25 Things You Probably Know & Don’t Know About Investing

If you are ready to give up everything else and study the whole history 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.

– Bernard Baruch

Making money in the modern market is tough. As investors, there are so many things we think we know, yet very few spend time thinking about the things they don’t know. Jim O’Shaughnessy, founder, Chairman, and CIO of O’Shaughnessy Asset Management recently shared what he thinks he knows and doesn’t know about the financial markets. I think investors should take note. Here they are:

  1. I don’t know how the market will perform this year. I don’t know how the market will perform next year. I don’t know if stocks will be higher or lower in five years. Indeed, even though the probabilities favor a positive outcome, I don’t know if stocks will be higher in 10 yrs.
  2. I DO know that, according to Forbes, “since 1945…there have been 77 market drops between 5% and 10%…and 27 corrections between 10% and 20%” I know that market corrections are a feature, not a bug, required to get good long-term performance.
  3. I do know that during these corrections, there will be a host of “experts” on business TV, blogs, magazines, podcasts and radio warning investors that THIS is the big one. That stocks are heading dramatically lower, and that they should get out now, while they still can.
  4. I know that given the way we are constructed, many investors will react emotionally and heed these warnings and sell their holdings, saying they will “wait until the smoke clears” before they return to the market.
  5. I know that over time, most of these investors will not return to the market until well after the bottom, usually when stocks have already dramatically increased in value.
  6. I think I know that, at least for U.S. investors, no matter how much stocks drop, they will always come back and make new highs. That’s been the story in America since the late 1700s.
  7. I think I know that this cycle will repeat itself, with variations, for the rest of my life, and probably for my children’s and grandchildren’s lives as well.
  8. Massive amounts of data have documented that while the world is very chaotic, the way humans respond to things is fairly predictable.
  9. I don’t know if some incredible jump in evolution or intervention based upon new discoveries will change human nature but would gladly make a long-term bet that such a thing will not happen.
  10. I don’t know what exciting new industries and companies will capture investor’s attention over the next 20 years, but I think I know that investors will get very excited by them and price them to perfection.
  11. I do know that perfection is a very high hurdle that most of these innovative companies will be unable to achieve.
  12. I think I know that they will suffer the same fate as the most exciting and innovative companies of the past and that most will crash and burn.
  13. I infer this because “about 3,000 automobile companies have existed in the United States”, and that of the remaining 3, one was bailed out, one was bought out and only one is still chugging along on its own.
  14. I know that, as a professional investor, if my goal is to do better than the market, my investment portfolio must look very different than the market. I know that, in the short-term, the odds are against me but I think I know that in the long-term, they are in my favor.
  15. I do know that by staking my claim on portfolios that are very different than the market, I have, and will continue to have, far higher career risk than other professionals, especially those with a low tracking error target.
  16. I know that I can not tell you which individual stocks I’m buying today will be responsible for my portfolio’s overall performance. I also know that trying to guess which ones will be the best performers almost always results in guessing the wrong way.
  17. I know that as a systematic, rules-based quantitative investor, I can negate my entire track record by just once emotionally overriding my investment models, as many sadly did during the financial crisis.
  18. I think I know that no matter how many times you “prove” that we are saddled with a host of behavioral biases that make successful long-term investing an odds-against bet, many people will say they understand but continue to exhibit the biases.
  19. I think I know the reason for the persistence of these “cognitive mirages” is that up to 45% of our investment choices are determined by genetics and can not be educated against.
  20. I think I know that if I didn’t adhere to an entirely quantitative investment mythology, I would be as likely—maybe MORE likely—to giving into all these behavioral biases.
  21. I know I don’t know exactly how much of my success is due to luck and how much is due to skill. I do know that luck definitely played, and will continue to play, a fairly substantial role.
  22. I don’t know how the majority of investors who are indexing their portfolios will react to a bear market. I think I know that they will react badly and sell out of their indexed portfolio near a market bottom.
  23. I think I know that the majority of active stock market investors—both professional and aficionado—will secretly believe that while these human foibles that make investing hard apply to others, they don’t apply to them.
  24. I know they apply to me and to everyone who works for me.
  25. Finally, while I think I know that everything I’ve just said is correct, the fact is I can’t know that with certainty and that if history has taught us anything, it’s that the majority of things we currently believe are wrong.

