by David | Jan 1, 2019 | Blog, Uncategorised
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
-
-
-
-
by David | Dec 12, 2018 | Blog, Uncategorised
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.
by David | Dec 12, 2018 | Blog, Uncategorised
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
- For residential investment property, I have used the New Zealand housing price index for the last 25 years. ..link here.
- For an alternative, I have used a highly regarded balanced growth fund from one of New Zealand’s leading superannuation schemes.
- 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.
- 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.
by Miles Flower | Jul 6, 2018 | Investment News, Uncategorised
Overview
The near-term outlook for the world economy is still positive, however, mounting tensions over a potential US-China trade war suggests an elevated risk to the medium term outlook. We expect events in early July will likely be the key to understand the effect of this potential trade war, as the US is poised to impose the first significant tariffs at that time.
In the US, strong economic growth and low unemployment will likely prompt the Fed to raise rates two more times this year while, in the euro-zone, the ECB is on track to end its asset purchases by December. Any trouble in emerging markets could be largely confined to Argentina and Turkey.
Global
While world trade has softened in recent months, the stability in trade volumes recent months offers some reassurance. Although the protectionist measures and rhetoric have escalated in recent weeks, the consequences do not yet point to anything worse than a modest slowdown of a resilient global economy, supported partly by household spending expanding at a decent pace. Further ahead, however, with monetary tightening set to take a toll on the US economy next year and China losing some momentum, global growth is predicted to slow in 2019 and 2020. This assumes no catalyst. such as a severe trade war, eventuates prior to then.
The US
GDP growth should rebound in the second quarter, helped by the fiscal stimulus of recent tax cuts. This should keep pressure on the Fed to continue gradually hiking interest rates. Markets anticipate a total of four hikes this year and another two in the first half of 2019. As the stimulus fades and the cumulative monetary tightening bites, however, a slowdown in GDP growth could eventually force the Fed to reverse course by cutting rates around 2020.
In June, the Federal Reserve lifted its benchmark interest rate by a quarter of a percentage point, to a range of between 1.75% and 2%, the second rise this year. The last time the rate reached 2% was mid-2008, before the worst of the financial crisis. The Fed hinted at two more rises this year and dropped its statement that monetary policy would remain stimulative for some time.
The UK
The UK’s Monetary Policy Committee (MPC) is unlikely to wait too much longer before adopting more hawkish measures and increasing interest rates. Although the beneficial effects on exports of the pound’s fall may be fading, it is not clear that the sterling boost to growth is over. With sustained rises in real wages anticipated, real
GDP is likely to rise by around 1.5% to 2% over 2018/19. This should allow the MPC to raise interest rates at a faster pace than markets expect. Indeed, the Committee could hike rates in August, and by a further three times by the end of 2019.
Europe
The ECB recently announced its plans to end asset purchases this year, but it also clearly outlined that it is in no rush to raise interest rates. Investors’ expectations have now shifted to the view that the expansionary policy is set to continue and that the ECB will wait until late 2019 before raising interest rates.
The Italian financial markets are likely to remain under pressure in the coming months due to concerns about the new government.
Emerging Markets
The growing threat of a US-China trade war and a strong US dollar
are the key risks to emerging markets. Even if trade tensions don’t worsen, GDP growth in Emerging Asia has peaked and is likely to ease over the coming year. Central banks in Indonesia, Korea and the Philippines are likely to raise rates further before the end of the year, but other central banks in the region will be in no rush to follow.
Regional growth is likely to slow over the course of 2018-19 in Emerging Europe. The sharpest slowdown will come in Turkey, where the recent tightening of financial conditions will feed into weaker economic activity. Meanwhile, Argentina’s recently agreed IMF deal imposes an aggressive tightening of fiscal policy, which could push the economy into recession.
Australia
Although GDP remains strong, the end of the mining, housing and migration“booms” has softened the outlook for the economy and the financialmarkets. The result is that interest rates are unlikely to rise soon and the Australian dollar could weaken in response to rising US rates. There is a risk that tightening credit controls in response to the Royal Commission into Banking may conspire to weaken Australian housing.
The escalating trade spat between the US and China could potentially boost the Australian economy in the near-term, but any reduction in global trade would be bad news for Australia in the long-term.
Governor Lowe outlined in a speech in late June that, before interest rates are raised from their record low of 1.5%, the RBA will want to have“reasonable confidence that inflation is picking up to be consistent with themedium-term target and that slack in the labour market is lessening”. Weexpect rates to remain on hold until at least the second half of 2019.
In June, the AUD depreciated against the USD by -2.15%.
