The Most Expensive Game of Golf You’ve Ever Played

Last week I wrote an article on investing following a speeding infringement. I received quite a number of positive responses to this note – thank you. I also received a number of questions on the concept I talked about in my blog, that is, compound interest and market timing. I touched on this topic a little while back, but let me give it another go.

Have you ever played golf and placed a bet on each hole? You know, everyone places a small amount of money on each hole, and the winner on each hole takes the lot? Pretty simple, and a bit of fun. Have you ever played this game whilst doubling the amount of money you bet on each hole? Not a big deal…start with 10 cents a hole, and double this amount for 18 holes. Any idea what the number is on the 18th hole? Before reading any further, just take a guess, quickly, don’t take too long!










$13,107.20! Ridiculous, right!?

How on earth does this happen I hear you ask? Here’s the above table in a chart.

Notice how nothing happens for a long time, the all of a sudden, BOOM, the amount explodes. This my friends is compound investing – the eighth wonder of the world.

If you think that all you need to know is which way the stock market is going in order to make money, think again. Talk to any successful business owner or investor, it’s more about being disciplined, having a game plan, and taking the long view.

Meet John – he’s the world’s greatest stock picker. He only buys when the stock market index is trading at 52-week lows, and assuming they are 17% below his last purchase. Meet Jane – she’s the world’s worst stock picker. She invests $2,000 only at market peaks beginning in 1970, when she’s 22 years of age. She increases her investment by $2,000 per decade – $4,000 per year during the 80’s, $6,000 a year during the 90’s etc. She retires at age 65.

The results? Hands down winner is John, right? The results of this experiment (thanks to Ben Carlson) may surprise you. John does quite well, as you would expect. But the results are very similar. You’d think John’s portfolio would be multiples of Jane’s as he was buying at market lows, and Jane at market highs, however this is not the case. Why? Compound interest.

Jump on any online calculator and calculate the capitalised interest on a 30 year loan. It’s okay, I’ve done for you. A $500,000 loan, with an interest rate of 5%, accumulates interest of $966,279.60. Think about that for a second – that’s only the interest. Imagine compounding capital and interest on your stock investment! The reason John misses out on the benefit of compounding, is because he’s out of the market for long periods of time. Carlson clearly states in his analysis, “Short-term moves in and out of the market don’t matter nearly as much if you have a long-time horizon. Thinking long-term increases your probability for success in the stock market while the day-to-day noise gets drowned out by discipline and compound interest.”

The strategy is so simple, requires no insight into the future, yet it is so powerful, and actually exists – unlike the perfect market timer. The catch? It takes a long time, and it’s b-o-r-i-n-g! The irony is however, that the group of people who have the greatest capacity to absorb the market’s volatility, are the same group of people who seem to be the least interested in it.

We’re Headed For Another Recession & You Have No Idea What Will Happen

Daniel Kahneman once said,

“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”

As investors, in fact as human beings, we’re constantly fighting the last war. In other words, we overweight recent events when we make judgment on the probability of an uncertain future event. We simply extrapolate the most recent event indefinitely into the future.

Think about the most recent economic decline, investors we’re running for the exits with the view that the ‘things we’re going to get worse’. The financial crisis of 2007/2008 was one of the most painful experiences in almost a century, yet it only lasted 18 months. I know plenty of investors who retreated at possibly the worst time, and were left hanging out to dry after the market bounced off the bottom, waiting for ‘the right time to get back in’.

Contrast this to how the market has been performing since the bottom of the GFC (March 2009), we have witnessed one of the longest recoveries in history, as illustrated in the chart below. This is probably one of my favourite charts – Bull markets since 1950 in measure in both duration and magnitude.

I know plenty of investors who have either bought back in after they had sold out at the worst time, or have been redeploying cash because they believe the market will continue it’s stellar performance.

Source: Yahoo Finance

Investor’s not only extrapolate the most recent events, but also try to plan ahead for the next GFC and how they’re going to deal with it, and it causes investors to shift their tolerance for risk at precisely the wrong time. If  you’re worried about a 10% correction in the stock market, stocks are not a place for you. Unfortunately for investors, no two market cycles are ever quite the same, so studying the last crisis is unlikely to prepare you for the next. Studying how you behaved during the last crisis on the other hand, may be quite beneficial.

