2010)





















In local currency. Dimson Marsh Staunton (DMS) Global Returns Database. Past performance is no guarantee of future results.

However, the tradeoff for pursuing higher expected returns of equities is accepting the risk of substantial declines compared to the relative stability of bills. Table 2 shows that equity values in the four markets have dropped from 50–69% over a two- to six-year period, whereas bills have always been flat or better (if you consider minus 2 basis points a rounding error).

Table 2: Worst Performing Periods for Equities and Bills, Nominal Returns (1900–2010)






Total Return


Total Return





















In local currency. Dimson Marsh Staunton (DMS) Global Returns Database. Past performance is no guarantee of future results.

The risk and return relationship from a preservation of capital perspective is apparent in these nominal returns, but the picture is a bit different after considering the impact of inflation. In terms of preserving purchasing power, now the "riskless" asset looks far from risk free.

Table 3 contains the biggest peak-to-trough declines, in real terms, for equities in these four countries over the same time period. It likely comes as no surprise that the magnitude of the real declines is substantial, with stock prices dropping anywhere from 55–71% after inflation. However, the duration of the declines is still relatively short, ranging from two to five years, and it took equity investors in these countries anywhere from three to eleven years to break even.

Table 3: Worst Performing Periods for Equities, Real Returns (1900–2010)


Peak to Trough Decline

Subsequent Recovery



Total Return























In local currency. Dimson Marsh Staunton (DMS) Global Returns Database. Past performance is no guarantee of future results.

In contrast, the data in Table 4 for bills, or the "riskless" asset, in these four countries is revealing. The biggest peak-to-trough declines after inflation now remarkably range from 44–61%, a similar order of magnitude to equities. Furthermore, the duration of the declines extends to a range of seven to forty-one years with investors in bills waiting an astounding seven to forty-eight years to recover!

Table 4: Worst Performing Periods for Bills, Real Returns (1900–2010)


Peak to Trough Decline

Subsequent Recovery



Total Return























In local currency. Dimson Marsh Staunton (DMS) Global Returns Database. Past performance is no guarantee of future results.

Click on the following link to see this data in graphical format - Preserving Capital v Preserving Purchasing Power in Australia.

More than ever, comparisons like these are needed when discussing the tradeoff of preserving capital versus preserving purchasing power. Investors feel the risk of equities in real time. Volatility is immediate and apparent as their portfolio value shows up in the mail every month or on their computer screen every day. Conversely, the risk of investing in bills and other low-volatility assets is less discernible and may take time to detect as it shows up when investors open their wallet at the grocery store or gas station many years later.

Investors may still want to revisit the tradeoffs they made and alter course if appropriate. However, changes to a long-term plan should reflect an informed decision rather than an emotional one. Fear and greed are powerful forces, but we should resist letting them dictate the tradeoffs we make in our lives or in our portfolios.

Many thanks to Marlena Lee for compiling this data from the Dimson Marsh Staunton (DMS) Global Returns Database.

1. Returns in this table are pre-tax, but actual consumption, as represented by inflation, requires after-tax dollars; therefore, if the marginal tax rate on interest income exceeds [1 – (Inflation/Bill Return)], the real return is negative. (e.g., Canada: [1 – (3.0/4.7)] = 36% but the highest marginal tax rate on income is roughly 45%.)

2. The difference in the real return of equities versus bills would increase after taxes in countries where the tax rate on income exceeds the tax rate on dividends and capital gains.

Posted by: Scott Keefer AT 12:45 pm   |  Permalink   |  Email
Tuesday, May 17 2011
I like to keep abreast of a broad range of opinions and research relating to finances.  One of these sources is the prestigious Stanford Graduate School of Business.  A new piece of research out from Stanford suggests that time not money provides the greatest level of happiness. It might at first seem that this topic is unrelated to the financial planning process but digging deeper it actually defines the most important aspect of the relationship between a client and their adviser.

