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.

The Hayne Royal Commission Could be Taking Things too Far. Here’s Why.

When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear.

– Thomas Sowell

As the royal commission on financial advice continues to crucify the banks and their executive teams, I’ve been watching with great interest and can’t argue with the revelations to date. Late last week I came across this article, which irritated me a little to say the least.

Source: AFR

As grandfathered commissions are all but dead – and I would argue they should never have been grandfathered to begin with, the Hayne royal commission seems to now be moving its shiny bazooka toward ongoing fees charged by financial advisers.

The financial industry has evolved from not charging clients anything at all and being remunerated via product commissions, to percentage of assets under management (AUM), to no commissions whatsoever and simply charging their clients a flat dollar monthly/annual retainer (with some charging a combination of percentage of AUM and flat dollar).

At my firm we charge a flat dollar monthly retainer as we think it removes most if not all conflicts of interest. It means we remain outcome focused rather than product focused. It also removes the vested interest to gather as much ‘AUM as we can. We’re free to advise clients across all asset classes instead of guiding them toward assets we would otherwise control/manage (and charge a fee on).

The commission is exploring the idea of overhauling ongoing advice fees, so financial advisers, like accountants and lawyers, must provide the service before they can invoice their customers.

When NAB chief executive Andrew Thorburn tried to defend ongoing fees as a “transparent upfront fee” of $12,000 a year that is paid $1,000 monthly, Mr Hodge challenged the need for such expensive financial advice.

“How many Australians do you think really need to be paying a thousand dollars a month for financial advice?”

Here’s the transcript:

Source: AFR

Mr Hodge, my neighbour thinks paying $13.99 per month to Netflix for unlimited streaming of movies, documentaries, and shows from all around the world is expensive and unnecessary. He also thinks paying Spotify $9.99 per month for unlimited streaming of music from all around the world is expensive and unnecessary. In fact, he even thinks paying $100 per month for a gym membership that will help him get back into shape is expensive and unnecessary. You see Mr Hodge, regardless of the cost of a service, the customer or client must see value in the service. There’s an old saying, “price is an issue in the absence of value”. This also applies to financial advice.

Charging a fee for service via a retainer promotes engagement, it encourages dialogue, and it incentivises clients to pick up the phone and ask questions without the fear of being invoiced and charged for a phone call (or meeting). It’s the basis of a true partnership.

What’s interesting to me is the number of accounting firms we speak with who are moving to the financial advisers’ fee model – a monthly retainer. The concept of charging clients after the work is done is great for one off transactions, and if that’s the business you’re in – good for you. This, however, is not the business we’re in. We’re in the business of ongoing advice, ongoing oversight, ongoing discussions, ongoing dialogue, ongoing debate. Our clients’ financial lives are not a one-off transaction Mr Hodge. Global financial markets, economics conditions, and the ever changing legal landscape are not a one-off transaction.

Mr Hodge, more Australian’s need to and should be paying $1,000 per month (if not more) to a good quality financial adviser. To help them make good decisions with their money. To help them avoid speculation and grow their wealth the slow way. To help them avoid buying and selling at the wrong time and chasing investment returns.  To act as their sounding board when they are faced with options and confusion. To help guide them toward their financial goals. And to save them time, energy, and anxiety with managing their money and financial affairs.

Show me the incentive and I’ll show you the behaviour.

– Charlie Munger

Finally, some of the responsibility needs to fall on the consumer. If you are engaging a professional to help you with your financial matters, and you are paying them a fee to do so, yet you are not receiving a service, it’s up to you to call it out. Here are 16 questions you need to ask your financial adviser.

Despite all the negative press aimed at financial advisers, it’s not that hard to find a good quality, ethical adviser. Here are just a few of them:

Chronos Private

Marasea Partners

Your Family CFO

Rasiah Private Wealth

ICG Financial Planning

There are many of us that pride ourselves on our ethics, transparency, drive, and our purpose. And we won’t allow uneducated and misinformed points of view dictate the great work we do for our clients.

Next time I turn on Netflix or Spotify, and I’m not receiving the service I am paying for, I will not be waiting for a royal commission on the cloud streaming industry, as a consumer I will be on the phone to find out what’s going on. You need to do this same. You deserve better.

