My Monday Rant

Last week I copped a bit of criticism following my Safe As Houses post. Here’s the first:

2 major flaws in your chart, which would suggest your post is indeed ‘enticing narrative’; – If you factored in the income from each of these assets, including the fully franked dividend from the CBA, you would find the CBA has delivered somewhere around 200% of the income return of property – What is the impact if you took said income and reinvested it? Massive… I’d love to see your chart then. Capital Growth is only one component of your return and in the case of the CBA, represents around half your return.

This reader raises a valid point – dividends and the impact and power of compounding returns. I decided to ‘tidy up’ my analysis. So I included CBA’s dividend, reinvested it (although not everyone reinvests dividends), and compared the return to Melbourne and Sydney house prices in nominal terms. I chose Melbourne and Sydney given the share of CBA’s loan book these two cities.

And voilà, here’s what we have. Although I didn’t have time to incorporate rental income from the two cities, the outcome is no different. I also note the chart is not a common base chart, i.e. all investments start at the same point, which means Melbourne’s end price would be higher given the lower start price.

You can see the correlation and behaviour is very similar. Another reader writes:

With two sides of the story being capital growth and income received I don’t think you have provided great understanding of the correlations and drivers of both property & shares and underrepresented both.

My original article was providing evidence of the correlation between residential property and CBA’s share price, and was being done so not based on the two being mutually exclusive.

The reader continues…

Families need to understand whether they want to have a part time job, maintaining a property portfolio, chasing rent, keeping tenants, fixing broken water pipes, paying real estate agents, paying lawyers. Or whether they would like a set and forget strategy of investing in the great companies of this world, where they pay a financial adviser, a platform and investment fee and they can enjoy what’s most important to them.

Although the reader seems to have misunderstood the intent of my original article, they raise a valid point. Investing in direct property can be both time consuming and costly. For this reason, most investors hire a real estate agent. They take care of the maintenance of the property, they both find and keep tenants, they arrange for the broker water pipes to be fixed, and yes, we pay them a fee. Just like our clients pay us for the services we provide. I would have also thought that property can be a ‘set and forget’ investment too, can it not?

The alternative the reader provides us with is to hire a financial adviser, pay them, hire a platform, and pay them, then pay the investment fees, and forget all about it.

I admit, my comments are tongue in cheek, but what these comments proved to me, yet again, is that those with vested interest will continue to peddle the narrative that best suits them. Walk into a Holden dealership, you won’t be sold a Toyota.

Investors deserve the truth. Investors deserve to be educated. Investors deserve the right to know what we as advisers can help them with and cannot help them with, not what we will and will not help them with – there is a difference.

My original article was not to spark debate between property or shares. Both asset classes not only behave very differently, they both serve different objectives. History tells us that both Australian shares and Australian residential property have performed broadly in line with each other over the long-term. Australian shares have provided a slightly higher rate of return, however Australian residential property has provided investors with a smoother ride along the way.

Source: AMP

I kindly remind you, as investors, look beneath the investment and ask yourself the following questions:

  1. Where am I allocating my money?
  2. What is the underlying investment?
  3. What is the investment influenced by?
  4. What am I really investing in?

Most importantly, ask yourself this question:

What is the objective/purpose of my investment?

Here’s the blueprint for how to think about investing in it’s simplest form – a snippet from our Intergenerational Wealth Transfer forum in 2018.

God speed.

Safe As Houses

I recently attended an investment forum lined up with a bunch of bond and equity managers pitching their great ideas. It was held in Crown’s Palladium, and the room was full. I can’t imagine what it cost these folk to get a guernsey for the day – but I know who’s ultimately paying for it (and I’m sure you do too).

Our industry is full of smart people and not so smart people. It’s dominated by cool charts, engaging narratives, long disclaimers, Italian neckties and hand bags, and fancy lunches and dinner. Whatever can be controlled will be controlled, all in the pursuit of influence – one way or another.

There was one presentation by a stock market fund manager that confused me slightly. Yet it provided me with such clarity.

The confusion

The gentlemen was speaking about the ‘over-inflated’ property market, at the same time presenting the audience with a number of convincing PowerPoint slides. He then went on to explain why Australian shares, specifically the Australian banks, provided investors with far better value. This was difficult for me to follow. As an investor and avid market follower, I am fully aware that the Australian banks have their fair share of exposure to the property market. I mean, this is how they make their money, right? So I decided to run the below chart. It shows Australia’s real house prices (blue), and CBA’s share price (orange). Can you spot the trend?

