The role of your adviser

Sell, sell, sell!!! Over the last few weeks, stock markets around the world have taken a bit of a battering leading some to suggest(1) that we are now seeing the beginnings of a recession. If that’s the case it could well mean that there is still some way to go before markets start to recover.

Buy, buy, buy!!! Conversely, there are also indications that economic fundamentals are still strong, that the bottom has been reached and markets start to recover some of their recent losses over coming weeks and months.

What should you do with your investments? If you believe the recession scenario, you may decide exit the markets (or just reduce the market exposure of our investments) and wait until there are signs of a recovery. However, taking steps now to reduce your exposure to the market could have one of 2 outcomes…either you’re right and you stem any further reduction in the value of your investment and you can buy back into the market at a lower price later on (assuming, that is, that you are lucky enough to time your buy on an upward swing) or, your hunch is wrong and you have to buy back into the market at a higher price in which case you’ve missed out on some gains in the mean time.
Ultimately the outcome can only be known with hindsight and often not until quite sometime later. Which really brings me to my main point in this article:

We can’t control the markets but we can control our response.

At Moneyplanners, when it comes to helping our client build and protect wealth, we are strong advocates of the principle: time in the market NOT timing the market. The money we manage for our clients is a long term investment, typically 10 years or more and, in that time the law of averages (based on historical returns!!) suggests we can expect to see at least one significant downturn (20% plus) and a strong probability of a recession lasting at least 12 months. But in the last 90 years or so, there have also been extended periods of more than 10 years of market growth…such as our recent experience since the GFC. The point here is that historical averages are not particularly useful in predicting the future.

Our goal in helping you manage your investments is not to outperform the market…our role is to help you keep your head while everyone else is losing theirs.

Which brings us to our role as your financial adviser. It’s typically during downtime’s in the market that our role becomes really important…and, perhaps not for the reason you might think. There’s a ‘back of the napkin’ sketch in a blog entitled behavior gap which in a very simple way describes the most important role we play as your financial adviser:

Source: https://behaviorgap.com/blogs/articles/the-value-of-an-advisor

Our goal in helping you manage your investments is not to outperform the market…..it’s not to add “alpha” to market return…our role is to help you keep your head while everyone else is losing theirs. Our role is to be the voice of reason when investment markets are all over the place…by being there to help you control what you can control – your response to a market downturn. Sometimes that can be hard but, it’s been shown time and time again that by trying to time your moves into and out of the market you end up much worse off than if you’d stayed the course.
So, the recent market turmoil will likely have an impact on your investments..you’ll likely see a reduction in value. However, it’s not a loss unless you sell…your investment is for the long term and market corrections happen from time to time. But it doesn’t have to affect your long term investment goals.
Feel free to get in touch if you have any concerns about what is happening or would like to sit down and review your investment goals.
Further reading

Good Money Reads for the Holidays

With Christmas in a couple of weeks and the prospect of a well earned break, many of us use the opportunity to catch up on some reading. If you’re interested in personal finance or investing, you may like to check out some of our favourite money reads this year:

(Please note the links on the images are to fishpond – a new zealand-based distributor. If you click on the link and subsequently purchase the book, Moneyplanners will receive an affiliate fee. We only recommend books that we ourselves have read.)

The One-Page Financial Plan by Carl Richards.

Carl Richards is one of our ‘reference points’ for matters relating to behavioural finance. He writes (draws!!!) a regular column for the New York Times (the Behavior Gap – which is worth subscribing to). He has this uncanny ability to make sense of relatively complex ideas through back of the napkin doodles!!! The one-page financial plan is a bit of a misnomer BUT his approach is really compelling. Rather than starting with your goals and taking a look at your budget and net worth, this book approaches financial planning from a different perspective by asking the question: why is money important to you. The answer to this question, underpinned by your own unique value system, drives everything else related to how you should structure your financial affairs. We also like how the book suggests a subtle (but important) shift from the term financial goals to ‘financial guesses’. This is an excellent book and an easy read without unecessary financial jargon.

 

A Wealth of Common Sense by Ben Carlson.

Ben is also one of our favourite personal finance bloggers. His Wealth of Common Sense blog is one of the few that I always read. This book takes the complexity out of investments and focuses on the most important topics which affect investment outcomes. Taking a practical approach to investments, this book takes a look at some of the enduring myths about investing as well as discussing and delving into some of the most important aspects of developing a personal investment plan. Like Carl Richards, Ben has a good understanding of how our behaviour affects outcomes when is comes to money matters.

 

 

 

The opposite of spoiled by Ron Lieber

I came across this book fairly recently (interestingly while reading a post in Ben Carlson’s blog (see above!!) and ordered it from the library. Ron Lieber is the New York Times personal finance columnist. This excellent resource provides a wealth of practical down-to-earth advice about including kids in conversations about money and how to turn those conversations into lessons about life. The book starts with the premise that it’s hard to come up with a word which is the opposite of spoiled, Instead the author sets out to identify a set of traits and virtues which embody the opposite of spoiled and along the way shares “how to embrace the topic of money to help parents raise kids who are more generous and less materialistic.” If you’re the parent of school-aged children or a grandparent of such kids, this is an excellent resource to help you to teach those kids to be better with money than we are.