Visualising The Damage on The Stock Market

Bed goes up, bed goes down, bed goes up, bed goes down.

– Homer Simpson

Since the GFC stocks have been the perfect place to hide. In fact, there has been no safer bet with stock markets around the world trading at multiples of their GFC lows. Here’s how major stock markets around the world performed (total return) since the bottom of the GFC:

(orange line – Australia, purple line – Asia, green line – Europe, blue line – US, red – Emerging Markets)

Only when the tide goes out do you discover who’s been swimming naked.

– Warren Buffett

Financial markets however, have no regard for what you want or what you need, and will turn on you like the Melbourne weather leaving you perplexed as to which season it is.

The recent spasm of news coverage on the stock market correction prompted me to assess the damage done on stocks. For the last two months, these were the headlines investors have been reading – how exciting!

I’m not sure who defined a market correction being a decline of 10% or more, but it’s the widely accepted definition. What good is it for investors to know that the correction has begun based on some meaningless threshold someone fabricated? Why is the threshold not 12%, or 15%? Why should a manufactured definition trigger investors to revisit their investment strategy? To me, this threshold seems illogical, and to base investment decisions on these definitions seems foolish.

Let’s take a look at what all the fuss is about. Here’s a chart showing the total return of the above indices since 8 October (when the decline began) to Friday, 23 November 2018:

Within two months, the US stock market is down 10.69%, Europe is down 9.05%, Asia down 7.97%, Australia down 5.92%, and Emerging Markets down 5.25%. Having said this, if we were to look at peak to trough using 52 week highs, the chart above would look different again. In fact, Emerging Markets would look a lot worse if we pulled the start date back to earlier on in the year. It doesn’t matter where you were invested your money, there really was nowhere to hide.

If you think that’s bad, just spare a moment for the tech investors. Here are the FAANGs (Facebook, Apple, Amazon, Netflix, Google) against the S&P500 (orange line) and Nasdaq (grey line):

(purple line – Facebook, green line – Amazon, blue line – Apple, yellow line – Google)

Hey, what do you expect after a run up like this:

Netflix’s market cap is currently sitting at US$112 billion. To put that into perspective, Citigroup is currently valued at US$150 billion. Number of employees at each company: Citigroup – 209,000, Netflix – 5,400. Revenue (2018 est): Citigroup – US$216,000,000, Netflix – US$16 billion. Net income (2018 est): Citigroup – US$18 billion, Netflix US$671 million.

Markets can remain irrational for a lot longer than you and I can remain solvent.

– John Maynard Keynes

Most money managers will highlight and emphasize performance for a select period of time (I’ll let you decide why), so it’s very useful to me (and investors) to look at things through a wider lens. So here it goes – the recent market declines since the GFC for stock markets around the world:

It comes as no surprise that the asset class that has performed the best over the last 10 years is the one that has fallen the most when things are seem a little uncertain.

Even following a market “correction”, the US stock market is still up 265%, the Australian market up 144%, and Asia, Europe, and Emerging Markets up 123%, 80%, and 59% respectively.

There are several narratives that are making headlines justifying the recent market decline. The general theme goes something like this: This bull market has been running hot for almost 10 years. Interest rates are rising, and cost pressures are rising, which will cause inflation. Whatever narrative you decide makes most sense to you, the reality is that the news that is floating around is not new and is probably priced into current market valuations anyway.

At the end of the day, the more you pay for an asset, the less the future expected return. The less you pay for an asset, the greater the future expected return. In life, and in financial markets, things sometimes just don’t make any sense – although they eventually do. Don’t try and keep up with the Jones’ or get caught up in the market and media hype – it takes guts, discipline, patience and time to make money.

When you decide to embark on the journey of investing, remember the wise words of Homer Simpson – bed goes up, bed goes down.

Source:

  • Charts and headlines – Thomson Reuters
  • Returns are denominated in AUD for all charts except the FAANGs

31 Reasons Why You Need A Financial Adviser

Someone once asked me that if I was any good as a financial adviser, why was I working as one and not simply making my money by managing my own investments? I thought to myself, that’s an interesting yet naive question.