On one hand we’re being told not to invest in Australian property, yet on the other, we’re being told to invest in ‘blue chip’ Australian banks. Can you see the reason for confusion?

The clarity

What was made very clear to me was that the stock market guy or stock market gal is going to plug their asset class by torching others. It’s sad, but true. I guess you’re not going to be sold a Holden when you walk into a Toyota showroom, right?

What’s worse is that investors are being fooled into a narrative that lacks evidence and substance. The pitch also got me wondering about the extent to which investors undertake analysis about their own investments. Where am I allocating my money? What is the underlying investment? What is the investment influenced by? What am I really investing in? Investors really need to be peeling back the onion.

Secure debt is another example. Investors hear the words and shake their heads, that’s too risky. Yet they’re very comfortable to take an equity position in a business that does this very thing. Where am I allocating my money? What is the underlying investment? What is the investment influenced by? What am I really investing in?

If you haven’t seen this before, it’s a simple table that shows you the lowest risk (senior secured debt) investment to the highest risk (equity) investment.

Next time you are reviewing an investment opportunity, ask yourself these questions. Take the time to truly understand what and where you are investing. Filter the noise and start to make informed and educated decisions about where you allocate your capital.

Those investments, make sure they’re safe as…houses?

The Greatest Property Bubble or A New Beginning?

Melbourne’s population is booming, and it has not only become one of the wealthiest cities in the world, but has also developed an international reputation as one of the greatest cities in the world.

Melbourne is in the midst of a land and property boom. Rather than building high-density apartment blocks like the European cities, Melbourne expanded wide and far. Real estate is ‘The Land of Promise’, as proclaimed by this sales poster for Moreland Road, Brunswick.

Investors are buying up farms and subdivided them. They are luring buyers with free railway passes out to the new estates, feeding them and serving champagne before bidding gets underway. In fact, the value of land in parts of Melbourne is as high as London.

The Argus newspaper wrote, ‘[The hunger] that has seized hold of so many people is the result not of an hallucination, but of an awakening to the value of land as a safe, a sound, and a profitable investment.’

I’m talking about Melbourne in the 1880’s – it was dubbed ‘Marvellous Melbourne’. Here we are in 2019, and the tune hasn’t changed in 140 years.

In April of 1893 the bubble had popped, and the boom was over. Melbourne’s unemployment rate jumped to 20%. Property prices dropped almost 40% (Melbourne) within years, which compares to a drop of 20% during the 1930’s depression. It would take Melbourne 60 years to recover.

Every bubble is different. Their formation varies from duration, magnitude, and cause. It was higher interest rates that would eventually pop the bubble of the 1890’s, and the banks’ failure to take security for loans written during this frenzy would lead to the collapse of a number of them.

With bank lending having soared since 2012, prices having doubled during this time, and interest rates at an all time low, could we be facing another crisis like the one that has been buried in history books for decades? Or is it different this time?

According to the media, Australia’s property bubble is akin to that of the US.

When people refer to the US property bubble, I ask them which city they’re referring to. Sure, the US had a property meltdown, however not all cities we’re wiped out. New York fell 24.45%, Dallas down 7.53%, and Boston fell 16.38%. In fact, it wasn’t even the cities that had the largest growth pre-GFC that fell the most (refer LA and San Francisco). On average, prices in major cities fell around by one third of their value.

Similarly, when people talk to me about the Australian property bubble, I ask them which city/ies they’re referring to. In Australia, it’s largely been a story of Sydney and Melbourne.

I decided to run a few charts to analyse the current state of play:

Australian Real House Prices

Here’s a long-term view on real house prices:

Major City House Prices

Since the RBA started cutting rates in 2012, house prices doubled in major cities. Since peaking in 2017, Sydney is down 14% and Melbourne 11%. Hobart continues to climb, and prices rises in Sydney and Melbourne guide investors to cheaper cities.

Residential Building Approvals

The story of Australia’s construction boom has been one of apartment construction. Detached housing has been moving sideways for sometime now. Economics 101 tells us that when the supply increases, price decreases, and when supply decreases, price increases. This is the story of apartments and detached housing.

