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.”

Here’s What Vikings And Investing Have in Common

On Saturday afternoon I visited the Vikings exhibition at Melbourne Museum. Over 450 artefacts were on display, making it the largest collection of it’s kind in Melbourne, and boy was it packed! Two things I learned from the exhibition:

1) Vikings’ swords weren’t that heavy, and

2) The importance of silver during trade.

This precious metal became such an important component of trade during the Viking period. Silver coins and ingots were used to balance transactions. Vikings would carry around their own set of small scales to ensure each transaction they entered into was measured accurately and precisely, and the transaction was completed fairly and that they weren’t being cheated.

When I look through the funds that have been used to construct a portfolio for individuals, families, and/or superannuation funds, I am always stumped by the high fees that are being paid by investors.

In business, there’s an old saying, you need to spend money to make money. When it comes to investing however, the more money you pay, history tells us that it has an adverse effect on what you have left in your pocket. Don’t get me wrong, every investment has a cost, even though it may seem as though you’re not paying anything. I recall being told by one “wealth management” firm, their fee to trade international shares for their clients was nil…NIL!? (I wasn’t aware you were a charity). After we did some digging around, we uncovered the firm would take a large clip from the foreign currency exchange. Sure, the brokerage was nil, but unless you understand how these things work, on face value it may seem as though you’re not paying anything.

Most people don’t evaluate the expenses incurred in managing their investments within their portfolio. When you understand how investment fees can dramatically reduce your returns, and when you understand how fees are a strong predictor of future returns, investors should spend more time in evaluating their investment fee.

Why costs matter 1

Sure, 0.50% here, 0.25% there, it doesn’t sound like much over the course of a year, but when you compound this number over long periods of time, it could mean the difference between retiring at age 65 instead of 69.

The impact of fees is two fold. Not only do you lose the annual fees you pay each year, you also lose the growth that money may have had for future years into the future.

To illustrate the significance of fees on an investment, I plotted the below chart, which shows 4 portfolios. Each earning 6% pa, and each invested over a 30 year period. Each portfolio has an internal fee of 1%, 2%, 3%, and 4% respectively.

As you can see, over long periods of time, the net result to the investor is significant. And if for one second you think a 4% pa fee on an investment is unrealistic, just think hedge fund.

Why costs matter 2

You’d be forgiven for thinking that the higher the fee, the higher the quality of the manager. This could not be further from the truth. Research on managed investments has shown that higher costing funds generally under perform lower costing funds. The more one charges, the more difficult it becomes to add enough value to overcome the additional expense.

Research by Vanguard illustrates funds with lower costs have outperformed more expensive ones.:

 

Nobel Laureate William Sharpe once said:

 

 

“the smaller a fund’s expense ration (cost), the better the results obtained by it’s stock holders”

The Australian Securities and Investment Commission (ASIC) in 2017 made changes to Regulatory Guide 97 which forced funds to disclose more information about their fees. Now, disclosure documents issued by investment managers should provide greater transparency to investors in order to help them make a more informed decision.

In my personal and professional opinion, your portfolios’ investment fees should not exceed 0.50% pa, in fact, you could probably get it down to as low as 0.30% pa for a properly diversified portfolio.

There’s an old Chinese proverb that says, If the river is too clean, you will catch no fish.” Meaning, by being too transparent you will not win new business. There are many different kinds of costs when it comes to the world if investments, but they all have one thing in common: If the money is going somewhere else, it’s not going to you.

Like the Vikings, maybe investors should be carrying around their own set of scales.

The Great Melbourne Land Boom

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

Melbourne was in the midst of a land and property boom. Cable trams ferried crowds through the streets and the young and fashionable ‘did the Block’, promenading the footpaths and arcades of Collins Street. Telephone and electric light were novelties and Melbourne’s first skyscrapers appeared. Theatres and opera houses drew large audiences through the weekend evenings.

Melbourne showed itself off to the world by hosting major international exhibitions of industrial, scientific and artistic progress from all corners of the globe.

I’m talking about Melbourne in the 1880’s – it was dubbed ‘Marvelous Melbourne’ by British journalist George Augustus Sala when he visited in 1885. Here we are in 2018, and the tune hasn’t changed in 133 years.

Between then and now however, Melbourne witnessed some of the most severe economic collapses which are now simply buried in history books.

Bubbles, in any market, have a tendency to burst. Not long after, in fact within a decade, Melbourne’s Land Boom crashed in the early 1890’s – it caused a depression that rippled through all the Australian colonies.

