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 Financial Happenings Blog 
Wednesday, December 07 2016

Scott Francis' latest Eureka Report article looks at the below average returns on the Australian share market since mid-2009 and compares this with previous perios after a major market downturn such as the GFC, 1987 crash, 1970s poor period of returns and the Great Depression.

Whilst the latest recovery period has not necessarily been different from the others mentioned, it does provide a stark reminder that a five to seven year window may not be enough to be confident that your share based asset classes will outperform cash.

Why five-to-seven years isn't adding up

Australian share market returns have been below their average since mid-2009.

Summary: Investors in Australian shares are on the cusp of a 10-year period of poor returns, with cash actually outperforming domestic equities since mid-2007.

Key take-out: The ‘five-to-seven-year’ rule for expecting a positive experience for investing in shares is being challenged, although post-GFC investors who used 2009 as a buying opportunity have been rewarded.

Key beneficiaries: General investors. Category: Shares.

As I started out as an investor, I remember thinking that managed funds would clearly be the best investment vehicle for me. They have the benefits of a professional manager and the administration is done for you. Also, while I didn’t fully understand them, I felt fees didn’t seem like too big a deal because I was confident my fund manager would outperform the average market. 

I understand, now, that the reality of investing in managed funds is quite different. As I looked around the glossy fund manager brochure starting out as an investor, I noticed that the most common time frame suggested for a successful investment in a share-based managed fund was five to seven years. 

One thing that the investment period from end-2007 to now has shown us is that the ‘five-to-seven’ year wisdom is not good enough for all periods. The Australian share market hit a peak in late 2007 closer to 7000 points than 6000 (the All Ords was 6779 in October of 2007).

The following graph, based on average share market returns, provides some initial data for us to look at as investors over a nine-year period from July 1, 2007 to June 30, 2016 – close to the market peak through to this year. It is worth noting that nothing particularly dramatic has happened in the months since July that would substantially change this – leaving us right now about six months away from a 10-year period of poor returns, well beyond the ‘five to seven’ year period often cited as a holding period for growth assets.

Chart 1: Total returns (income and growth) from asset classes – July 1, 2007 to June 30, 2016

Source: Vanguard

Looking at this data, it is clear that the key Australian asset classes of listed property and Australian shares have provided an extended period of below average returns. In this case they trail the returns from cash. It is worth noting that the returns from these investments include both the price movement and dividends paid – in the case of Australian shares, the price movement has been negative over this period but a stream of income has been paid, leading to the overall positive return. 

The bottom of the market then happened in early 2009 – in the case of Australian shares they fell in value by around 50 per cent (bottoming in the low 3000s). This is a tremendous loss of value but consistent with market falls in 1987, the early 1970s and the Great Depression in Australia.

So, what has happened since then? The following data shows the period from July 1, 2009 (just after the market bottomed) to June 30, 2016. It shows that investors who used 2009 as a buying opportunity have been rewarded. Interestingly, the worse performing asset class from 2007 to 2016 (Australian listed property) has had the strongest return since 2009. 

Chart 2: Market 'rebound' total returns – July 1, 2009 to June 30, 2016

Previous 10-year returns from ‘tough market periods’

The 1987 crash is the most recent of the big falls in Australian markets, happening towards the end of 1987. To look at the 10-year recovery from this, we can look at returns from July 1, 1988 to June 30, 1998. Interestingly, as the following graph shows, the returns following this downturn don’t look all that different to what we are looking at in this current post Global Financial Crisis period – reasonable returns without anything particularly spectacular. 

Chart 3: Post '1987 crash' returns – July 1, 1988 to June 30, 1998 

The period in the early 1970s was also a poor period of returns from Australian shares. For the period June 1970 to June 1975 a $10,000 investment in the average share market portfolio fell from $10,000 to $6900 when you include the value of dividends received. This might not seem like a historically large fall, but when you consider that inflation was above 10 per cent for an extended period of time, it was a significant destruction of purchasing power for investors who owned shares.