The authors, Jennifer Aaker and Melanie Rudd at Stanford University, and Cassie Mogilner at the University of Pennsylvania, published their findings in the Journal of Consumer Psychology this year - "If Money Doesn't Make You Happy, Consider Time".  The conclusion from the report is that for greater levels of happiness we need to spend our time wisely and in particular:

- spend time with the right people
- spend time on the right activities
- enjoy experiences without spending time actually doing them
- expand our time
- be aware that happiness changes over time

None of this seems to be rocket science but as the report points out we struggle to sit back and reflect on these 5 key points and often rather get caught up in the pursuit of money and objects.  If you are looking for a little more detail about the research it can be found here -
If Money Doesn't Make You Happy, Consider Time.

How can a financial adviser help?

Financial advisers are not life coaches, although it feels like it sometimes, however a key aspect of the relationship with a financial adviser is the confidence and peace of mind that it should bring.  We are here to at least help manage if not totally manage your financial affairs.  This ticks both the goals of money and time.  We should be working to ensure that you are smart with the money that you have but also by delegating some of the responsibilities to your financial adviser you are freeing up time both in physical terms but also the mental stress time that you need to exert thinking about your financial affairs.

This second aspect of the relationship is very difficult on which to place a value but for many it is well and truly the most valuable aspect of the relationship between adviser and client.

Posted by: AT 11:25 pm   |  Permalink   |  Email
Wednesday, May 11 2011
Dr Shane Oliver is the Chief Economist at the AMP and is a regular commentator on the economy and its implications for investors.  I do not always agree with his conclusions but I do think he is able to clearly articulate economic theory.

His latest contribution is an explanation of investor behaviour in an article written for the ASX - Why markets are irrational

You may think that it is strange that I refer to this article as this firm's investment philosophy is seemingly built on the backbone of the efficient market hypothesis and Dr Oliver clearly does not believe in this theory.  However it is not that issue that I think is most useful in this article, it is rather the explanation of investor behaviour and concepts such as irrationality, the madness of crowds and why bubbles and busts occur.  Dr Oliver, as do I, believe it is crucial for an investor to understand these concepts and act accordingly.

The concluded implications
for investors from the article are:
  1. Understand emotions. Investors need to recognise that investment markets are not only driven by fundamentals, but also by the often-irrational and erratic behaviour of an unstable crowd of other investors. Also, not only are investment markets highly unstable, they can also be highly seductive. Be aware of past market booms and busts, so when they arise in the future you doe not overreact – piling into unstable bubbles near the top or selling everything during busts and locking in a loss at the bottom.
  2. Consider how you react. Recognise your emotional capabilities. Be aware of how you are influenced by lapses in your own logic and crowd influences. An investor should ask: “Am I highly affected by recent developments (positive or negative)? Am I too confident in my own expectations? Can I bear a paper loss?”
  3. The right strategy. Choose an investment strategy that can withstand inevitable crises while remaining consistent with your financial objectives and risk tolerance.
  4. Discipline. Essentially stick to your broad strategy even when surging share prices tempt you to consider a more aggressive approach, or plunging values might suck you into a highly defensive approach.
  5. A contrarian approach. Finally, if tempted to trade, do so on a contrarian basis. Buy when the crowd is bearish, sell when it is bullish. Extremes of bullishness often signal market tops, and extremes of bearishness often signal market bottoms. But contrarian investing is not foolproof – just because the crowd looks irrationally bullish or bearish does not mean it can’t get more so.
The approach taken by this firm is focussed on points 3 & 4, getting the strategy right from the outset and remaining disciplined to that strategy.  A major reason for this approach is to protect clients from themselves and letting emotions dictate decisions.  If you can achieve this discipline around a strategy developed on strong principles you are streets ahead of the game.


Posted by: AT 09:31 am   |  Permalink   |  Email
Wednesday, June 16 2010
One of the great traps with investing is the tendency to follow investments or asset classes that have done well in the past under the assumption or hope that they will do likewise in the future.  Jim Parker in his latest commentary piece for Dimensional highlights some research showing the pitfalls with this approach.

Stars or Straws?

Jim Parker, Vice President, DFA Australia Limited

Investors frequently seek external validation to ease the anxiety of putting their money at risk. Problem is there is no guarantee that a "five-star" rating on a chosen fund will lead to a "five-star" investment experience.