New Zealand
At home. the Reserve Bank of New Zealand left interest rates on hold at 1.75% in late June. Governor Orr repeated that the OCR will stay at the current expansionary level for a considerable period. Comparing this with the federal funds rate, which pushed higher in June to a target range of 1.75 to 2%, it is the first time since late 2000 that the OCR is lower than the Fed funding rate. In June, the NZD depreciated against the USD by -3.33%.
Summary
Global markets continue to face a more balanced set of tailwinds and headwinds than was the case a year ago. While the economic and earnings outlook remains relatively strong, the peaking of leading economic indicators and earnings revisions suggest a more challenging environment as momentum for both slows.
Monetary policy generally remains accommodative and the expectations are for future policy direction to be neutral at best, but more restrictive in the US with multiple rate hikes planned over the balance of 2018. We expect events in July are likely to be key to understand the extent of the impact of the US-China trade negotiations as the first significant tariffs are implemented. We will continue to monitor these events carefully to consider investment risk.
Also, geopolitical risks such as the instability in Italy endangering eurozone stability and the overhang of Brexit negotiations will be important to watch too.
Given the extended period of strength from investment markets, it is important that the risk levels in clients’ portfolios are appropriate.
by Miles Flower | Aug 21, 2017 | Uncategorised
I’m saddened to hear of Coxy (the T.V. Builder) sharing his story of terminal cancer. Many of know the friendly and trustworthy face and now he must deal with the hand life has dealt him…terminal cancer.
You can watch his interview here
I don’t know any insurance details about him, but I thought it is a timely reminder to make sure that we have our insurances in order.
Coxy said “there were no warning signs” and I think we need to treat life insurance with urgency and priority, not something that’s an additional cost and we will get around to doing it soon because we’re too busy…take care of it now!
If your health changes, you will not get cover for your condition, and then it’s too late, when you need it you can’t get it, you need to get it BEFORE you need it.
Terminal Illness Payments
In most cases an insurance company will pay your insured amount of Life Insurance if you are diagnosed as being terminal. The differences between insurers will be in how much you get paid, for example;
- Some will pay the whole amount upon diagnoses
- Some will pay 50% up front upon diagnoses
- Some will pay if you are diagnosed that you only have 6 months to live
- Some will pay if you are diagnosed that you only have 12 months to live
A Terminal illness is normally built into your Life Insurance cover and is not normally an additional addon, but in saying that, please check with us about your current policy or your insurer if we have not arranged your cover.
Trauma Cover Payments
Trauma cover is slightly difference because there is no terminal diagnosis required, all you need to do it meet one of the conditions and you are entitled to claim. Payments are slightly different in that this is a different type of cover which you need to purchase additionally.
It does cover you for cancer and about 30 other conditions, but you do not have to be terminal to receive your insured amount.
___________
Information and Disclaimer:
This article is for information purposes only. It does not take into account your individual needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should contact Miles Flower on 021 645 000.
by Miles Flower | Aug 21, 2017 | Uncategorised
2017 has been an interesting year in terms of residential property in New Zealand. Recent statistics suggest that there has been a definite easing in property values, particularly in Auckland but also throughout most of the country. There are a number of factors which are influencing the current trend – most of which are driving down demand. Lets take a look at some of these factors and then identify how this may play out over the next couple of years.
- RBNZ has kept interest rates at historic lows throughout this year and, in recent announcements has suggested this is likely to be the case for the foreseeable future – perhaps well into 2019.
- Despite the low RBNZ rates, international market influences (which is where most of our banks source their funds for lending purposes) are putting upward pressure on interest rates leading most of the banks to raise interest rates both fixed and floating. These rises in interest rates have had a dampening effect on demand for property as net returns for developers and investors are negatively impacted.
- The LVR restrictions and bright-line IRD test has also affected investor demand and created challenges for first-home buyers in particular who are trying to getting onto the housing ladder. Despite political comment that, with an easing in property inflation pressures, there is a possibility that LVR restrictions could be eased, there is no indication when this could happen.
- One of the more important counter-balances to price softening is the continued net migration inflows. There is no sign that this will change any time soon.
- Political uncertainty with the upcoming election, is also a dampening factor on demand with buyers (and sellers) taking a wait and see approach before moving.
So what is the outlook for property. As always, this requires some form of crystal ball-gazing and no-one really has the answer. However, it would seem likely that over the short to medium term at least, the double-digit growth we have seen in recent times is a thing of the past. It’s worth remembering that investing in property should be a long term decision – over the short to medium-term buying a property becomes more speculative; not something we would recommend to any of our clients.
If you’d like to understand what all this means for you – get in touch and we can discuss your situation and needs.
___________
Information and Disclaimer:
This article is for information purposes only. It does not take into account your individual needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should contact Miles Flower on 021 645 000.