So I decided to list 31 things good financial advisers will do for their clients, and why you need one. Here it goes:

  1. Takes as much time as necessary to genuinely understand where you are now, where you want to go, what help you need/want, and most most importantly, why.
  2. Helps define your goals, aspirations, desires, and fears.
  3. Understands what ‘truly wealthy’ means to you (because money is simply a means to an end).
  4. Thoroughly reviews your current position, then studies and analyses multiple scenarios/strategies to help enhance your current and future position.
  5. Will create an initial plan, which is simply a starting point, and make adjustments along the way to help support your goals.
  6. Helps makes wise choices about cash flow, management of debt, education funding, tax efficiency, personal insurance, estate planning, and investments.
  7. Puts in place strategy and structure to help achieve your future goals.
  8. Will explore all asset classes to help achieve your goals.
  9. Not only manages investments, but also manages investors.
  10. Helps you decide how, where, and when to invest.
  11. Helps match your balance sheet to your life.
  12. Will measure your performance not to an index, rather, to your personal goals.
  13. Helps you make better decisions with your money in the face of uncertainty and fear.
  14. Arms you with information to help you make better decisions.
  15. Helps reduce the uncertainty and anxiety that comes from making important financial decisions with your money.
  16. Stays on top of economic, market, and legislative changes so you don’t have to.
  17. Proactively keeps in touch with you.
  18. Liaises with your other professionals, and co-ordinates your banking, personal insurance, and estate planning with specialists.
  19. Gives you back time so that you can spend it on more important things in your life.
  20. Advises on the optimal mix of investments for you so that you can maximise your rate of return for a given level of risk.
  21. Monitors and oversees your investments.
  22. Maintains financial records on your behalf, such as tax reports, cost basis information, wills, and legal documents (basically your financial life).
  23. Acts as your sounding board.
  24. Is the ‘middleman’ between you and stupid.
  25. Provides as unemotional and unbiased point of view.
  26. Has your back.
  27. Is honest with you – they’ll tell you what you need to hear, not what you want to hear.
  28. Introduces you to the right people.
  29. Helps consolidate and streamline your affairs.
  30. Shares experiences of many other clients who have faced or are facing circumstances similar to yours.
  31. Get’s shit done (because you probably won’t).

It’s always simpler to do nothing. Chasing something you want is hard work – I guess that’s why not everyone gets what they want in the end. Personal finances are easy, right? Wrong. On our own, most of us lack clarity and objectivity, we get stuck in our own heads, we make emotional and careless decisions. We’re most likely busy doing other things in our lives, and we don’t have the information, resources, or time to sit down and dedicate thought, energy, and focus that personal finances take to make great decisions over the long-term.

Engaging an experienced and professional adviser to help you create your own personal financial blue print and game plan will help you understand your current position – your status quo, and more importantly what you need to do to get to where you want to go.

Asking others who are strong in areas where you are weak to help you is a great skill that you should develop no matter what, as it will help you develop guardrails that will prevent you from doing what you shouldn’t be doing.

– Ray Dalio

I’m curious. If money is the vehicle, what’s the destination?

The 6 Biggest Mistakes You Will Make as an Investor

Most of us want to achieve success, whether that may be at work, in our relationships, or our health. In the pursuit of success, we all experience moments of self-loathing and frustration that stems from nowhere other than from our own hands – we are, our own worst enemies. Success in personal finance is no exception.

Have you ever wondered, what is the biggest risk to achieving your financial goals? Is it geopolitics, inflation, the rise of crypto-currency, a property bubble? No. It’s your own mind.

You can invest is all the right things, minimise all your fees and taxes, and diversify most risks away, but if you fail to master your own psychology, it is still possible to fall victim of financial self-sabotage.

Our brain’s natural instincts, to avoid pain and seek pleasure, may be very useful to Fred Flintstone, but can be very harmful when making financial decisions. So how do investors overcome these biases? The concept is simple, yet will test even the most seasoned of investors.