Financial markets never follow the exact same route more than once, yet human behaviour follows precisely the same route, each and every time. Here’s a great, simple 30 minute animated video by Ray Dalio, on how the economy works. It’s probably one of the best videos on the economy I’ve seen.

The timing, the impact, and the duration of recessions are all different. Here is every US recession going back to the Great Depression along with the corresponding stock market performance.


Source: National Bureau of Economic Research, Ben Carlson

Even if you knew when the next recession was going to hit, the duration, and the impact it would have on the economy, it’s unlikely you would be able to profit from it. The stock market’s performance during each of these recessions would surprise most investors. This is one of the reasons why you can’t ‘wait for things to get better’ before investing – the stock market is a forward looking machine, not backward.

On average the stock market:

  • Has been up during a recession
  • Has been up 6 months prior to a recession
  • Has returned over 20%, 12 months after a recession has ended
  • Has returned over 52%, 3 years after a recession has ended
  • Has returned over 85%, 5 years after a recession has ended

By the way, we don’t need a crisis or a recession to see the stock market go down. Here’s 13 instances where the stock market has fallen 10% or more without a recession:

Source: Stocks for the Long Run, Ben Carlson

Paul Samuelson once said,

“The stock market has predicted nine out of the last five recessions.”

Next time you find yourself captivated by the alarming predictions made by the guy or gal on the television, in the paper or on Twitter, please remember this: More money is lost in trying to anticipate a collapse in the stock market than the collapse itself.

Probabilities Versus Predictions

Last week, South Korea stunned the football world by knocking out World Cup favourites Germany. In an astonishing finish, South Korea kicked two goals within minutes of the final whistle during extra time, in one of the biggest upsets in the sport’s history. Why? Because Germany were expected to take out the 2018 Fifa World Cup.

Here’s the 2 minute wrap up of the match courtesy of SBS:

It wasn’t only the football world who expected the German’s to take the cup home, it was also the expectation of UBS’ analytical team who ran complicated statistical models to place probabilities on all nations competing in the World Cup. Here’s the report if you’re curious.

Following Germany’s loss to South Korea, UBS have been copping criticism from journalists and social media trolls, about their inability to predict or forecast the future. Individuals’ and companies’ inability to forecast the future is well documented and certainly not news to anyone that studies the market, no matter how sophisticated they are or their technology is.

Let’s get one thing clear, UBS nor any of the other investment banks “predicted” Germany would win the World Cup. They simply applied a 24% probability of winning, in other words, a 76% probability of not winning – there is a huge difference.

“We are humble enough not to outright claim that Germany will win the tournament again, but our simulations indicate there is no other team with higher odds to lift the trophy than the defending champion.” – UBS (emphasis mine)

As nerdy and as absurd as this analysis may seem, what else do you have to rely on? Your gut feel? The tip your taxi driver gave you? Your “expert” football mate? I’ll take the odds thank you very much.

This is exactly how casino’s work. Their gaming systems are all designed to ensure the odds are firmly in their favour. Sure, you may win, and you may even win big, which is why you keep playing – but the odds are slim. And if you keep playing for long enough, you will eventually lose.

And when it comes to investing, investors seem to throw the odds out the window and prefer to play a very different game. One that is akin to the gambler at the roulette table. One where investment professionals try to outguess prices established by the collective wisdom of millions of different buyers and sellers each and every day.

Investors may be surprised by:

1) The number of investment funds that become obsolete over time, and

2) The low percentage of funds that are able to outperform their benchmark.

The chart below shows the sample number of funds that existed as at 31 December 2017, the number of funds that survived, and the number of funds that outperformed their benchmark. For example, 5 years ending 31 December 2017 (from 31 December 2012), there were 2,867 sample funds, of which 82% survived the 5 years, and only 26% were able to outperform their benchmark.

Source: Dimensional Fund Advisers (DFA)

Both survival and out-performance rates fall as the time horizon expands. For 15 years ending 31 December 2017, only 14% of funds survived and outperformed their benchmark. The odds of this game don’t seem very compelling if you ask me.