 

Investment Property or Managed Fund: a retiree’s conundrum

IMPORTANT PLEASE READ: The information in this article is not personalised advice. The findings and conclusions relate to a specific client situation which may or may not be relevant to your situation. Furthermore, the analysis herein is relatively academic as it is based on historic returns which are not a good indicator of prospective future returns. You should seek professional investment advice BEFORE deciding whether or not to invest in any type of investment. 

 

A retired couple we know recently announced that they had bought an apartment at a retirement village. It is expected that they will move in early next year. When they do, they will also have to decide whether to sell their current property (a small 1 bedroom apartment on the shore) and invest the proceeds or keep it as an investment property.

 

The variables behind this decision led me to do some research around which of the two options would be better from an investment viewpoint. What follows are my findings.

 

Investment property often gets a bad wrap in the financial planning world for a number of reasons perhaps the biggest being that having a large sum invested in a single asset runs counter to one of the key principles of investing; diversification. If we park this for a moment how does residential investment property stack up against for example a managed fund? One of the key benefits of investment property over other types of investment is the ability to easily leverage returns by borrowing to fund the purchase. So, for example, if you were to borrow 80% of the purchase price of a property, the return on the funds you actually invested will be enhanced fivefold.

 

Let’s return for a minute to our retired couple’s situation….they are debt free on their current home so by holding on to the property, they won’t be gaining the benefits of leverage. This means we can conduct a relatively direct comparison between property and (for the purposes of simplicity and available data) a managed fund.

 

So let’s take a look at the numbers over the last 25 years. For this exercise I have used a couple of relatively broad brush measures of return for each investment type.

 

Variables and assumptions

  1. For residential investment property, I have used the New Zealand housing price index for the last 25 years. ..link here.
  2. For an alternative, I have used a highly regarded balanced growth fund from one of New Zealand’s  leading superannuation schemes.
  3. I have only looked at property values over time and have ignored rental income on the investment property for the sake of simplicity and due to the fact that such income will depend on the nature and location of the property. Furthermore, there are maintenance and operating costs associated with investment property which dont apply to managed funds.
  4. For this exercise, I compared the relative value of $1 invested into residential property (using the Reserve Bank all NZ housing index) versus $1 invested into the reference fund (Balanced Growth) on the 31st March in each reference year. I used 5 year, 10 year, 20 year and 25 year reference periods.

 

Key Results

Value of $1 invested
31st March 2013
31st March 2008
31st March 1998
31st March 1993
Property Value 31st March 2018
$1.565
$1.586
$3.394
$4.951
Fund Value 31st March 2018
$1.508
$1.991
$2.790
$4.297

 

It was interesting to note that, with the exception of the 10 year timeframe, investment property provided better growth than a balanced growth fund.
As a result of this initial analysis, I took the opportunity to explore results over the last 18 years (I only had data going back to 1993 for the balanced fund in question) and the results provided some interesting reading. The following table summarises my findings. For the year ended 31st March in each year, the table shows which option performed better over the timeframe indicated and the relative difference in overall growth (measured by reference to the end value of the investment e.g. for the 20 years  ended 31st March 2017 a $1 investment in property would have been worth approximately $3.56 versus an approximate $2.97  for $1 invested in the reference balanced growth fund. – a difference of 22%.
Results and Materiality

 Year ended 31st March  25 Years 20 Years 10 Years 5 Years
2018 Property 15% Property 22% Fund 20% Property 4%
2017 Property 20% Fund 4% Fund 3%
2016 Property 5% Property 24% Fund 29%
2015 Property 0% Property 10% Fund 22%
2014 Property 20% Property 14% Fund 41%
2013 Property 15% Fund 15% Property 11%
2012 Property 8% Property 21%
2011 Property 18% Property 17%
2010 Property 53% Fund 10%
2009 Property 35% Property 3%
2008 Property 14% Fund 25%
2007 Property 3% Fund 14%
2006 Property 12% Property 1%
2005 Property 21% Property 41%
2004 Property 34% Property 78%
2003 Property 36% Property 70%
2002 Property 62%
2001 Property 35%

So what should this couple do with their property?

When I first started looking at this, I had expected to find their best option (from a purely economic viewpoint) would be to sell the property and invest into a diversified portfolio of stocks and bonds or managed funds. However, my (albeit limited) analysis suggests otherwise – at least in their situation (this is important – see below!!). On the basis that they won’t need the funds invested in the property for many years (if at all), there is no really compelling argument to sell just yet – in fact, the findings and their other investments suggest otherwise.  There are, of course, other factors which may influence their decision – such as the practical aspects of owning a property – maintenance, collecting rental, tax implications, etc, but from a purely economic viewpoint, it would make sense for them to hold on to the property and use the rental income to supplement their other income sources (to the extent they need to.