Rather than building high-density apartment blocks like the European cities, Melbourne expanded wide and far. Real estate during the 1880’s was ‘The Land of Promise’, as proclaimed by this sales poster for Moreland Road, Brunswick (click for larger image):

Source: Moreland Road, The Land of Promise, West Brunswick, close to Essendon, 1888 (Dyer collection of auctioneers’ plans, Melbourne and suburbs State Library of Victoria)

Investors would buy up farms and subdivide them. They would then lure buyers with free railway passes out to the new estates, feed them and serve champagne before bidding got underway.

By 1889, the value of land in parts of Melbourne was as high as London. The Argus, a daily Melbourne newspaper wrote, ‘[The hunger] that has seized hold of so many people is the result not of an hallucination, but of an awakening to the value of land as a safe, a sound, and a profitable investment.’

In April of 1893 the Commercial Bank of Australia, who had lent substantial money to those involved in property speculation, closed it’s doors. The bubble had popped, and the boom was over. It’s estimated that Melbourne’s unemployment rate jumped to 20% during the 1890’s. Property prices dropped almost 40% (Melbourne) within years. This compares to a drop of 20% during the 1930’s depression.

Following the collapse of the 1890’s, it wasn’t until the boom of the 1950’s that would see prices return to levels reached during the 1890’s. It would take Melbourne 60 years to recover in price.

Here’s an aerial shot of a new housing estate in 1948, known at the time as ‘Heidelberg’.

Source: Charles Daniel Pratt 1892-1968 Photographer/State Library of Victoria/H91.160/376

Every bubble is different. Their formation varies from duration, magnitude, and cause. It was higher interest rates that would eventually pop the bubble of the 1890’s, and the banks’ failure to take security for loans written during this frenzy would lead to the collapse of a number of them. With bank lending having soared since 2012, prices having doubled during this time, and interest rates at an all time low, could we be facing another crisis like the one that has been buried in history books for decades? Of course not, it’s different this time. Right?

I Sat Down With One of The Wealthiest Families in The Country – Here is Their Advice

Have you ever wondered how you could be as financially successful as the country’s wealthiest? I recently sat down with a family member of one of the wealthiest families in our country and asked them what they believe are the ingredients for long-term, sustainable wealth. Here is their advice.

1. Values

Be clear on your values. What is most important to you? Family, freedom, happiness, joy, growth, contribution? Spend time clarifying your values, and discuss them with your family and children.

Spend time uncovering what it is that your children value also, and why. And then dig even deeper. What are the rules for your values – what needs to happen for you to feel joy, to feel happiness, for you to feel as though you’ve made a contribution?

Your values are your blueprint. Your values shape your beliefs and your beliefs influence your decisions, so be clear on them.

2. Goals & vision

Once you have clarified your values, start setting your goals. Break them up into short (1-2 years), medium (3-5 years), and long-term (5+ years) goals. Put a time frame next to them, and a value. Most importantly, write them down! These should be revisited and reviewed regularly – at least once, possibly twice a year depending on your situation.

We spend so much time setting goals for our businesses, and we spend more time planning our annual holidays than we do our money and finances.

A Harvard Business School MBA study asked one single question about life goals, “Have you set written goals and created a plan for their attainment?”

Prior to graduation, it was determined that:

  • 84% of the entire class had set no goals at all,
  • 13% of the class had set written goals but had no concrete plans, and
  • 3% of the class had both written goals and concrete plans.

The results?

Well, you’ve likely somewhat guessed it. 10 years later, the 13% of the class that had set written goals but had not created plans, were making twice as much money as the 84% of the class that had set no goals at all.

However, the kicker is that the 3% of the class that had both written goals and a plan, were making ten times as much as the rest of the 97% of the class.

3. Talk to you children about money

We can never be too sure whether its right to talk to our children about money, let alone when is the right time – it can be a little embarrassing.

The advice is to talk to your children. Whether it’s around the dinner table, or while watching the footy, you’re already spending time together, so add it to the agenda – it helps instill strong values earlier on in their lives.

We allow our children to ride their bike without training wheels, we allow them to drive their (sometimes our) car once they’re legally allowed to, and we allow them to head out into all hours of the morning, yet we tell ourselves they’re not mature enough to have input into financial decisions. They’re likely to eventually end up with it anyway, so it’s our responsibility to ensure a sustainable wealth transfer – use your wealth as an enabler, not a dis-abler.

Historically, 70% of inter-generational wealth transfers fail due to lack of communication, so it’s on you to get it right.