Our ideas are so simple that people keep asking us for mysteries when all we have are the most elementary ideas. – Charlie Munger

Put in place a system, rules, and a set of procedures that will protect you from yourself.

Mistake #1 – Seeking confirmation of your own beliefs

Our brains are wired to seek and believe information that validates our own existing beliefs. We love proving to ourselves how smart and right we are.

The solution

Ask questions and actively seek the opinions of well respected people that disagree with your own.

The power of thoughtful disagreement is a great thing – Ray Dalio

Mistake #2 – Extrapolating recent events

One of the most common and most dangerous, recency bias – to believe the current market trend will continue into the future. Investors end up buying more of something that has recently increased in price, ultimately paying more for the investment.

The solution

The best way to avoid this impulse of buying high (aka FOMO), rebalance your portfolio. You effectively sell assets at higher prices and buying assets at lower prices – when one investment performs well, you sell some of it, and top up the investment that hasn’t done so well.

Mistake #3 – Overconfidence

Ask a room full of people to raise their hands if they are a better than average driver, and you’ll have 93% of the room raise their hand. As human beings we overestimate our own knowledge and abilities, which can lead to disastrous financial outcomes.

The solution

By admitting you don’t have an edge, you’ll end up with an edge..

If you can’t predict the future, the most important thing is to admit it. It its true that you can’t make forecasts and yet you try anyway, then that’s really suicide. – Howard Marks

Mistake #4 – Swinging for the fences

As tempting as it is to go for the big winners to fast track your financial wealth, the more likely you are to be bowled out, which also means it’s going to take you even longer to get back on track.

The solution

The best way to win the game of investing, is to achieve sustainable long-term returns that compound over time. Short-term noise is simply a distraction from Wall Street.

The stock market is a device for transferring money from the impatient to to the patient. – Warren Buffett

Mistake #5 – Home bias

We have a tendency to invest in markets we are most familiar with creating a ‘home bias’. For example, we invest in the stock market of the country we live in, we invest in the stock of our employer, or we invest in the industry we work in. This bias leaves us overweight in “what we know”, which can destroy our hard earned wealth in some circumstances.

The solution

Diversify across asset classes, regions, and industries. From January 2010 to October 2018, Australian shares returned 7.50% pa. International shares returned 12% pa, and US shares returned 16% pa.

Mistake #6 – Negativity

Our brains are wired to bombard us with memories of negative experiences. The amygdala – the fight of flight system in our brain, floods our bodies with fear signals when we are losing money. Think GFC – markets were plunging, investors panicked, selling down their investments to cash. The US market has tripled n value since the GFC, making up all the losses plus more.

The solution

1) Be clear on why you made a certain investment.

2) Invest today for the long-term but assume the market will collapse tomorrow.

3) Partner with the right financial adviser to act as your sounding board.

By failing to prepare, you prepare for fail. – Benjamin Franklin

These aren’t guarantees that you will be successful during your investing journey, but it will damn sure put the odds in your favor.

Godspeed.

Source: Visual Capitalist, Wikipedia, Vanguard

You’re Being Fooled Into Overpaying For Underperformance – Here’s How

When people ask me what I do, I tell them I’m in the business of helping people make money. The business we’re really in though, is helping improve the lives of our clients. It comes from the belief that life is about more than money. I believe money is an enabler – it provides us with options, choice, and flexibility. So if we can help our clients preserve and build their financial wealth, we can help them live a more meaningful and fulfilled life – a life that is truly rich.

Sadly, most people never achieve a life that is truly meaningful and fulfilling – true wealth. Why? Because they’re focused on the scoreboard, and not the process. They’re focused on chasing the money.

Enter the world of investments, stock brokers, financial advisers, fund managers, and high flying financial institutions. If you’re not careful, you might be sailing toward financial freedom with a hole in the bottom of your boat. That hole, is in fact lining the pockets of those purporting to be helping you sail toward the sunset.

When was the last time you looked at your superannuation or investment portfolio statement? Your portfolio has probably grown, especially over the last ten years, so you haven’t taken too much notice. The real question is, how much have you left on the table?

