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

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

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

A Text From a Real Estate Agent – Here’s What it Said

Each Saturday afternoon between 2:30 and 3:30 pm, I receive a text message from a real estate agent who provides his distribution list with an update of how the day went. Last Saturday, his tune completely changed, which intrigued me. Here’s the text:

I commend him for his honesty – well done. And it’s true. Clearance rates have been falling sharply since mid 2017 (see below chart).

Source: AMP

Clearance rates have dropped from a solid 80% to about ~46% (final) in Sydney, and ~49% (final) in Melbourne. The last time we saw these levels were back during the GFC and 2012 (when interest rates were first cut).

Here’s what the auction market looked like last week:

Source: Core Logic

Allow me to give you insight as to the implications (at least historically) of falling clearance rates. They’re a leading indicator for house prices by about 5 months (see chart below). As auction clearance rates fall, we see property prices fall in the following months.

Source: JP Morgan

Not only are clearance rates a leading indicator, so too are housing finance commitments (loans). These have also been falling (see chart below). Loan commitments are a leading indicator by about the same time as clearance rates – 6 months.

Source: JP Morgan

As the regulators and banks tighten lending standards, as we continue to see a rise in the supply of dwellings, as affordability is still an issue given low wage growth, and with the constant drumming of political and policy uncertainty (negative gearing and CGT discount), we can expect further weakness ahead.

As I began to write this note, I found out that 60 Minutes was airing ‘Bricks and Slaughter’ at 8:30 pm (click here for the ‘Part One’ episode).

The episode was basically calling for a housing crash. Martin North of Digital Finance Analytics predicts a housing crash of 40%-45% within the next 12 months, and we hear Louis Christopher of SQM Research echoing Mr North’s call.

Follow these gentlemen on Twitter and you will see a slightly different point of view:


Well done 60 Minutes in fear-mongering the Australian public.

To this day, we continue to hear comparisons being made to the US property bubble. What most people don’t understand is that the “housing market” is made up many other smaller ‘markets’. To illustrate this point, take a look at the table below. It shows the top 10 US cities’ boom from 1996-2006, crash from 2006-2011, and so on.

Take a look at New York, up 173% during the boom, and down 24.45% during the bust. Dallas was down 7.53%, and Boston down 16.38%. The interesting thing about all of this is that the city with this largest gain (LA) was not the city with the largest fall – it was Phoenix, down almost 55%! On average, the US housing market fell 33%.

One fact that I don’t believe gets enough showtime is the oversupply of dwellings in the US pre GFC. Leading up to the GFC, the US had overbuild close to 6,000,000 units of housing. As of the beginning of 2018, the US is sitting close to 2,000,000 units short (see below chart).

In Australia, we have a very different story (see below chart). For many years, we have never truly caught up to the demand for dwellings. Having said this though, we are getting to a point where we are now seeing good supply hit the market.

Source: NAB

The Australian, specifically Melbourne and Sydney property market has been running hot for a number of years now. We will see a collapse in prices – timing and magnitude, no one truly knows. However all indicators are pointing to a slow down and natural correction.

The fundamentals for property in this country remain strong, yet the sentiment remains weak. The market will present buying opportunities for those that are patient, disciplined, have a game plan and are cashed up. As foolish as one may feel for holding funds in low returning cash and term deposits, the tide will turn, and you too will have your opportunity.

A Bear Market is Just Around The Corner (or is it?)

You’d be totally forgiven for thinking no more of what a bad economy and market looks and feels like. I mean, how could you not?

Consumer confidence is the highest it’s been for a number of years, and well ahead of GFC lows:

Australia Consumer Confidence

We’re spending more:

Australia Consumer Spending

We’re saving less:

Australia Household Saving Ratio

We’re earning more money since the GFC:

Australia Average Weekly Wages

And of course, the stock market…say no more:

World stock markets continue to make all time highs. The current bull market (as defined as a 20%+ increase in the market) has lasted 3,255 days, which in fact is the second longest on record behind the 4,494 day bull market that ran from late 1987 through to the early 2000. The market climbed 13 years without a single decline of 20% or more.

If this bull market was going to topple the record of the 1987 bull market, we’d see our stock market continue to climb until the 19th of June 2021. Hard to imagine right? It’s not as if it hasn’t happened before!

Here’s a chart of both bull and bear markets since 1926. It shows the number of days both bull and bear markets have lasted. A couple of things to note: 1) Bull markets last longer than bear markets (I mean, a lot longer!) – the average bull market has lasted 981 days, and the average bear market has lasted 296 days, and 2) Bull/bear market cycles have been lasting longer since WW2.

Source: BIG

Let’s dig a little deeper into the post WW2 period. The chart below shows all the bull (in green) and bear (in red) markets, when they started, ended, the percentage change, and number of days they lasted. The average bull market was up 152.4% and lasted 1,651 days, with the average bear market falling 31.8% and lasting 362 days.

Source: BIG

Meanwhile, pundits have been calling for the mark top since 2012. I want you to read these comments, seriously, read them. And next time you hear or see another attention grabbing headline about the market, I want you to recall this post. Here’s a summary of the commentary since (click for larger image):

Market All Time Highs (ATH) doesn’t necessarily mean the market will crash. Here are the number of ATHs each year since 1929. The year 1995 set the record with 77 ATHs, 1964 recording 65, and 2017 notching up 62. The year 2017 is sitting in third place with the number of ATHs in any given year. Presently, the year 2018 is in 27th place, with four months to go in the year – anything could happen.