What is it about investing and financial markets that you don’t know?

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

Time or Money: Which is More Important?

It was only after having kids I realised how much time I really did have on my hands – I mean, what on earth did I do with it all!? Any spare time I now find myself with, I ask myself three questions:

  1. What needs to be done, and what would I like to do – Mowing the lawn, washing the car, or taking the kids to the park?
  2. What’s really important – time with my kids.
  3. Can I outsource the rest – yes.

For me, my family and kids are the most important thing in my life (after my health, because without it I can’t enjoy and provide for my family). More often than not I find that I somehow convince myself that I’ll get around to doing the other two things, such as mowing the lawn and washing the car because this time it’s different! Time and time again however, the grass gets longer, and the car get’s dirtier. Without exception, I give in. I’ll arrange for Victor the lawn guy to come over and do the lawn, and the car will be dropped off at the car wash whilst we’re at Westfield Shoppingtown. Inevitably, the cost of mowing the lawn and cleaning the car is always more expensive because I left it for so long and it got so bad. No brownie points even though I had good intentions.

Our time is so valuable, yet I think many of us don’t realise this. Realise it not intellectually, because I think most people understand the concept of finite time, but understand it emotionally.

We all have 10,080 minutes each week. Let’s say we sleep for 7 hours each day (2,940 minutes each week), we’re left with 7,140 minutes each week to do the things that are most meaningful and fulfilling. In one of his talks, Peter Attia poses the question:

I will be willing to bet that not one of you, if you were offered every dollar of his (Warren Buffett’s) fortune would trade places with him right now.

He goes on to say:

And you would all intuitively say no, I think, because you realise that time matters more than money. And I would also bet by the way, that he would be willing to be 20 years old again if he was broke.

The question Attia asks is incredibly thought provoking. Sure, I could have all the money and fame in the world. I could travel to anywhere I like, I could meet anyone I wanted to meet, and I could buy anything I wanted to have. Notwithstanding Warren Buffett’s fortune, there is no way I would be willing to trade places with him – would you?

Researchers at Harvard published a paper after studying the spending habits of more than 6,000 people around the world. Here’s what they found:

Despite rising incomes, people around the world are feeling increasingly pressed for time, undermining well-being. We show that the time famine of modern life can be reduced by using money to buy time. Surveys of large, diverse samples from four countries reveal that spending money on time-saving services is linked to greater life satisfaction. To establish causality, we show that working adults report greater happiness after spending money on a time-saving purchase than on a material purchase. This research reveals a previously unexamined route from wealth to well-being: spending money to buy free time.

In our everyday lives we outsource and spend money on so many time-saving purchases. From Friday night take-away, buying fruit and veggies from the market, to having our cars serviced. Not only do these purchases save us time, some of them require more skill and expertise than others – and we’re happy to pay a premium for it.

In the world of money management, the amount of time, focus, attention, and expertise that is required is enormous. Not only are the above factors required, the most underrated factor, I believe, that is required is having the ability to control human emotions.

Here’s how I think about time and money:

  1. Trade money for anything that is below your hourly wage.
  2. Trade money for anything that allows you to spend more time on things you find more meaningful and fulfilling.
  3. Trade money for memories.
  4. Trade money for anything you’re not an expert at – you’re likely to have no idea what and how to do it, if you do know how, you’re likely to take twice as long, make a mistake, or not optimise the outcome.

Never discount the concept of time and how a precious commodity it is.

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.

Here’s Why Your Gym Routine Sucks, And Why it Makes You Unhappy

It was pouring down with rain as I ran from my car to the gym. Although the roads were a little slower that morning, I made it to my HIIT class in time (yes, I’m a fitness First member – high five!).