Chart 4: Share market recovery  – July 1, 1975 to June 30, 1985

This recovery seems spectacular enough with 18-plus per cent returns for a period of 10 years. I am sure we would all sign up to that today if we could. However, with inflation relatively high over that period, and cash returns of 12.5 per cent, the returns from shares were only 5.8 per cent higher than that – a reasonable return for the risk of investing in shares. 

It is, of course, a little harder to find market data around the time of the Great Depression. A book of Australian Historical Statistics was produced for the Australian Bicentennial and contains some share market data back to the late 1800s. It shows that at June 30, 1929 the All Ordinaries index was at 52.5 points, and over the next two years fell to 30.2 points. This is consistent with a fall of around 50 per cent, as the highest and lowest points will have been more extreme than these end of financial year values. 

The market then recovered over the 10 years from June 30, 1931 to almost exactly double to a value of 60.3 by June 30, 1941. Over this period the market yield was always above 4.5 per cent, with a peak of 8 per cent – adding to the returns from the price-index doubling.

Final word

Clearly the ‘five-to-seven-year’ rule for expecting a positive experience for investing in shares is challenged by this current period, where we are on the cusp of a 10-year period with negative price returns. 

It is interesting to look back to previous market downturns; investors who were disciplined, and held Australian shares after a downturn, were rewarded over the next decade. 

That said, I don’t think it can be argued that subsequent returns will necessarily be positive or exceptional, rather that shares have provided returns in excess of cash over these periods.

Early evidence is that this is certainly the case for investors who bought shares around the bottom of the market in 2009.  

Posted by: Scott Keefer AT 01:26 am   |  Permalink   |  Email
Thursday, October 06 2016

Hillary or Donald?  Should investors be making adjustments to portfolios based on their view of the upcoming election?  If history is any guide, you would be better served switching off the noise and focussing on the long term strategy.

Posted by: Scott Keefer AT 02:30 am   |  Permalink   |  Email
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
Wednesday, December 16 2015

Probably the most important question when it comes to whether you have enough in savings to retire is what level of cash flow will you need through your retirement years.  For many this is a difficult question to answer.  However there are some tools to help in determining what this magic number might be.

1) A percentage of pre-retirement income

One rule of thumb is to look at your pre-retirement cash flow (spending) and estimate that this will reduce to approximately 70% to 80% of that level once in retirement.  So if you are spending at the rate of $100,000 you might estimate an $80,000 annual base spend through your retirement years.

Why might spending be lower in retirement?

The school of thought is that certain expenses will no longer be required or at least reduced especially in relation to work related expenditure.  Items such as transport to and from work, spending on work clothes and income protection insurance are a few of the costs that might disappear.

However there are also going to be costs to fill in the time that you now have available to you.

2) Create a budget

This is a really good exercise for anyone but particularly those preparing for retirement.  If nothing else the process should help identify what you are currently spending funds on and what you would like to be spending those funds on.  This exercise might actually shine a light not only on the financial implications regarding retirement but also how you intend on spending your time during those years.

A useful tool to get the buget started is through the ASIC Money Smart site's Budget Planner -

Unfortunately many find this exercise difficult so there is a third option that might not only help develop your personal budget but also shine a light on whether your spending plans are in the right ballpark.

3) Refer to ASFA’s Retirement Standard

Even if you are comfortable using one of the above methods you might well ask – but is my current spending pattern / budget realistic or indeed efficient?

This is where ASFA’s Retirement Standard may be a useful reference.  The Retirement Standard sets out the budget for a modest and comfortable lifestyle for a single and couple.  The numbers are updated every quarter to take into account price movements (inflation).

The current numbers as at the end of September 2015 were:

Modest lifestyle

Comfortable lifestyle





Total per year





So for a comfortable lifestyle in retirement for a couple aged approximately 65 the budget is just under $59,000.

The bottom line annual amount provides a simple number to focus your attention.  However, included with the bottom line amount is a budget that sets out how these broad brush figures were generated.