Price to Income Ratios

This ratio tells us how much of the median income (as a multiple) does it take to buy the median house. For example, in Melbourne, it takes 10 times the median income to buy the median house. In Sydney it’s 13 times. In Hong Kong it’s 20 times. It seems as though global ratios are converging following a massive divergence pre GFC.

Housing Finance Commitments & House Prices

There’s a strong correlation between the amount of debt the banks lend out and house prices. In fact, house prices lag lending by about 6 months. The data tell us that lending is still falling.

Auction Clearance Rates

This is one of my favourite charts because they are timely and have a good cyclical relationship with property prices in Sydney and Melbourne. Clearance rates have been declining for some time now, although you can see a little kick post election – something to keep an eye on.

House Prices & Household Debt

This chart shows us the strong relationship between debt and property prices. Overvaluation in prices really started in 1996 –  it’s popular to blame negative gearing, the capital gains tax discount and foreign buying for high home prices and debt. However, the basic drivers are a combination of the shift from high to low interest rates over the last 20-30 years boosting borrowing power, along with a surge in population growth.

Dwelling Construction & Population Growth

For many years we have had a supply issue in this country (thanks to tight development controls and lagging infrastructure). It’s expected that Victoria will be home to about 8 million people by 2050.

And these people will want somewhere to live, surely. Based on these numbers, it may come as a surprise to most people, but we’re just now starting to build enough property to help support our growing population.

Sure, we’re going to see periods of oversupply and periods of under-supply, which in turn will result in periods of price growth and periods of price declines. This is not unusual, the free market has been valuing assets this way for centuries.

Bank Non-Performing Housing Loans

Although non-performing loans are down from their GFC peak, they have kicked up since late 2017. A switch from Interest Only loans to Principle and Interest loans have been driving servicing costs.

They say investors have a three year time horizon.

As human beings we’re wired in such a way that makes it difficult for us to be able to see so far into the future. Take the city of Melbourne for example.

Here’s the evolution of Melbourne city over 130 years, in images, taken from the top end of town – Spring Street:

Here’s Melbourne today:

Between 1% and 3% of a city is demolished and rebuilt each year, such that over almost a lifetime, a city is completely transformed and almost recognizable. Incremental change is so difficult for us to recognize, however over long-periods of time, it’s clear as day.

If for one moment you think our city can no longer be built out, here’s the City of Melbourne’s Development Activity Model. Here’s the city as we know it today:

Let’s add the buildings under construction (yellow):

And those that have been approved (green):

And those that are in application phase (blue):

As investors we need to fight the minute by minute news headlines that try and grab our attention each and every day. Although we are not wired to, we know deep down that true, significant, and sustainable wealth is created over long periods of time – yet we want it all now.

We’re clearly in for another interesting year in property, one with moderate price growth in some locations and virtually no growth in others and falling prices in others.

Australia’s property markets are very fragmented, driven by local factors including jobs growth, population growth, consumer confidence and supply and demand.

Investors need to have a sound strategy and game plan. So when the opportunity presents you know exactly what you need to do, and how to do it. It also ensures you maximise returns and avoid unnecessary market and asset risk. Shooting off the hip is not a strategy.

Our property markets are behaving as they always do – boom, downturn, bust, boom, downturn, bust…

The biggest profits are made during the downturn and bust stage of the cycle – that’s because downturns are only temporary, while the long term increase in the value of good property is permanent.

Take the long-view.

Here’s What Michael Jordan And The Stock Market Have in Common

“Look at the air, look at the hang time, look at the flying motion”

The debate is an ongoing one. Michael Jordan or LeBron James, who is the greatest player that ever lived. For me, it’s Michael – hands down. Sure, I’m biased – I grew up in the 80’s. The shoes, the jersey, the shorts, the posters – I was obsessed with him. Watching highlights of MJ now gives me goosebumps each and every time. His skill, his talent, his style, his accuracy, his precision, that air time would have not only the supporters in the stands up on their feet, but also the game’s commentators.

He was an absolute sniper with that ball in his hands. Leave him open for a split second, and he’ll put that thing away before you even had a chance to work out what happened.