Whenever I’m at the gym, 99% of the time I’m training in a group class. A class with a small group of people and a trainer. What I really like about these classes is that there is a set time, usually 30 or 45 minutes. There is a set program. There is someone I’m accountable to (other than myself), and there is someone pushing me to go that extra rep, that extra kilo, those extra 5 seconds. As painful as it is whilst I’m training, I reap the rewards later (as long as I don’t eat too much pasta over the weekend…you know what I’m talking about!).

This class in particular intrigued me. There were two ladies who caught my attention (and not in that way). During each and every exercise, during each and every break, these two ladies were chatting away – non stop. Let me make one thing clear, there is no judgement here, just an observation.

We were all doing the same exercises, pushing ourselves to the max. I burnt almost 500 calories during that class, with an average heart rate of 150 bpm, and a max heart rate of 191 bpm. I think I’m reasonably fit, and by the end of this class I was completely knackered.

Now, unless these two ladies were super fit (which they may very could have been), I’m unconvinced they truly got what they could have got out of the session from a fitness point of view.

Why am I telling you this story? Because I believe it relates so closely to investing, our wealth, and our personal goals. How so I hear you ask? How many times have you found yourself wondering why you’re not achieving your goals, whether these may be from a health and fitness point of view, financial, or personal?

Just because you have engaged a financial adviser, just because you have a coach, just because you have a personal trainer, it doesn’t guarantee you success. You have a massive part to play in your success.

Your coach, whether fitness, personal, or financial, can help you set your goals, set the program, the exercises, he or she can be there to hold you accountable, but unless you’re doing your bit, the chances are you’ll fail. At our recent wealth breakfast, Paul Roos is quoted saying, “there’s no doubt they had a belief in me and trust in me, I think they also felt just because I arrived they we’re going to win games of footy. They’ve got a fairly big part to play in whether they win or lose.” – referring to when he first arrived at Melbourne Demons footy club.

How do you go from simply wanting something, to feeling like you’ve got your back against the wall and will actually do something about it?

The Power of Goal Setting

Almost three years ago I quit my corporate job and ventured down the path of one of my biggest goals – setting up my own business. The concept of goal isn’t exactly ground breaking. Yet most people don’t have a clearly defined set of goals. It was only a few months ago however, I started to write down my goals – personal, family, relationship, financial, and business. I’m clear on my ‘action plan’, the ‘outcome/result’ it will provide me, and my ‘why’.

Yale researchers conducted an intensive study back in 1953. They interview the graduating class just before they left school. They asked the students “Do you have a clear, specific set of goals with a written plan for achievement?” Less than 3% of the students answered “yes”.

Then, 20 years later, the researchers went back and interviewed the class members again to find out what their lives were like. They noted that the 3% that had written their goals for a specific plan seemed to be happier and more well-adjusted than the others. They also found that the 3% group was worth more in financial terms than the other 97% who did not have clear goals.

I believe most of us have goals, and most of our goals are not that inspiring – inspiring enough for us to jump out of bed each morning. When people ask me what I do for a “job”, I tell them for me it’s not a job. It’s so much bigger than that. For me, there is genuine meaning and fulfillment. I like to think of these as meaningful goals. Goals that inspire me to do even more.

The Game Plan

Here’s what worked for me:

1. I Wrote Them Down

Sounds like a waste of time doesn’t it? Believe me, there’s nothing more important. There’s also something about writing down your goals. Studies have shown you are not only acknowledging to your conscious mind that you’re dissatisfied with where you are right now, but also your subconscious mind.

People generally take action when they reach a threshold. When you’re comfortable with where you are right now, it’s unlikely you’ll take action.