 

IMPORTANT PLEASE READ:
My conclusions for this article are specific to this couple’s situation. There are some important factors which affect the recommendations which are unique to them;
1. They have no other property.
2. They have access to a substantial well diversified portfolio of shares, bonds and fixed interest investments which supports their income needs during retirement.

 

If you would like to discuss your investment needs, please get in touch with Miles – 021 645 000.

Investment Update July/August 2016

Unexpectedly, in late June, the British voted to leave the European Union (EU), a decision which now leaves the world’s fifth largest economy facing deep uncertainty about its future growth prospects.  This decision in the UK will also hurt the economies and markets of the EU and beyond.

The Brexit vote initially triggered a sharp downturn in share values, particularly in Europe, and a strong rally in safe haven assets like bonds and gold.  The pound also suffered a swift devaluation.

This is an unexpected political crisis rather than an economic or banking crisis like the 2008 Global Financial Crisis.  In economic terms, it is likely to lead to a modest UK recession as well as an ensuing slowdown in the EU, along with a period of considerable political turbulence in the UK and Europe.

Even aside from Brexit, global economic conditions are still far from robust. The existence of near zero or negative interest rates in many countries indicates something very unusual is happening. In early June, the World Bank has recently slashed its global growth forecast for 2016 to an “insipid” 2.4% amid what it calls stubbornly low commodity prices, faltering growth in advanced economies, weak global trade and shrinking capital flows. In January, the Bank had forecast global growth of 2.9% for 2016. The latest downgrade to 2.4% reflects slides in the prices of commodities, including oil and iron ore, and an inability of countries that benefit from the lower prices to use them to bolster growth.  After Brexit, a further down grade now looks likely.

US

The World Bank cut its forecast for the United States growth from 2.4% to 1.9% in 2016.

In mid- June, the Federal Reserve pushed back its plans to raise its benchmark short-term interest rates, a widely-expected move following a series of mixed US economic reports, particularly in employment data. Although the unemployment rate has declined to 4.7% now, job gains have diminished.

The cautious stance comes after an unexpectedly weak payrolls report in which the US economy added only 38,000 jobs in May, the lowest level in six years.  Brexit is likely to delay interest rate rises in the US even further.

Meanwhile, on the plus side, inflation, which has run below the Fed’s 2% target for four years, has shown signs of strength in recent months, as oil prices and the US dollar stabilised.

Japan

The World Bank cut its forecast for growth in Japan from 1.3% to 0.5% in 2016.

In June, the Prime Minister changed his mind and kept the consumption tax unchanged to assist internal demand and growth prospects.

China

The World Bank held its forecast for China’s growth rate at 6.7%.

Soaring corporate debt is a serious and worsening problem in China that needs to be tackled quickly if Beijing wants to avoid potential systemic risk to itself and the global economy.  While China’s total debt of around 225% of gross domestic product is not particularly high by global standards, its corporate debt at approximately 145% of GDP is high by any measure.

Europe

The World Bank held its forecast for the Euro area at 1.9% in 2016.

With policy interest rates approaching their lower bounds and the Euro yield curve already very low and flat, the focus on macro-economic policy discussion has now switched towards possible fiscal policy in Europe.

The UK’s decision to leave the EU now puts further pressure on EU growth, and asks the question: what are the likely responses now from the European central bank?

Australia

In early June, the Australian Reserve Bank kept interest rates on hold at 1.75% and delivered a statement that gave no indication that it is inclined to ease monetary policy any time soon.

The general election result in early July is looking to be a close contest with polls suggesting a narrow Liberal victory.

New Zealand

In early June, the Reserve Bank left the Official Cash Rate unchanged at 2.25%. At this time, it said:

“Global financial market volatility has abated and the outlook for global growth appears to have stabilised after being revised down successively over recent quarters. There has been a modest recovery in commodity prices in recent months. However, the global economy remains weak, despite very stimulatory monetary policy and significant downside risks remain.

Domestic activity continues to be supported by strong net immigration, construction, tourism and accommodative monetary policy. The dairy sector remains a moderating influence with export prices below break-even levels for most farmers.

There continue to be many uncertainties around the outlook. Internationally, these relate to the prospects for global growth and commodity prices, the outlook for global financial markets, and political risks. Domestically, the main uncertainties relate to inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.

Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range”.

Summary

Brexit brings with it heightened uncertainty and financial markets certainly do not like the unknown.  We therefore expect a period of weaker and more volatile share markets. We also expect a low interest rate environment for even longer now.  We expect investors to be more cautious, maybe to adopt a “wait and see” strategy.

We feel that accommodative monetary policy settings in most jurisdictions around the world will probably continue to be broadly supportive of markets, however we have now had over 7 years of rising share prices and corrections in some markets are more likely to occur as investors adjust their risk positions and “take some profits”.

For some months, to control portfolio risk, we have recommended to clients that their investment portfolios should be well aligned to their long term strategic asset allocation positions and well diversified.

Source: JMIS, investment consultant to Select Wealth Management