To find the detailed budgets take a look at

Concluding Comments

I would encourage those preparing for retirement, as well as those already in retirement but wanting to review cash flow requirements, to reflect on the budgets set out in the Retirement Standard.  Everyone’s budget will be unique but this resource provides a useful starting point for those seeking greater clarity.



Posted by: Scott Keefer AT 08:51 am   |  Permalink   |  Email
Tuesday, December 15 2015

In his latest Outside the Flags article, Jim Parker from Dimensional Fund Advisors looks back at some of the individual company share forecasts made at the end of 2014. 

December 14, 2015

The Silly Season
Vice President

Aside from reports on shark attacks and cricket, the onset of the festive season and summer in Australia and New Zealand are traditionally lean times in the news business. So the forecasters come out to play.

Thinly staffed newsrooms and the prospect of lots of blank space to fill over the holidays prompt hard-pressed editors to assign reporters to crank out "Year Ahead" features before they go on leave.

For readers of the finance pages, this means lots of surveys about the outlook for the economy and markets in the coming 12 months. These can be diverting at the time, but they're much more entertaining a year later.

In its 'Top 100 Picks for Investing in 2015', published between Christmas and New Year, 'The Weekend Australian' newspaper canvassed staff and contributors for their recommendations on stocks to buy.

In its heavyweights list ("energised to move"), the paper selected BHP Billiton. It was energised all right, but the movement was all down. By early December, BHP had delivered a negative return of more than 30%.

The other chosen heavyweight was Alumina, which was picked because of expectations of improved prices and returns. Unfortunately not, as it turned out. Alumina was down nearly 27% over the year.

In the oil and gas sector, the newspaper asked "have prices hit bottom?" Clearly not, because four of its five favoured picks (AWE, Otto Energy, Origin Energy and Carnarvon Petroleum) were 30-55% lower. The fifth, Woodside Petroleum was a mere 6% lower.

Never mind, the paper said. Lower petrol prices would leave people more to spend. So it favoured consumer stocks Thorn Group and The latter managed a 3% gain for the year, but Thorn was down 27%.

In financials, the newspaper said Treasury Group (later Pacific Current Group) was "fuelled to fly". Its stock delivered a negative return of 33% year-to-date. Gold stocks were "ready to rise"—like Independence Group (-40%). And watch out for the "rising stars"—like Colorpak (-18%), Nearmap (-44%) and Retail Food Group (-16%).

To be fair, there were also a few successful picks in the top 100, like food maker Bellamy’s, whose 12-month total return was more than 600% thanks to Chinese panic buying of its organic baby formula.

But the real issue is that building portfolios around bottom-up analysis of the prospects for individual stocks or sectors is not a sustainable or systematic way of investing. You might get lucky. But then again, you might not.

In a concentrated portfolio, idiosyncratic influences can have an outsized effect. For instance, The Australianpicked software developer Infomedia as an IT play. But the non-renewal of a key buyer agreement forced a profit downgrade and its stock was down around 40% for the year.

However, even in a well-diversified Australian portfolio, it can be hard to avoid the drag from heavyweight stocks like BHP Billiton. Facing plunging commodity prices and an environmental disaster in Brazil, its stock hit 10-year lows recently. 

The Australian market is small by global standards and highly concentrated, the New Zealand market even more so. That’s why it makes sense to diversify as much as possible across different countries, sectors and stocks.

The idea is not to think of your portfolio in terms of individual stocks, but in terms of the broad drivers, or dimensions, of returns. These are your exposure to the market itself, to low relative price stocks, to small company stocks and to profitable stocks.

These dimensions of return have been shown to be sensible, backed by evidence, persistent and pervasive across different markets. Most of all, they are cost-effective to capture in diversified portfolios.

Of course, there is still no guarantee you won’t have a bad year in the market, but you can take comfort from knowing your portfolio is built around systematic differences in expected returns, not the whims of a newspaper.

Many happy returns!

Posted by: Scott Keefer AT 06:20 pm   |  Permalink   |  Email
Tuesday, May 13 2014

The first budget for the new coalition government has as expected provided some significant changes as well as confirming changes that had been widely anticipated.   This summary will look at the following major changes grouped into three main areas – tax planning, retirement planning and government benefit planning.  The full summary can be found at our 2014 Budget - Personal Finance Summary page.