Let’s say you’ve found a manager who’s been able to outperform their benchmark for the last 3 years, and you’ve decided to hire them. Most investors and advisers use this method of manager selection, reasoning that a fund manager’s past success is likely to continue into the future – sack the poor performers, and hire the strong performers is how the narrative goes. The evidence suggests the contrary.

The chart below shows that among funds ranked in the top quartile (25%) based on previous three-year returns, most of them did not repeat their top-quartile ranking over the following. Over the periods studied, top-quartile persistence of three-year performers averaged 26%.

Source: DFA

The assumption that strong past performance will continue often proves faulty, leaving many investors disappointed. And despite all the evidence, investors continue to search for the winning investment – taking far greater risks than they ever expected.

Imagine for one second you could invest like the casinos. Putting the odds of success firmly in your favour the longer you play the game. As investors, we need to consider more than just a compelling story, and more than just good past performance. You may choose to ignore the evidence. You may choose to take on the odds. You may choose to ignore probabilities and make decisions based on predictions. Now that Paul the octopus is no longer with us, you may as well ask Achilles the cat for stock tips.

30 Facts About The Stock Market

My son turned 4 years of age the other week and it was a weekend full of parties and eating. One of my son’s favourite toy is Lego. His imagination and creativity runs wild. I’m one of those dad’s that keeps the instruction manuals in a folder – I mean c’mon, how else will you know how to build the original toy Lego had designed with all those parts? Although I did recently find out that Lego’s website stores all the instructions. Maybe I’m just a little old fashioned…at 35 haha!

Anyway, this got me thinking about how often we, as investors, deviate from what the stock was always designed to do. We seem to lose the instruction manual too often and our imagination and creativity seems to run wild like my 4 year old son with his Lego.

So I decided to take the liberty and list 30 facts about the stock market. What it was designed to do, how it operates, it’s performance and behaviour, and some of the facts that many folk in our industry seem to ignore:

  1. Stock markets exist and were conceived in order to allow companies to raise equity from the public in exchange for shares in that company.
  2. For every seller of a company, there is a buyer.
  3. For every buyer of a company, there is a seller.
  4. Over the long-term, the Australian share market has returned 8.5% pa.
  5. On average, the number of times the stock market moves up or down 1% within a day is 57 times over one year. In 2017 we witnessed 20 +/-1% days, and in 2018 so far we’ve witnessed 6.
  6. Australia makes up 2.1% of the world’s stock market. The US makes up 52.2%.
  7. The Australian stock market is made up of 40% in banks, and 18% in mining.
  8. Since 1926, we’ve witnessed 10 bear markets (declines of 20% or more). On average, the decline has been 45% and lasted for just over 2 years. The shortest was 3 months, and the longest was 5 years.
  9. Since 1926, we’ve witnessed 11 bull markets (including the current). On average, the climb has been 159% and lasted for 3.5 years. The shortest was 13 months, and the longest 9.5 years.
  10. Since 1926, we’ve experienced 15 recessions. That’s 1 in every 6 years.
  11. The average recession lasts 15 months, and the average expansion lasts 47 months.
  12. Over long periods of time, small company stocks beat large company stocks.
  13. Over long periods of time, the average investor under performs the stock market by a about 5% pa.
  14. Over long periods of time, professional investors under perform the stock market 77% of the time.
  15. Over a rolling 10 year period, the stock market has not lost money.
  16. The biggest gains in stocks are made while the company is on the way to the top, not after the gains are made.
  17. The stock market returns double digit gains or losses in 70% of all calendar years.
  18. The stock market lost almost 90% of it’s value during the great depression.
  19. The Japanese stock market has done nothing since 1989.
  20. Dividends make up about 42% of an investor’s return.
  21. If you missed the best 10 days in the stock market over the last 20 years, your portfolio would have returned 67% less than the market. If you missed the best 40 days, your portfolio would have returned 114% less than the market.
  22. If you missed the worst 10 days in the stock market over the last 20 years, your portfolio would have returned 150% more than the market. If you missed the worst 40 days, your portfolio would have returned 952% more than the market.
  23. 90 days of the year generates around 95% of all the year’s gains.
  24. The US stock market rose 22% last year. 25% of that return came from 5 companies. 10 companies made up 35% of the return. 23 companies accounted for half the return. Apple’s return alone was responsible for of the index’s total return then the bottom 321 (of the S&P 500) companies combined.
  25. From 1980-2014, 40% of all the Russell 3000 stocks lost at least 70% of their value and never recovered.
  26. The stock market has experienced an average intra-year decline of 13.8% every year since 1980.
  27. The average return of stock markets are between 8-12%, yet stock markets see gains within this range only 5% of the time.
  28. The stock market produces a positive return 3 in every 4 years.
  29. The stock market produces a negative return 1 in every 4 years.
  30. Stocks go up most of the time.