Michael leads the NBA All-Time Points table with an average of 30.12 points per game. Quite impressive. But MJ’s scores per game were no where near his average. With the data that’s available, I have crunched the numbers. I looked at each game Jordan played and took the points he scored during that game. I was able to get my hands on 868 game data (Jordan played 1,072 games). I then calculated how many times Jordan scored 30 points in a game. The number is 35. Michael Jordan scored 30 points per game, 35 times in his career. In other words, 4.03% of the time he scored his average points.

Each blue dot in the chat below represents one game, and the red horizontal line represents an average of 30 points. You can see the range of scores that are well below and well above his average.

Data: www.landofbasketball.com

The Australian stock market has delivered an average annual return of around 13% since 1980. But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting your expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?

The chart below shows calendar year returns for the S&P/ASX 300 Index (Total Return) since 1980. The shaded band marks the historical average of 12.94%, plus or minus 2 percentage points. The S&P/ASX 300 Index had a return within this range in only four of the past 39 calendar years. In most years, the index’s return was outside of the range—often above or below by a wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average returns and being aware of the range of potential outcomes.

Source: DFA

Despite the year-to-year volatility, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. The chart below documents the historical frequency of positive returns over rolling periods of one, five, and 10 years in the Australian market. The data show that, while positive performance is never assured, investors’ odds improve over longer time horizons.

Source: DFA

While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. By thoughtfully considering these and other issues, investors may be better prepared to stay focused on their long-term goals during different market environments.

As you wouldn’t bench Michael when he’s scoring 15 points per game, investors shouldn’t be benching their investment strategy when returns are looking below average. If you’re not playing the game, you’re not scoring the points.

“There’s Michael Jordan and then there is the rest of us.”

— Magic Johnson

Take the long-view. Thanks for the memories Michael.

Your Expectations Versus Reality

I remember learning about tech stocks in my high school economics class. It was the late 90’s, and the internet was a new thing for me (and us). I remember my friends and I would stop by the local computer store after school and book the one computer that was connected to the internet just so we could see what the fuss was all about. Sausage Software was the company that was making all the noise at the time – a Melbourne based company, who I believe, were in fact based in Doncaster (I could be wrong!).

At its peak, just before the dot com crash in April 2000, Sausage shares hit $40, briefly valuing the company at close to $1 billion. A year later the stock had fallen to $1.80.

The company no longer exists.

Here’s a rare interview by Business Sunday of the founder, a 23 year old Steve Outtrim. It’s funny how the tech scene hasn’t really changed since the mid 90’s – kids in crazy t-shirts, baseball caps, roller blading into the office.

You never know what’s around the corner, and how these things will play out. I recently saw these two posts on Twitter, which caught my attention. They are truly interesting facts.

Hindsight is a wonderful thing. And for all the headlines these companies are making, investors would have had to go to hell and back in order to participate in the triumphs of these two extraordinary companies. Sure, it’s all smiles and champagne for Bezos and Hastings, but allow me to shed some light on this journey:

Amazon

  • The stock drops 50% in 1999.
  • In fact, the stock has seen multiple drops of 50%+.
  • Later in 1999, the stock tops US$107 and tumbles to US$7  over 2 years – a 93% decline.
  • It took another 10 years to get back to where it was in 1999.
  • In 2008, the stock fell 60%.
  • In 2015 the stock fell another 25% over the course of 12 months.

Netflix

  • Within 12 month of floating, the stock fell 55%.
  • Through 2005, the stock fell 76%.
  • During 2012, the stock fell 81%.
  • Through 2015/2016, the stock fell another 37%.
  • Most recently the stock fell 35% during 2018.

The point I’m trying to make is that these headlines are written in a way that appear as though the company went from US$1 to US$1,000 just like that. The reality is that most investors would not have been able to handle the volatility that comes with these gains. Human beings are wired in such a way that we fear losses more than we enjoy gains. And because of this, I am confident you would have sold your Amazon and Netflix position after your 55% decline. Or the 60% decline. Or the 81% decline. Or the 93% decline. You get my point (hopefully).

Sausage Software was also worth billions. And just like that, the company is gone and Steve Outtrim is now making headline for different reasons.

I’m not saying Amazon or Netflix are terrible companies, in fact quite the opposite. I think they’re great businesses, which I am a customer of both. I just think that investors need to avoid falling in love with these fantasy headlines – they never happened as easily as they’re made out to seem.