2. I Got Clear on my ‘Why’

Have you ever opened the fridge and last night’s birthday party cake was starring you in the face? The more we tell ourselves we don’t want the cake, the more our mind tells us to go and eat the cake. If your why is to simply ‘lose weight’, it may not be enough. But if your why is to stay fit and healthy to be able to see your grandchildren grow up, all of a sudden your why has so much more meaning, is so much more powerful, and is more likely to stop you from eating the cake.

By getting clear on your why, you will find your purpose. And what you’ll find is that your purpose is far stronger than the outcome. The purpose of your goal is not the result. It’s what the end result will give you. Knowing this will help you through the toughest times.

For me, it was about my children. It was about creating a life for them that I never had. It was about creating options and flexibility. It was about creating a legacy.

3. I Took Action

Someone once told me that ideas suck, and that action and execution is key. I found myself always looking for excuses. It’s not the right time. I’ll do it next quarter. I’ll do it when the kids are older. There was always an excuse. Something magical happened however, when you know what you want to achieve, and more importantly, why you want to achieve it, it creates an unstoppable force that enables you to take action. Knowing full well that the status quo was not something I was going to resort to.

I was a perfectionist. It stopped me from getting things done. I’ve learnt however, that perfection is the enemy of execution. As long as I get things 80% right, I’m happy to drive forward and work on the rest of the 20% as we go.

You need to work hard for what you want, engaging someone else to help you doesn’t mean you relinquish all responsibility for action. Other people can help guide us, hold us accountable, and even push us when we need them to. Getting what we want isn’t easy – if it was, we’d all be happy and fulfilled. It takes time, clarity, purpose and commitment. Blaming others is the easy way out. Blaming ourselves is the most difficult.

Take a step back and find out what’s not working for you and take action.

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.

Today’s The Day – Half a Billion Dollars, 16 Years in The Making

They say dreams are born during childhood and suffocate during adulthood.

It was July 20, 1985, at 1:05 pm, the marine radio crackled to life in Mel Fisher’s Florida Keys office, “Unit 1, this is Unit 11. Put away the chart’s, we’ve got the Mother Lode!”

Sunken treasure. Pirate gold. Long John Silver. Fifteen men on the dead man’s chest — Yo-ho-ho, and a bottle of rum! Mel Fisher was a treasure hunter. Inspired after having read Robert Louis Stevenson‘s Treasure Island as a boy, his heart was eventually set on the search of the Spanish galleon Nuestra Señora de Atocha – a royal galleon with 40 tons of gold and silver aboard which sank in a devastating hurricane in 1622 and was never found.

For 16 years, Mel Fisher searched the sea bed for the lost galleon. In the process, he lost a son and daughter-in-law, when the boat they were on capsized in 1975.

This man went out on search every single day for 16 years. Can you imagine coming home to your wife each day, who asks you, did you find anything today dear? To which you reply, not today honey. For 1 month, 3 months, 6 months, 12 months, every day, for 16 years! Can you imagine if he stopped searching after 12 months, 18 months, or 2 years!?

Why didn’t Mel stop searching? I mean, so many people set goals but never quite achieve them. Setting goals are easy. Just think back to how many time you set yourself new goals each new year’s day? How long did it last? Maybe your goal wasn’t compelling or inspiring enough? Maybe the goal you set for yourself wasn’t even exciting enough for you?

What made Mel chase his goal for 16 years without any bit of evidence he was anywhere near achieving it along the way? It’s that leap out of bed in the morning feeling. It’s when you don’t think about work as being work. Anyone that’s working towards something knows what I’m talking about. The vision, the excitement, the growth, absolutely loving the journey.

Do you think Mel Fisher would have given up on his dream if he didn’t find the Atocha after 16 years? What about after 17 years? 18 years? I’m a massive believer in purpose – why do you want what you want? What will it bring you? Once you know why you’re doing what you’re doing, you’ll always find ways to make it happen. Reasons come first, the answers follow.

The Atocha was added to the Guinness Book of World Records for being the most valuable shipwreck to be recovered (estimated at $400,000,000). Mel Fisher’s mantra each and every day during the years-long search for the Atocha, “Today’s the day.”