The stock market needs to be looked at as owning a piece of a company, a business. The ownership or worth of a business represents it’s futures earnings power. I strongly believe that as technology progresses, as we become more innovative and efficient, profitability should increase, and therefore businesses become more profitable, and businesses become more valuable – on the whole. During this process, we’ll witness and many of us will experience default. But I believe this is part of the evolution and progress.

Returns on the stock market are not promised to anyone, nor are they guaranteed. Having said this, the track record of the stock market is compelling. If you’re patient and disciplined enough, you too may be able to participate in what it has to offer.


Index Fund Advisers

JP Morgan – The Agony & The Ecstacy

JP Morgan – Guide to Markets (Australia)


Morgan Housel

Ben Carlson


The Changing Face of Melbourne

Once upon a time in 1667, the Dutch East India Company, the most valuable company in the world at the time, wanted a monopoly on nutmeg – a spice that was worth considerably more than gold. During this time, Run island, a tropical island closer to Darwin than Jakarta, was prized as the home of nutmeg.

In July of 1667, the Dutch acquired Run island via a swap with the British. They agreed to trade New Amsterdam for Run island. The Dutch now had a global monopoly on nutmeg. It has been described as “the real estate deal of the millennium”.

Unfortunately for the Dutch, the price of nutmeg eventually collapsed. The British stole seedlings and dramatically increased supply by growing them in other parts of the world. Furthermore, the arrival of other stimulants such as coffee, tea, and tobacco didn’t aid the Dutch’s situation.

Today, Run island has a population of around 2,050, and still grows nutmeg. New Amsterdam was renamed New York, and the rest is history. All of this within a very short period of time – 351 years to be exact.

They say investors have a three year time horizon, last year, this year, and next year. As human beings we’re wired in such a way that makes it difficult for us to be able to see so far into the future. Take the city of Melbourne for example.

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

And here’s Melbourne today – a very different picture to that of the first.


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

Here’s a different perspective, one that most of us can recall. Southbank, in the blink of an eye is completely transformed.

Today is no different. With not only the unprecedented level of construction within the city of Melbourne, but also the density of construction, the public are outraged that we are killing our cities. Our cities have never stopped growing, have never stopped evolving, and have never stopped progressing.

This is what progress looks like. Just because it’s new, just because this wasn’t how it used to be, just because this isn’t how we grew up, doesn’t mean we should fear what the future holds.

Melbourne was founded on the 30th of August 1835. A lot has changed since then. A city which is 183 years young, houses a population of around 4.725 million. Contrast this to the city the Dutch swapped for their nutmeg monopoly in 1667. New York City, founded in 1624 is now around 394 years young, housing a population of around 8.625 million.

By the year 2046, Melbourne’s population is expected to increase by 2.8 million people. Here’s what Melbourne’s skyline looks like looking up from the south:

Here’s what the same skyline starts to look like when Melbourne houses 10 million people:

And if you were to take all the buildings on Manhattan Island and placed them into the city of Melbourne, this is what it would look like:

Although quite staggering, it can be done.

As investors we need to fight the minute by minute news headlines that try and grab our attention each and every day. Although we are not wired to, we know deep down that true, significant, and sustainable wealth is created over long periods of time – yet we want it all now. We need to change the way we think about, and invest not only our money but in ourselves. We seem to be attracted to complexity and complication when in fact simplicity yields a more favourable outcome. We seem to prefer to make significant and material changes less frequently, when in fact small, incremental changes made more frequently, which may seem insignificant to us today, compound to and have a far greater impact than we could have ever imagined. It’s like a freight train that gains momentum – it becomes unstoppable.