The Boy Who Cried Wolf

A shepherd-boy, who watched a flock of sheep near a village, brought out the villagers three or four times by crying out, “Wolf! Wolf!” and when his neighbors came to help him, laughed at them for their pains.

The stock market reminds me a little of this classic story. Human psychology fascinates me. For all the market’s ups, downs, twists and turns, you would think that investors would have become accustom to the stock market’s cry for wolf. Alas, human beings are not wired to do so.

It wasn’t too long ago that the Aussie stock market was down 10%, and global stock markets down around 20%. The Aussie stock market has recently made a high we haven’t seen since pre GFC.

To celebrate the recent milestone, let’s take a look at what is considered a pullback, a correction, and a bear market. These terms that I am using are basically financial jargon – made up by pundits. Generally speaking, a pullback is a decline of 5%, a correction implies a decline of 10%, and a bear market is a decline of 20%. Now that I have impressed you with my financial terminology, let us continue.

Pullbacks

These happen a couple of times a year – most people don’t even realise.

Corrections

On average, the stock market sees one correction per year. The average length of a correction is 71.6 days. On average stocks decline about 15.60%. Once the decline hits it’s bottom, the market typically takes about 4 months to get back to where it was.

Ben Carlson found that when stocks cross the 10% decline threshold, almost half of the time they don’t fall more than 15%. About 60% of the time, according to Carlson, a decline of 10% doesn’t foreshadow a bear market; 40% of the time it does. Perhaps this explains nervousness among investors about a moderate and normal 10% decline. Since we tend to fear losses more than we like gains, this might account for the anxiety — the expectation that worse is to come.

In fact, between 1980 and 2018, the US stock market has declined about 10% 36 times and 5 of those corrections resulted in longer bear markets. The other 31 transitioned relatively quickly back into bull markets. In other words, in recent history, about 14% of corrections were the start of a prolonged downturn – but most are just blips on the radar.

Bear Market

Now this is something different. Investors find a new level of craziness at this point – perhaps residual post traumatic stress from the GFC. Markets have always recovered from what has been proven to be a temporary bear market – although it never feels like it during the time. We’ve all experienced a bear market in varying degrees. From 1973 where the stock market fell about 57%, to the dot-com bubble where the stock market fell about 88%, to the GFC where the stock market also fell about 57%.

The world economy will continue to rise and fall. Investors will continue to anticipate and respond to global events. I will leave you with the below chart (click for larger image) which illustrates the performance of the US stock market since 1896. It shows the market’s peaks and troughs, a reflection of the US economy’s triumphs and tribulations.

At its simplest, the chart proves once again that over the long term, the stock market always rises because intelligence, creativity, and innovation always trump fear. Yet at the same time, it also underscores the basic mantra that market participants need to stay nimble during times of uncertainty to maximize their returns.

Elections And Investing

With Australia in the middle of another general election campaign and facing the prospect of a change of government, investors may ask what implications the political cycle has for financial markets and for their own portfolios.

Media commentators often say that elections pose significant uncertainty for markets, as investors weigh the prospect of policy change and how that might impact on overall sentiment, the direction of the economy and company earnings.

It is true that in this federal election, the opposing platforms of the incumbent Liberal–National Coalition and opposition Labor Party feature significant differences in tax policy that may impact on individual investors depending on their circumstances.

But it is also true that in terms of macro–economic policy, there is little separating the two major party groupings, who both express a commitment to fiscal responsibility, independent monetary policy, free trade and open markets.

Certainly, if you look at history, there is little sign of a pattern in market returns in election years. Since 1980, there have been 14 federal elections in Australia. In only three of those years (1984, 1987 and 1990), has the local share market posted negative returns. (See Exhibit 1).

This isn’t to imply that federal elections are ‘good’ for shares either. Firstly, this sample size is too small to make any definitive conclusions. And, in any case, it is extremely hard to extract domestic political from other influences on markets.

For instance, 1983, a year in which the Australian market rose nearly 70% and in which Bob Hawke led the Labor Party to a landslide election victory, also coincided with the end of an international recession and the floating of the Australian dollar.

Likewise, the election year of 2010 was one of the poorer years for the local market. But this was also the year of the Euro crisis as worries about Greece defaulting on its debt triggered concerns for fellow Euro Zone members Portugal, Ireland, Italy and Spain.