It is human nature for consumers to seek comfort in the idea that the products they are buying are proven in the marketplace. That need is met by ratings agencies that play a legitimate and vital role in providing independent assessments of various investment products.

Those assessments are made in professionally compiled and detailed reports that can be a useful yardstick for investors and their advisors in comparing funds so that they can make a fully informed decision.

But despite diligent cautions from the agencies about chasing returns, problems arise when consumers blindly extrapolate star rating systems for various funds into imagined future performance.

The risks of this approach were highlighted in a survey by US private wealth management business Burns Advisory Group, which went back to 1999 to study the subsequent 10-year performance of Morningstar's five-star funds.1

Burns found that of the 248 funds rated five-star by Morningstar on December 31, 2009, only four were still receiving that rating a decade later. Of the original sample, 87 had ceased to exist. Of those still existing, all had been downgraded to an average of just under three stars. Even worse, in all categories except international stocks, the average performance for five-star funds over this 10-year period was worse than the average for all funds.

"These findings imply the star ranking methodology leaves long-term investors in the lurch," Burns concluded. "If nothing else, it demonstrates clearly why investors should not rely on one measure as their sole research tool."

But it is not just unsophisticated investors that are chasing performance. Another recent report suggests that even wealthy individuals and institutional investors can be blind-sided by past returns.

The study by researchers at the European School of Management and Technology, quoted in The Economist magazine, looked at how investors allocated money to hedge funds over 10 years from 1994.2

The researchers found that the funds that had performed well in the previous three quarters attracted significantly more money than their competitors. In other words, the supposedly "smart money" was chasing past returns.

Bear in mind, also, that indiscriminately chasing returns can be even more costly with hedge funds, which typically charge management fees of 2% or more, plus 20% of the returns they generate for clients.

Given the large body of academic evidence that it is extremely difficult to predict market returns with any confidence, it should be evident that past returns should not be the foundation for choosing one fund over another.

Leading academics Gene Fama and Ken French, in a recent study of mutual fund performance, showed how hard it is for investors to distinguish skill from pure chance in analysing the returns of individual funds.3

So what should an investor and his or her advisor weigh up in making a decision? The key here is to focus on items within their control, such as:

  • Are the risks being taken related to return?
  • Are those risks targeted in a reliable, consistent way?
  • How diversified is the fund?
  • Does it make promises it can't keep?
  • What is more important - individual judgement or clear processes?
  • Are the underlying strategies driven by forecasts?
  • Does the fund take account of costs and taxes in its decisions?
  • Does the fund manager communicate in a clear and consistent way?

While many of these attributes can lead to good outcomes for investors, they are no guarantee of positive returns every year. Anyone who makes those sorts of promises risks disillusioning those who put their faith in them.

But the above characteristics can give investors comfort that their money is being invested in a consistent, transparent way and that ensures that when the targeted premiums kick in, they are positioned to receive them.

This is a grounded, completely defensible approach. The alternative is that by reaching for the stars, investors are left clutching at straws.

1. McGuigan, Tom and Courtenay, Tim, Star Gazing: Five Star Funds Revisited, Burns Advisory Group, April 2010

2. Buttonwood, Who's the Patsy?, The Economist, May 29, 2010

3. Fama, Eugene F., and Kenneth R. French. 2009. Luck Versus Skill in the Cross Section of Mutual Fund Returns, SSRN

Posted by: AT 06:30 pm   |  Permalink   |  Email
Wednesday, May 05 2010
There is a growing stream of research in business and finance faculties throughout academia looking at the issue of investor behaviour.  We think it is extremely important for all investors to have an understanding of the theories to help inform each individual's approach to investing.

Scott Bosworth from Dimensional in the United States of America has put together a really informative online presentation which steps users through the various aspects of behavioural biases.  The full presentation is about 25 minutes in length and in our opinion a good investment in time.

Click on the following link to be taken to the presentation - Behavioural Biases
Posted by: AT 07:30 am   |  Permalink   |  Email
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