Try and add 5+5+5+5+5+5+5+5+5+5 in your head. It’s pretty easy, you can do it right? The answer is 50. What if I asked you to multiply instead of add in your head, 5x5x5x5x5x5x5x5x5x5? There’s no way you’ll be able to do it, in fact, I don’t even think you’ll be able to wrap your head around it (by the way, the answer is 9,765,625).

As investors we underestimate the long-term. We underappreciate the power of compounding. Because it isn’t intuitive, we ignore it, and try to solve problems through other means. Next time you’re planning ahead, stop and think about the long-term. Stop and think about the potential of compounding.

Thanks to Tony Crabb of Cushman & Wakefield for the inspiration.

The Art of Wu Wei

For 30 years ending 2016, the US stock market returned 10.16% pa. Yet the average investor for this same time frame generated 3.98% pa. This is the behaviour gap folks. A 6.18% pa behaviour gap!

Staying disciplined through the gyrations, and heart-stopping rises and falls of modern markets isn’t always easy, yet it’s crucial for your long-term investment success.

When it comes to investing, we look beyond short-term fads, the panicked reaction, the rumoured sure thing and the ‘my gut feeling is to (whatever)’, and we build investment portfolios based not on intuition, forecast or rumour, rather, on research and evidence.

At Baharian Wealth Management, we don’t purport to our clients or prospective clients that we hold the secret sauce to investment management. That we hold market information that no one else does. That we have the ability to beat the market. At BWM we spend our time and energy ensuring the market doesn’t beat us.

Far too many people and firms focus their energy and efforts into pursuing something that is statistically improbable. Their job is to keep you as their investor/client, amused and entertained. It’s nothing more than dinner theater. President Lincoln once said, “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”

There are three key over-arching factors that help us bridge the (6.18% pa) behaviour gap:

  1. We think about factors rather than forecasts,
  2. We think about probabilities rather than possibilities, and
  3. We focus on process rather than the outcome.

We focus our energy on aspects of investment management that we can control; human behaviour, diversification, costs, and rebalancing.

If you want to succeed as a long-term investor, take the time to understand the Taoist concept of Wu Wei, which literally translates to “act without effort”. The practice of Wu Wei are fundamental beliefs in Chinese thought and have been mostly emphasized by Taoism. It means natural action, or action that does not involve struggle or excessive effort – it manifests as a result of cultivation.

Be clear on your investment goals, put in place a disciplined process and plan that is going to help you achieve them, and stick to it – avoid over thinking and avoid the panicked over-reactions (fear-sell/greed-buy). Let the process unfold – it takes time.

Several years ago, Charlie Munger was asked by a probing journalist, “If what Berkshire has done is so simple, why haven’t more people copied it?” To which Munger replied, “More investors don’t copy our model because our model is too simple. Most people believe you can’t be an expert if it’s too simple.”

Long-term successful investing is simple, but not easy.

If you want to know more about how we think about investing, click here. We’ve uploaded two documents at the bottom that the page that you may find of interest. Or feel free to get in touch.




2018 Federal Budget: Tax Cuts The Centerpiece

I watched Scott Morrison hand down the 2018 budget live on Twitter last night, it was pretty cool I must admit. I think the viewer count got to around 1,500 people, maybe more, I can’t recall precisely. What even cooler was watching the comments being posted as the budget was being handed down…all on the same screen. Welcome to the future folks.

Here’s my take on Mr Morrison’s third budget, which seems as though it was designed to ensure he has a forth:

1. Tax Cuts

This was the centerpiece for the 2018 budget. A seven year plan to lower, and simplify income tax. From July, those earning up to $37,000 will have their tax reduced by $200. The offset will increase up to a maximum of $530 for those earning $90,000. The benefit gradually decreases to zero at a taxable income of $125,000.

The Government wants to combat bracket creep. The 37% rate won’t kick in until people start earning $90,000, instead of the current $87,000, with the threshold rising to $120,000 in 2022-23. The next year, the 37 percent bracket will be abolished completely. With a top personal tax rate of 45% kicking in after $200,000 from July 2024.