Neither is there much evidence of a pattern in returns based on which side is in government. Over the near four decades from 1980, there have been four changes of government in Australia—from the Coalition to Labor in 1983, from Labor to the Coalition in 1996, back to Labor in 2007 and to the Coalition in 2013.

During the Hawke/Keating Labor governments of 1983–1996, the Australian market delivered annualised returns of 16.4%, the best of this period. But this wasn’t markedly different than what was delivered by the global equity markets in the same period.

During the 11–year era of the Howard Coalition government from 1996–2007, the annualised return of the local market was 14%. While this was twice the return of the world market in the same period, the latter half of this period included the China–led resource boom. (See Exhibit 2).

Put simply, while Australian general elections are understandably a major media focus, there is little evidence that whoever is in power in Canberra has a significant impact on the overall direction of the local share market. Of course, specific policy measures proposed by an incoming government can impact on individual investors within that jurisdiction, depending on their asset allocation, investment horizon, age, tax bracket and other circumstances.

But these are the sorts of issues that are best explored with a financial advisor who understands your situation and how any tax or other change might influence your position. The bigger point is that markets are influenced by many signals and events—economic indicators, earnings news, technological change, trends in consumption and investment, regulatory and policy developments and geopolitical news, to name a few.

So even if you knew the election outcome ahead of time, how would you know that events elsewhere would not take greater prominence? In any case, if the major policy changes are flagged ahead of the election, markets have already had the opportunity to price them in.

In the meantime, for those concerned about individual tax measures, it is worth reflecting on the benefits of global diversification and moderating your home bias, as this reduces the potential impact of policy changes within your own country.

Contributor: Jim Parker

5 Strategies to Stop Your Kids From Blowing up The Family Wealth

Any fool can make a fortune. It takes a man of brains to hold onto it after it’s made.

– Cornelius “The Commodore” Vanderbilt

We’ve all heard the story of the Vanderbilt family. A US$5 billion (adjusted for inflation – 2017) balance sheet was depleted within 20 years. No Vanderbilt would be among the richest people in America after this time. In fact, when 120 of the Commodore’s descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.

From rice paddies to rice paddies within three generations.

– Japanese proverb

Statistics back up this folklore. Several studies have found that 70% of the time family assets are lost from one generation to the next, and all assets are gone 90% of the time by the third generation.

More often that not, families focus on those who have created with wealth. Seldom is the focus on the potential receivers of the wealth – this is where we need to focus if we want our legacy to continue. Investing your family’s assets and crafting a careful estate plan are critical in ensuring success, however, so too is the preparation of your heirs. A successful inheritance is just as much about parenting as it is about money management.

So what does it take to preserve the millions (or billions)? Here are five ways you can increase the chances of preserving the family fortune and not becoming just another statistic.

Money is not a dirty word

Money is not a popular topic over the family dinner table. Especially if parents are worried that it will spoil their kids. Young people who inherit such wealth, without any preparation, like lottery winners, can be completely derailed.

The uncertainty of whether they’ll outlast the family’s wealth, or the uncertainty of how to deal with the topic generally keeps parents silent. Yet, they’re forever discussing the topic between themselves, speculating a to what they children might or might not want. Whatever the reason for the lack of communication, heirs who are ill-prepared are left to wonder why their parents thought they were incapable of handling the information or couldn’t be trusted. It’s best to drop the ego, and get on with the conversation – discuss the wealth you have and your plans for it.  Get your children involved. Find out what’s important to them and the things they’re passionate about. And don’t forget about how it came to be in the first place, especially if it was created several generations ago.

Embark on a mission

Most people know it subconsciously, yet so many people ignore it consciously. Life is about more than money, and that money is simply a means to an end. Make sure your legacy is about more than just money too. What are your family values? What is your family’s purpose? What is your life truly about? What is your legacy?

Involving the entire family in determining common objectives and deciding how they’ll be accomplished avoids the trap of your children being dictated to, and you dictating to your children. It gives you the opportunity to express your preferences to you children, as well as the opportunity for your children to express theirs to you. It may also ease tension between family members, especially between those running a business for example, and those not involved.