Australians have around $2 trillion sitting in superannuation, which has attracted fund managers like bees around a honey pot. And Australian are paying some of the highest fees for the management and oversight of this money. In fact, last year, Australian’s paid $31 billion in superannuation fees – totaling around $230 billion in the last decade.

So what can you do about it? Here are three things to consider:

1. Fund Fees

When it comes to truly understanding the cost of your investments, it’s hard enough for the professionals to do, let alone the general public. There are many hidden costs that lie beneath the surface – here they are (average):

1. Expense ratio – 0.90% pa

This covers marketing and distribution cost, as well as the management of the portfolio. Typically, this is the only fee investors are aware of.

2. Transaction costs – 1.44% pa

Typically investment managers buy and sell frequently. And with these transactions comes transaction fees. There are three types of transaction costs: 1) brokerage, 2) market impact, and 3) spread.

3. Cash drag – 0.83% pa

This is the portion of your portfolio that is invested in cash. It hurts your return over the long-term because of the missed opportunities in the market.

5. Taxes – 1.00% pa

When you by into a fund, sometimes you’re being taxed for other investors’ gains.

The total of these fees can be as high as 4.17% pa. Although on face value these fees don’t seem high at all, when you compound these costs over long periods of time, it will blow your mind. The above list didn’t even include performance fees!

Here’s what happens when you invest $100,000 into the market with a 7% pa return. The compounding value over 50 years is almost $3,000,000! Let’s start deducting some fees from this return – here’s what you’re left with when you take 1% and 2% in fees:

Even a small number like 2%, compounded over a long period of time, can lead to financial ruin. Jack Bogle, the founder of Vanguard once said:

You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return!

2. Chasing Performance

Forget fees. Just invest in the top performing funds, or sell before the market falls and buy before the market rises (market timing). Easier said that done.

A) Chasing the top performers

Over the last 15 years, almost 80% of all Australian fund managers have failed to beat the broad Australian share index. And after 15 years, only 56% of Australian find managers survived.

Over the last 15 years, almost 90% of all international fund managers failed to beat the broad international share index. And after 15 years, only 46% of international fund managers survived.

B) Timing the market

Researchers Richard Bauer and Julie Dahlquist examined more than a million market-timing sequences from 1926 to 1999. Their research concluded that by just holding the broad market index outperformed more than 80% of market-timing strategies.

Clearly, neither of these strategies put the odds firmly in your favour. In fact, they’re akin to gambling more than anything. Making money in the markets is tough. So if you can’t beat the market by hiring the best, what to the the real experts recommend you do?

3. The Advice

Making money in the markets is tough. The brilliant trader and investor Bernard Baruch put it well when he said:

If you are ready to give up everything else and study the whole industry and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy – if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.

Jack Bogle says understand that what appears to be success in financial markets could just be dumb luck:

If you pack 1,024 gorillas in a gymnasium and teach them each to flip a coin, one of them will flip heads ten times in a row. Most would call that luck, but when it happens in the fund business, we call him a genius!

Warren Buffett wrote this in his 2013 letter to Berkshire Hathaway shareholders:

My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers

He even made a bet in 2008 and put his money where his mouth was. You can read my note about it here.

It’s super important to know that not all costs are bad. The right financial adviser can help you make better decisions over the long-term to save you money. Vanguard recently published a study to help quantify the value of a good adviser.

1. Suitable asset allocation – 0.75% pa

2. Cost effective implementation – 0.70% pa

3. Rebalancing portfolio – 0.37% pa

4. Behavioural coaching – 1.50% pa

Total – 3.32% pa of value added

This does not include any other benefits or value of a good financial adviser, such as strategic and structural advice. Compound that and see what your portfolio looks like.

Next time you pick up your investment portfolio statement, think twice about what you’re doing. Are you 100% sure the financial odds are firmly in your favour? Fees are the silent killer in your portfolio, and only a handful of funds beat the market consistently and over the long-term, and much of this can be attributed to randomness.

Being in the market, while minimising costs, can empower you to getting the real financial freedom you deserve.

Source: Forbes – The real cost of owning a mutual fund 2011, Visual Capitalist, Vanguard, SPIVA, Berkshire Hathaway Shareholder Letter 2013