4. Structure and planning

Once you’re clear on your values and have written down your goals, it’s time to put in place the structure and strategy to drive your vision – your game plan.

This ensures investment decisions can be made while looking through the right lens, and that your decisions are driven by your vision and by achieving yours goals, not by the Fear of Missing Out (FOMO), tax, or other distractions. Unfortunately, far too many people lead their decision making with the product or investment first, when in fact you should be driven by your goals and plans.

5. Take the long view

Some of the wealthiest families in the world have been riding through the ups and downs of investment markets for decades. Patience and remaining disciplined are important traits in order to be successful. You need to allow time for your strategies to unfold. The corporate and investment world is so focused on the performance and outcomes over the next “quarter” (3 months of the year), you too should focus on the next quarter, the next quarter of a century that is.

Finally, stop focusing on stock picking and get your asset allocation right – it represents and generates 90% of your return, whereas stock selection generates 5%. We spend 90% of our time on the thing that generates 5%, and 5% of our time on the thing that generates 90%.

You can’t know everything about everything. They say that a man who represents himself in court has a fool for a client. Find someone who can provide you with expertise. Someone who can help you make sound, unemotional decisions, someone you can use as a sounding board, someone who can help you see the forest for the trees, someone who can introduce you to and work with other subject matter experts when required. If you do all these things, you too can be an overnight billionaire.

If successful investing and sustainable wealth was easy to attain, everyone would be wealthy.

The Joy of Winning

It’s April 15 1960, episode 28 of the Twilight Zone aired in the US, titled “A Nice Place to Visit”.

We meet a man named Henry Francis “Rocky” Valentine – a shady gambler who is shot by police after robbing a pawn shop. He wakes up to find himself in Heaven where he meets Pip, his angel, who grants Rocky all of his wishes.

Pip takes Rocky to a casino. They take the elevator to the penthouse. Rocky is provided with a wardrobe full of tailor made suits, draws full of luxurious watches, and a suitcase full of cash. Rocky heads downstairs to test his luck as he takes a seat at the blackjack table. He’s dealt blackjack on his first hand – winner! Next hand, blackjack, following hand, blackjack – he can’t believe it! He heads over to the craps table, rolls a winner over and over again. He’s being served alcohol, women are surrounding him, and everyone is cheering him on. He can’t believe his luck, he’s never won so much money in his life.

This continues for the next month. Rocky keeps winning, in fact, he can’t lose. He summons Pip and explains to him that he has become bored with having his desires instantly met. Out of frustration, he tells Pip he’s tired of Heaven and wants to go to “the other place”, to which Pip responds:

“Heaven? Whatever gave you the idea you were in Heaven, Mr. Valentine? This is the other place!”

Horrified, Rocky frantically tries to open the now locked penthouse door as Pip laughs evilly at Rocky’s torture.

What if you could have all the planes, boats, homes, watches, or money your heart desired? How would this make you feel? Would you feel ultimate happiness and joy? Would you feel truly fulfilled? I’m sure you know of millionaires or billionaires who are unhappy, and I’m sure you know of someone who may not be financially wealthy, however they are one of the happiest people you know.

Without spending time to uncover what fulfills you, just like Rocky, you too will realise that money is simply a means to an end, and that you are setting yourself up for failure. Material items do not bring true joy or happiness. If you live for that luxury house, the finest time piece, the overpriced shoes you will probably never wear, or the next piece of technology, you will never have enough, and you will never be truly happy. You’ll be living in a Twilight Zone of your own making.

Tony Robbins sums up what I believe are two of the most important human needs perfectly:

The Need for Growth

If you’re not growing, you’re dying. If a relationship is not growing, if a business is not growing, if you’re not growing, it doesn’t matter how much money you have in the bank, how many friends you have, how many people love you—you’re not going to experience real fulfillment. And the reason we grow, I believe, is so we have something of value to give.

The Needs for Contribution

Corny as it may sound, the secret to living is giving. Life’s not about me; it’s about we. Think about it, what’s the first thing you do when you get good or exciting news? You call somebody you love and share it. Sharing enhances everything you experience.

Life is really about creating meaning. And meaning does not come from what you get, it comes from what you give. Ultimately it’s not what you get that will make you happy long term, but rather who you become and what you contribute will.

Everything we do in life is about how it makes us feel. Whether or not you believe that deep inside you are continuing to grow and push yourself, to do and give more than was comfortable or you even thought possible. The wealthiest person on earth is one who appreciates.