Posted by: Scott Keefer AT 10:43 am   |  Permalink   |  Email
Thursday, March 20 2014

An article published in the Australian Financial Review last week provided some revealing data about average fee levels in the superannuation environment – Wake up to Super Fees.

The article reported the following broad fee levels:

Average fees charged by MySuper schemes for not-for-profit industry schemes             - 1.01%

Average fees for comparable retail funds                                                                   - 1.32%

Total fees charged on actively managed retail default funds with $100k balance                           - 1.10% to 2.39%

Total fees charged on actively managed retail default funds with $250k balance                           - 1.05% to 2.33%

Total fees charged on passively managed retail default funds with $100k balance                         - 0.55% to 1.09%

Total fees charged on passively managed retail default funds with $250k balance                         - 0.52% to 1.04%

The article goes on to debate that the performance of a particular fund is not just about fees.  There can be no question that the end outcome for a member of a super fund is the net return after fees and taxes.  However whether an active or passive approach will achieve that outcome will be the topic of endless debate.

The research we have considered at A Clear Direction clearly suggests that keeping costs low should lead to a better outcome, on average.  Investment approaches that utilize a passive, index based approach to building portfolios generate lower costs for clients and in our opinion provide better long term outcomes.  This is why index funds are at the core of our investment philosophy for building client portfolios.

So how do the fees stack up for A Clear Direction’s approach?

The ARF article suggests that the typical default balanced fund mix is 30% defensive and 70% growth. Based on a 30 / 70 asset allocation mix (30% invested in cash & high quality fixed interest, 70% in growth assets such as shares and property) the indicative administration and investment fees that clients of this firm are charged are:

$100k portfolio                     0.79%

$250k portfolio                     0.78%

Please note that here are adviser fees on top of those amounts, as there would be if an adviser was involved with any of the average industry fee levels mentioned earlier.  We believe that our fee level compares very favourably to the fees across the superannuation industry and therefore puts clients ahead of the game in terms of long term net returns after fees and taxes.



Posted by: Scott Keefer AT 08:09 pm   |  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
Thursday, October 03 2013

The latest S&P Indices Versus Active Funds (SPIVA) Scorecard has been released in the US.  Australian investor might ask what has that got to do with investors here in Australia?  We think it is very important for two reasons:

  1. Most likely 50% of an Australian investor’s international share exposure is invested in US companies.
  2. Academic research continues to show that the largest share market in the world provides a guide as to what will and does happen in markets around the world including the much smaller Australian share market

So what does the latest report tell us?

Yet again the US SPIVA Scorecard finds that active fund managers, those charging significant fees and spending significant resources to choose investments that will beat the average market, are failing to beat the benchmark S&P Index.

For the twelve months to the end of June, 2013:

  • 59.58% of large cap funds,
  • 68.88% of mid cap funds,
  • 64.27% of small cap funds,
  • 62.59% of global funds,
  • 65.86% of international funds, and
  • 74.53% of emerging markets funds all underperformed.

The only winning sectors for active managers were the US small cap growth sector and international small cap sector.

The five year data was even more condemning of active managers.

(Refer to the full SPIVA report for further details.)


What are the lessons for investors in Australia?

The key lesson for us Australian investors is that we need to be very careful in employing active fund managers as all we may be doing is helping the fund managers to buy their yachts, mansions and expensive cars and not actually providing any value to our portfolios.  Many studies show that a key reason for the underperformance is the extra fees that have to be paid to the fund managers.  This creates a headwind that is difficult for them to overcome.

There are many other reasons and we encourage you to take a look at our research pages to understand more about why active managers are not likely to be a great investment choice.

Please be in contact if you would like to discuss how to apply this research to your particular circumstances –



Posted by: Scott Keefer AT 01:21 pm   |  Permalink   |  Email

Scott Francis' articles in the Eureka Report 
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