No one knows how long this market will continue to run hot. No one knows when the market will collapse either.

What you can and should do however, is design your portfolio as if the market will collapse tomorrow. Because someday, maybe sooner rather than later, the market will collapse tomorrow. And you will exhibit precisely the same behaviour as you did in 2008. You will have forgotten how you behaved, however you will remember exactly how it felt. Your human mind will switch to ‘fight-or-flight’ mode, and you will either destroy a lifetime of savings, or you could create a lifetime of savings – the choice is yours.

As long as the music keeps playing, we’ll all continue to dance, until it stops.

Property Prices Doubling Every 10 Years is a Myth, Here’s Why

There’s an old saying in Australia, property prices double every 10 years.

How true is this old saying? I was recently presenting financial analysis we had undertaken for a property portfolio. As we presented our findings, our assumed rates of return were questioned – why would you use such a low rate of return – historically property prices have double every 10 years?

Let’s jump down this rabbit hole.

We Aussie’s have an obsession over property. I get it, I love my property too and have also been lucky enough to be a beneficiary of this market. I will however be the first person to admit that it was through no skill whatsoever, nor did I anticipate to what extent this market would rise when I initially invested in property. My decisions are driven with specific objectives – a roof over my family’s head, investment properties in specific locations for income and future development potential to help my kids in the future, a beach house to get away from the hustle and bustle and spend time with my family. What I do with any of my properties are unlikely to be be influenced by what the market is doing, nor by what the market believes my property is worth. In fact I couldn’t care less.

Yet so many people have the equation so wrong – speculating on the price of land on the basis that property doubles every 10 years. Allow me to let you in on a little secret – the concept of property values doubling every 10 years is completely misleading. Don’t believe me? I’ve crunched the numbers, and here’s what I think.

I’ve summarised the return of the Melbourne property market for every decade beginning 1980 in the table below (median price). For example, for ten years ending 1990, the growth in the median price of Melbourne property was 237.93% – ridiculous, right!?

Table 1: Nominal 10 Year Return

Source: REIA, Core Logic

Based on the above table, I can understand why you may have been told (and believed) that property prices double every ten years – both the average and median percentage return for price rises have been over 100% since 1980.

Let’s take a look at what happens when you take into account inflation. The table below is the same as above, and I have calculated the Real Rate of Return in the third column. Take a look at the example we looked at earlier. The nominal (before inflation) return from 1980 to 1990 was 237%. When you take into account inflation, or the real return for the same period, was 55.06%. Although this is still a solid return, its certainly a far cry from 237%.

Table 2: Nominal & Real 10 Year Return

Source: REIA, Core Logic

Once you take inflation into account, the average and median ten year real return is 50.24% and 44.14% respectively.

Even though in Table 1 the average and median price rises are in excess of 100%, prices only increased more than 100%, 55% of the time – 45% of the time, prices did not double. Once you take inflation into account, since 1980, Melbourne median property prices have not double. Ever. During the decade ending 2005 they came close, returning 92.58%.

Now that we have established that real property prices don’t double every ten years (although my guess is that there will still be those who don’t believe me, and if this is you, reach out to me – we can chat further), I decided to analyse Melbourne’s rolling ten year real returns per annum. In other words, what was the real rate of return each year for every decade since 1940. For example, let’s say you purchased a Melbourne property in 1940 and held it for ten years, your actual real rate of return was about 9% pa. If you held property for ten years ending 1960, your annual return was a bit over 10% pa. If you held property for ten years ending 1987, your annual real return was 0% – yes, property can not grow in real terms.

The average annual real (after inflation) return for those holding property for ten years was about 4% pa since 1940 (ending 1950).

Here’s the chart. The blue line represents the return, the green dotted line is that average annual return, and the red dotted lines represent +/-1 and +/-2 standard deviation from the average.

Table 3 – Real Melbourne 10 year Rolling Growth (pa)

Source: Stapledon, ABS

What we can also see from the above chart, is that property goes through cycles – who would have thought!? Periods of high growth are followed by periods of low growth, and periods of low growth are followed by periods of high growth.

Where does this leave housing as an investment?

This is probably one of my favourite charts. It’s put together by Shane Oliver of AMP Capital and compares the long-term return of Australian residential property, Australian shares, Australian bonds, and Australian cash.

Source: AMP Capital

Since 1926 residential property has provided investors with a similar return to Australian shares – 11.1% pa to 11.5% pa.

As you can see from the above chart is that although Australian shares have performed slightly better, they have come with higher volatility. They are more liquid and easier to diversify, whereas property has been less volatile (partly because it’s not valued every single second of the day – unlike the share market), it is less liquid and harder to diversify.

Both shares and property have rewarded long term investors. In fact, shares and property tend to have low correlations with each other, meaning they typically don’t go up and down at the same time and at the same magnitude. Therefore, from a diversification point of view, there is a very strong case to hold both in your portfolio for the long-term.

I guess anyone can fudge the numbers to support whatever narrative they’re peddling. At the end of the day, the facts are the facts. You deserve to know the truth, it helps you manage your own expectations and make better investment decisions. Just because property prices haven’t doubled every ten years, doesn’t mean they won’t.

Godspeed.