Here’s what the tax rates will look like over the next seven years:

Here’s the debate on Twitter:

I think we can always compare one thing to another, however if we look at what the simplification is designed to do, it should mean that 94% of Australian tax payers will pay no more than 32.5 cents in the dollar. Surely that’s a good thing?

2. Surplus, surplus, surplus

The Government is forecasting a $2.2 billion surplus in 2020FY, which would be the first since the global financial crisis. Some of the assumptions that are being used however, seem to be a little on the optimistic side. Time will tell I guess.

3. Super

Superannuation made it into the budget again, but not in the way it has in the past.

Exit fees on all superannuation funds will be banned. A subtle but bold move. Good one ScoMo.

Account with a balance of less than $6,000 will have a maximum fee cap of 3%. Although I reckon 3% is absolutely ridiculous. It’s a start nonetheless.

You know all that lost super you have. Well, the ATO will be given the powers to track down funds with balances less than $6,000 and reunite them with you active accounts. Hopefully one less headache for you. Thanks ScoMo.

4. Roadworks Ahead

Infrastructure is back on the cards, again. The Government is allocating $24.5 billion for new projects to help ease traffic congestion. This includes the long awaited Melbourne to Tullamarine rail line, which has $5 billion allocated to it.

If you think this is all a done deal, just cast your mind back to December 2015, where the East-West Link cost tax payers $1.1 billion to scrap the project. Most of the big projects require the states to kick in half the money, so not sure how this one’ going to go down.

It kind of reminds me of the 90’s arcade game, Street Fighter.

I’d love to see constant progress with infrastructure, as I truly believe it’s key in allowing Melbourne to compete on so many fronts, as well as help with the housing affordability issue. Anyway, don’t hold your breath on this one (although I am crossing my fingers).

5. Beer will be cheaper

Craft beer that is. From July 1, 2019, concessional draught beer excise rates will apply to smaller kegs typically used by craft brewers, making craft beer cheaper. On ya ScoMo.

Here’s a neat little summary by the ABC, Budget 2018: Winners and losers

If you want to know how the tax changes impact you, here’s the calculator that will work it out for you.

As always, we’ll know more as the details are revealed and clarified. Here’s the budget overview if you’d like to know more.

You Suck at Investing – But it’s Not Your Fault.

Think about the last time something bothered you. You may have seen something you didn’t like, or someone may have said something that you didn’t agree with. Chances are you exhibited some sort of eye blocking behaviour, such as covering your eyes, squinting, or lowering your eye lids for a prolonged period of time.

This type of behaviour reveals the human brain is dealing with some sort of stress. How do we know this? In 1974, Joe Navarro studied children who were born blind. During his research he found that when they heard things they didn’t like, they didn’t cover their ears, they covered their eyes. It’s hard wired in us.

The human brain is capable of incredible things, but it’s also extremely flawed at times. When it comes to investing, our brain doesn’t let us off the hook. There are around 188 cognitive biases that can have a profound effect on how we process information and our investment decision making. Whether it’s confirming existing beliefs, extrapolating information from the wrong source, or failing to remember events the way they actually happened.

Here are five common cognitive biases that throw investors:

Here are 18 other biases worth knowing about.

We’re not going to change the way our brain responds to things it’s presented with, it’s just how we’re wired. But we can be aware of our own biases before making an investment decision to help avoid missing out on what the market is offering us.

To illustrate this point, I share with you the results of an annual study undertaken by Dalbar, which highlights the ‘Behaviour Gap’. The chart shows the annual return for the US stock and bond markets, as well as a Balanced Portfolio, and compares this to what the average investor in each of these indexes and portfolio returned for the same period – voilà the Behaviour Gap. According to Dalbar, psychological factors make up at least 50% of the chronic shortfall. But hey, this doesn’t apply to you because you’re above average.

So next time when you ask your colleague, friend or a family a question and they start to cover their eyes, squint, or lower their eye lids for a prolonged period of time, chances are they didn’t like the question you asked. Now that you know, don’t hold it against them – it’s just how they’re wired.