Discuss money at a young age

Even at an early age, children should be taught money skills – having one thing may mean not having another – from budgeting to instant gratification. A common concept is to give your children three piggy banks, one for savings, one for spending, and one for giving. Children need to learn the concept of priorities and decision making. If you haven’t seen The Marshallow Test, it’ a must watch. Standford University ran this experiment, which was performed on young children demonstrating the significance of delayed gratification.

Put on the training wheels

Avoid the mistake of concealing all the family’s wealth in the pursuit of protecting your children and preserving your wealth. You’re probably doing more long-term damage than good.

Help you children invest they’re money. Assist them in researching different investment options. Match their contributions to incentivise their saving. When it comes to giving, ask your children to decide who and what they would like to support. More importantly, ask them to explain why. The onus is on us as parents to educate our children, our schools certainly aren’t doing it.

Assemble a strong team

Over and above your financial adviser, tax adviser, and lawyer, you may want to bring in mentors and coaches for your children (it could also be the same people mentioned above). The advice of an independent person or an outside expert, over and above mum and dad’s opinion, can make a big difference. Although the advice may echo the advice on mum and dad, the impact it has on your children can be remarkably different.

The outside expertise can come in handy when your children are faced with money related decisions. Whether it’s your children’s friends asking them for money, or the never-ending European trips with friends, or that next hot tip investment – one of the surest ways to wither away an inheritance, an independent coach can act as a sounding board and guide.

In the end, you’ll have the best shot at preserving both your wealth, your legacy, and your family with a multi-generational effort that begins when your kids are born, not when you die. Unlike investing, where timing can be critical, there’s no bad time to invest in your family’s legacy.

What’s your plan to preserve your hard-earned wealth?

Source: https://www.kiplinger.com/

Winter is Coming. Avoid These Mistakes.

It was over 150 years ago Admiral Robert FitzRoy took his own life. Today FitzRoy is primarily remembered as the captail of HMS Beagle during Charles Darwin’s famous voyage in the 1830. However, during his lifetime FitzRoy found celebrity not from his time at sea but from his pioneering daily weather predictions, which he called by a new name of his own invention – “forecasts”.

Discovering how seasons worked, and understanding that winter came around once a year, has helped humans thrive for centuries.

Financial markets, not dissimilar to the weather, goes through patterns. And winter, is a harsh season for both. The current bull market has been running for over 10 years now, making it one of the longest in history. As summer doesn’t last forever, neither do bull markets. By understanding how the seasons of financial markets work will give you an enormous edge over the average investor.

The only value of stock forecasters is to make fortune-tellers look good.

– Warren Buffett

Here are 7 facts you need to understand and remember about the stock market.

Fact #1: On average, corrections happen once per year

For more than a century, the market has seen close to one correction (a decline of 10% or more) per year. In other words, corrections are a regular part of financial seasons – and you can expect to see as many corrections as birthdays throughout your life.

The average correction looks something like this:

  • 54 days long
  • 13.5% market decline
  • Occurs once per year

The uncertainty of a correction can prompt people to make big mistakes – but in reality, most corrections are over before you know it. If you hold on tight, it’s likely the storm will pass.

Fact #2: Fewer than 20% of all corrections turn into a bear market

When the stock market starts tumbling, it can be tempting to abandon ship by selling assets and moving into cash. However, doing so could be a big mistake.

You would likely be selling all of your assets at a low, right before the market rebounds!

Why? Fewer than 20% of corrections turn into bear markets. Put another way, 80% of corrections are just short breaks in otherwise intact bull markets – meaning that selling early would make you miss the rest of the upward trend.

Fact #3: Nobody can predict consistently whether the market will rise or fall

The media perpetuates a myth that, if you’re smart enough, you can predict the market’s moves and avoid its downdrafts.

But the reality is: no one can time the market.

During the current nine year bull market, there have been dozens of calls for stock market crashes from even very seasoned investors. None of these calls have come true, and if you’d have listened to these experts, you would have missed the upside.

The best opportunities come in times of maximum pessimism.

– John Templeton

Fact #4: The market has always risen, despite short-term setbacks

Market drops are a very regular occurrence. For example, the S&P 500 – the main index that tracks the U.S. stock market – has fallen on average 14.2% at least one point each year between 1980-2015.