16 Questions You Must Ask Your Financial Adviser

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

It’s a tough gig for regulators – to try and have all financials advisers acting in the best interests of their clients. As we have all seen the exposé from the Royal Commission into Financial Services, they haven’t done a great job. So as consumers, we need to take it into our our hands and arm ourselves with the right questions (and know what to listen out for) when engaging a financial adviser – an adviser that will put your interests first!

Here are 16 questions to ask your financial adviser – I’ve provided some commentary and/or answers to each question. In fact, you should print these off and don’t be afraid to go down the list, one by one. You’re interviewing them as much as they’re interviewing you.

1. How are you licensed to provide advice?

Some like the comfort of a large institution or institution licensed firm, and others prefer to stay away from them. The key to being licensed by an group that is unaligned, is that their approved product list (APL) is far wider. If you’re meeting with a bank licensed firm, ask what percentage of their clients’ investments, insurance policies, and platforms are placed with related parties. This should tell you what you need to know.

2. How do you charge for your services?

There are many ways advisory firms charge for their service. Hourly, which is not very common. This is good for project based work. Most of the industry charges via a percentage of assets under management (% of AUM). This can be around 1% pa. The incentive for the adviser is to hoard as much of your investments under their management as they can, in turn, maximising fees.

For an ongoing engagement, fixed annual retainer is best and probably far more reflective of the work completed for you throughout the year (no surprises too).

3. Do you have any targets whatsoever set for you and/or your team?

A confident and convincing No.

4. Do you earn a commission/placement fee for placing me into certain products or investments?

A confident and convincing No.

5. Do you pay referral fees to generate new clients, and will you put this in writing?

Some advisers pay their referrers a fee, which needs to be disclosed to you both verbally and in writing. You probably want your adviser be recommended to you on the basis that they are professional, trust worthy, competent, and that you’re going to get along with them, not because someone is receiving a payment from them.

6. Do you earn a referral fee for referring us to other professionals, such as mortgage brokers, solicitors, etc?

You probably want to be introduced to other professionals because they are professional, trust worthy, competent, and you’re going to get along with them, not because your adviser is going to receive a payment.

Ask your adviser if they’ve personally used the services of the people they’re recommending.

7. Do you earn more money by recommending certain products or services?

A confident and convincing No.

8. In what ways are you remunerated?

The only way your adviser should be remunerated is by the fees you pay them.

9. Does anyone else at all, within your firm and/or your licensee, benefit from the advice you provide and/or the products you recommend?

A confident and convincing No.

10. Do you recommend more of certain products than others, and if so, why?

Yes – there should be very good reason for this. Primarily it should be about bringing you the ‘best-in-breed’ solutions. Whether it’s a particular investment, investment/portfolio manager, or custodian/platform, it needs to be because it’s good for you. Secondly, the more efficient your adviser’s firm, the quicker the turn around of your needs, and fees remain competitive.

11. What is your investment philosophy?

There are so many ways to invest. The most important thing is to find someone that has a philosophy (you’d be surprised how many don’t!). Then it’s a matter of ensuring your personal beliefs around investing align with your advisers. Ideally, you’re looking for a philosophy that is evidenced based, and not based on a gut-feel or hunches.

12. Do you believe your investment philosophy can beat the market?

There are roughly 60 billion shares traded each day around the world. It’s a tough ask to expect any one individual to outsmart millions of traders and investors around the world, over long-periods of time, and to do it consistently.

The answer should be No. If it’s a yes, you’re probably taking on more risk than you think.

13. How different do your client’s portfolio’s look to each other?

You probably expect your adviser to tell you that all their clients are unique and each portfolio is hand crafted to reflect their clients’ goals. And this is true. Although most client portfolio’s won’t look identical, a large portion of it should look and feel similar. By that I mean the underlying investments should largely be the same or similar, and that the allocations to those investments will vary.

14. Do you invest in the products you recommend me?

I’m a huge believer in ‘eating your own cooking’. The answer here should be Yes.

15. How often do you change investments or trade my portfolio?

Your adviser should be trading as seldom as possible. Maybe a couple of times a year. High turnover means high transactions fees, which in turn means lower returns. And we all know stockpicking is largely discredited.

16. What is a reasonable estimated return on my portfolio over the long term, after inflation and fees?

Your adviser should be able to provide you with these figures for past returns for a given level of risk (conservative all the way through to aggressive portfolios). You should expect a return of inflation plus 3-7% pa over the long-term. Anyone promising you double digit-returns is either a fool or a crook.




The Art of Discipline

I stopped driving into the CBD for work a little while ago. The traffic, the frustration, the cost of parking, fuel, and ongoing maintenance just didn’t make sense for me anymore. Since then, public transport has been my escape to the wonderful world of reading and listening. I don’t get too much time to do this on my own, with two little kids, and a wife who also runs a business, we have our hands full like most other young families.

The list of people’s work I like to read has grown over time, and with the calibre of work from these folk, it makes it a little harder each time to add a new one to the list.

One of my favourites is Jason Zweig, a personal finance columnist for The Wall Street Journal, editor of Benjamin Graham’s The Intelligent Investor, and author. He’s a great writer and a brilliant thinker.

With all that is going on in markets at the moment, I thought I would share with you his wisdom. Here are Jason’s Statement of Principles, which he does a much better job than I could ever do in helping shape one’s thought process for investing. Enjoy.

Successful investing is about controlling the controllable. You can’t control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor.

The first step to reaching your financial goals is to make sure you set goals that are reachable. Your expectations must be realistic. The stock market is not going to provide a high return just because you need it to.

The second step is to recognize what you are up against. Despite what all the daily market reports make it sound like, investing is not a game, a sport, a battle, or a war; it is not an endurance contest in a hostile wilderness. Investing is simply the struggle for self-control — the unending effort to keep yourself from becoming your own worst enemy.

The market is not perfectly efficient, but it is mostly efficient most of the time. Attempting to beat the market may often be entertaining, but it is seldom rewarding. There’s nothing wrong with gambling on poor odds, as long as you admit honestly that what you’re doing is gambling and as long as you put only a tiny proportion of your wealth at risk.

The brokers on the floor of the New York Stock Exchange clap and cheer when the closing bell clangs every afternoon because they know that no matter what the market did that day, they will make money — because you tried to. Whenever you buy a stock, someone is selling it; whenever you sell a stock, someone is buying it. Most of the time, the person on the other side of the trade knows more about it than you do.

However, you don’t have to lose just because other people win, and you don’t have to win just because somebody else loses. You win when you stick to your own long-term plan, and you lose only when you let greed or fear goad you into changing that plan.

The right time to buy is whenever you have cash to spare. The right time to sell is when you have an urgent and legitimate need for cash. If you buy because the market has gone up, or sell because it has gone down, you are letting 100 million strangers rule your life with their greed and fear.

Once you lose money by taking too much risk, the only way you can earn it back is by taking still more risk. If you lose 50%, you have to earn 100% just to get back to where you started. And if you lose 95%, you need to earn 1,900% before you break even. You may be able to do that once or twice through sheer luck alone, but the more often you have to try it, the more likely you are to end up broke. All too many people live their investing lives like hamsters on a wheel, running faster and faster and getting absolutely nowhere.

If you want to have more money, save more money. (I don’t 100% agree with this one, because I think if you want to have more money, making more money is also an option).

Investments that outperform in a bull market are certain to underperform in a bear market. There is no such thing as an investment for all seasons. That’s what diversification is for: to protect you against the risk of putting too many eggs in the wrong basket. And buying something that has just doubled, in the belief that it will keep on doubling, is an extremely stupid idea.

Your goals are a function of all your life circumstances: your age, marital status, income, current and future career, housing situation, and how long your children (or parents) will be dependent on you. Risk is a function of probabilities and consequences — not just how likely you are to be right but how badly you will suffer if you turn out to be wrong. Investors tend to be overconfident about the accuracy of their own analysis — and to underestimate how keenly they will kick themselves if that analysis is mistaken. Understanding your own shortcomings as an investor is far more important to your long-term success than analyzing the pros and cons of individual investments.

In the short run, hares have more fun; but in the long run, it’s the tortoises who win the race.