Like winter, these drops are a part of the market’s seasons. Over this same period of time, despite these temporary drops, the market ended up achieving a positive return 27 of 36 years. That’s 75% of the time!

Fact #5: Historically, bear markets have happened every three to five years

In the 115 year span between 1900-2015, there have been 34 bear markets.

But bear markets don’t last. Over that timeframe, they’ve varied in length from 45 days to 694 days, but on average they lasted about a year.

Fact #6: Bear markets become bull markets

Do you remember how fragile the world seemed in 2008 when banks were collapsing and the stock market was in free fall?

When you pictured the future, did it seem dark and dangerous? Or did it seem like the good times were just around the corner and the party was about to begin?

The fact is, once a bear market ends, the following 12 months can see crucial market gains.

Fact #7: The greatest danger is being out of the market

From 1996 through 2015, the S&P 500 returned an average of 8.2% a year.

But if you missed out on the top 10 trading days during that period, your returns dwindled to just 4.5% a year.

It gets worse! If you missed out on the top 20 trading days, your returns were just 2.1%.

And if you missed out on the top 30 trading days? Your returns vanished into thin air, falling all the way to zero!

You can’t win by sitting on the bench. You have to be in the game. To put it another way, fear isn’t rewarded. Courage is.

– Tony Robbins

Source: Visual Capitalist, Tony Robbins, Peter Mallouk, S&P

How You, The Amateur, Can Beat The Pros

My family and I spent the Easter weekend over in Ballarat. Our kids had never been to Sovereign Hill. We ate boiled lollies, freshly baked tarts, and panned for gold. What a time consuming exercise gold panning is, but oh, how much fun it was. The amount of time, energy, and patience that is required is enormous. And even if you endure the process, the reward, a speckle. After spending almost 2 hours entertaining myself, here’s what I walked away with. I was assured the gold I had discovered was worth more than the $1 bottle I bought to put it in.

It’s been one month since the AFR reported It’s the end of an era in Australian funds management. Funds management is a tough gig, especially in this day and age as technology and fee pressure adds fuel to the fire. Professional investors are not all they’re made out to be – unlike professional sports. Consider this. You’re an avid boxing fan. You’ve got all the top gear, gloves and all. Would you jump in the ring with Mike Tyson?

Charles Ellis (founder Greenwich Associates) said, “Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

Playing their game on their terms will leave you and your portfolio for dead. There are however, a number of advantages amateur investors have over the pros. Here are my top 5:

Benchmarks: As a pro, you are measured against a benchmark day by day, second by second. Arbitrary or not, that’s that game. Rather than applying a considered long-term philosophy, short term comparison of benchmarks will eventually take hold. As an amateur, you have no benchmarks to compare yourself to each week, quarter, or year. You can feast on all the free market have to offer over the long-term.

Short-termism: As an amateur investor, you don’t have to trade as frequently as the pros. With all the twists and turns in the stock market these days, you can avoid making sticking plaster decisions by not reacting to all the noise and remain focused on the long game.

Doing nothing: With every zig and zag of the market, the pros needs to act. It’s difficult to justify fees and demonstrate expertise by doing nothing. So, they do more. As an amateur investor, you probably sat idle for that last 20% correction. Am I wrong? The pros, pulling their hair out for either missing the decline or not positioning themselves to participate in the recovery. Jack Bogle once said, “Don’t do something, just stand there.”

Fees: You can keep yours low. The pros cannot. Staff, conferences, flights around the world, expensive offices, legal and compliance departments are only just the beginning for these guys and gals. As an amateur, you have access to the US stock market for just 0.04%. The average pro charges 1.09% – that’s a 2,725% increase on what the amateur has access to.

Forecasts: You don’t need to make them. The pro’s do. And then they trade on it – despite there being ample evidence that they have any capability in this area. And I get it. Acknowledging that markets are very unpredictable in the short-term and responding with, “I don’t know” to questions that are asked of you, is not the way you climb the industry ladder. I guess it’s better to have a sophisticated point of view and be wrong.

Like panning for gold, stock picking is a damn hard game to play. Sure, it’s entertaining for those panning, but when the spectators (investors) have been waiting this entire time, and all you can produce is a speckle of gold (if that), and the speckle (return) is not worth more than the bottle of water (fees) you bought, which is more often the case, they’ll spit in your face and leave you for the dogs.