It’s time in the market that counts

“Fortune favours the brave.” Investing more aggressively is one of the key behaviours of money masters in creating long term wealth. But when the share market falls suddenly and significantly many people cannot contemplate such a behaviour.

To help you be comfortable to invest more aggressively you need to invest time educating yourself about the short term risk, the long term rewards and your available options. Education and awareness is one key.

To assist you, Vanguard have published a chart of the volatility of the Australian share market index over the past 30 years. It shows that there have been 7 times since 1978 that the index has fallen more than 10%, for an average fall of 21.2%. The chart also shows the time length of the downturn and the subsequent recovery.

View the chart on the Vanguard website.

Remember: wealth creation is a long term game. What happens in the short term is mostly irrelevant – it’s just a blip on the radar.

Six rules can help you avoid Sod’s Law

In The Australian today, Peter Switzer writes a good article that extracts fundamental lessons for us all from the recent loss of $100 million by Sydney lawyer, Chris Murphy. Read the full article here.

When seeking investment information it is easy to be attracted to the neon lights and fanciful claims of certain investments. But it is essential to look past the glamour and understand the core of what is going on.

Is it a wolf in sheep’s clothing? Or a beautiful swan within an ugly duckling?

If in doubt, return to the fundamentals and stick to what you understand. Complexity does NOT equal value. Simple is often the best. 

Property index changes name

Standard & Poor’s and the Australian Securities Exchange (ASX) recently changed the name of the S&P/ASX 200 Property Trusts Index to the S&P/ASX 200 A-REIT Index. The name change follows the ASX and Property Council of Australia’s renaming of Australian listed property trusts as Australian Real Estate Investment Trusts (A-REITs) to align with global practice.

REIT is the most commonly used and understood term used for listed property trusts in international markets. Australian REITs currently comprise around 12 per cent of the world’s listed real estate assets and are one of the largest sectors on the ASX.

Source: Vanguard Investments Australia, Smart Investing newsletter.

I recommend that all investors benchmark their portfolio returns once per year. The above name change is important to know because I recommend you use the market indices as one of your benchmarks.

Keep it simple to ride out market emotions

In his latest article, Robin Bowerman of Vanguard Investments Australia suggests: “There is one clear lesson investors can learn from the recent sharemarket turmoil – the smart way to invest is to keep things simple.”

It is an excellent article that discusses behavioural finance and draws on research from Steve Utkus, the head of Vanguard’s US Centre for Retirement Research. You can read the full article here. Be sure to read the closing paragraphs suggesting strategies for guarding against overconfidence.

You can also watch an interview with Steve Utkus here. If you are already familiar with the context of behavioural finance then I recommend you skip to question 7 in the video.

Contracts for Difference – a dream or a nightmare?

Newspapers and magazines are full of advertisements for seminars on systems and products to help you get rich fast. The ads generally are full of testimonials from people who allegedly made a killing in months, not years – and it was soooo easy. Contracts for Difference (CFDs) have been one of the recent fashionable tools that has been promoted in such seminars.

I have always considered such systems to be akin to gambling for the average investor, and only suitable to the most sophisticated investor with deep pockets. Well the front page of yesterday’s Weekend Australian newspaper covered a story that reinforced that even the Australian regulator, ASIC considers them to be like gambling.

If you ever find yourself tempted by such glamorous advertisements in the newspaper then read the article to help you to further inform your investment decisions.

Four Lessons from the Market

Morningstar and IFSA (The Investment and Financial Services Association) have combined to publish an interesting article that helps one keep recent volatile markets in perspective.

It may not be the first time that you have heard of one or more of the lessons but you may find that the current share market volatility has changed your receptiveness to the lessons in the article. So the article is worth reading with a fresh mind, especially if you would like to increase your tolerance of risk to take advantage of a broader range of opportunities.

Read Four Lessons from the Market now.

Volatile markets present a great opportunity

Many media commentators are suggesting that the current volatile Australian sharemarket potentially presents a good opportunity to buy. But I think it actually presents a terrific opportunity to learn.

Most likely it is only people with an existing appetite for risk and confidence in their decisions that would be comfortable buying at volatile times like now.

So for everyone else it is a great opportunity to learn and to begin the journey of increasing your tolerance of risk. Emotions are one of the key drivers of risk tolerance. So right now and during volatile times do the following:

  1. Stop, take time and observe your thoughts and feelings about the current state of the market
  2. Write them down in your journal or diary, if you have one, or even in you investment file. (Date the entry.)
  3. Probe deeper by asking the wonderful question that children master: “Why?” For example, “what makes me feel or think that way?”, “What do I think may happen?” Keep drilling and obtain mastery of your thoughts.
  4. Seek resources that help you learn about the thoughts or fears you identified

The Financial Planning Association of Australia have just released this excellent resource to help you learn about risk: “The trade off – understanding investment risk.”

The graph on page 14 is particularly pertinent to anyone thinking they should be selling now. My question to those people is “if you do choose to sell now, what are the triggers that will make you buy again?” If you are serious about long term wealth creation you need to answer that question. The graph on page 14 shows the significant impact of missing the best month because you hesitated in being in the market.

If you are a long term investor turn off the news when the finance report starts. It’s just distracting noise.

Your place in the wealth scale

New research on 30,000 wealthy Australians has revealed “Income, saving and – most importantly – time are the most
important elements of wealth creation” – well surprise, surprise! 🙂

Doug Turek of Wealth Benchmarks has been researching wealthy investors since January this year. In the latest edition (5th December 2007) of The Eureka Report, Doug presents some of the findings of his research, which he plans to publish in a book in June 2008. The article is available for subscribers only but you can get a free 14 day trial so you may be able to read it if you act quickly.

Following are a few quotes from the conclusions in the article:

“Successful people create a “virtuous” wealth-building circle of earning, saving and investing and reinvesting.”

“The key message, which is a timeless anecdote about finance, is that we build wealth patiently and purposefully. There is a rich reward for those who get it right.”

“Other factors apart from age and income drive financial freedom or impact it. I observe, for example, a
marital separation knocks off on average 20% of lifetime wealth.” (Matt’s note: there is much value in investing in relationship development as well as wealth education.)

“Knowing the right asset allocation for you and managing your portfolio to this target is a critically important investment discipline. This work reinforces my suspicion that too many Australian investors neglect this fundamental and focus instead on tactically or ad hoc accumulating shares and other investments.”

Check out Doug’s site Wealth Benchmarks to conduct a free benchmark of your net worth against the average Australian.

Another reason why managed funds are not “set and forget”

Nine former Suncorp investment managers, the Australian Equities team, have walked out the door to a competitor. Should you care? (Read the news item here.)

So often people recount stories to me that how they identified their managed fund was based on past performance. They also say they did lots of research when they first invested but in the intervening years have done little more than check the balance.

You’ve probably heard that past performance is not indicative of future performance – but I often sense that people see that statement as a legal escape clause for the marketer rather than having much basis.

Well, if the entire team managing your money has changed (usually to different jobs) then there’s a good likelihood that future performance may be different to past performance.

Industry researchers van Eyk Research identify the capability and stability of senior investment staff as a key factor in the quality of the managed fund. In modern society it is common that we change jobs every few years and the same happens in financial services, including in funds management. So it is important for you to keep an eye on the ongoing performance of the team managing your money.

Investing, even in managed funds, is not a set and forget game. You need to nurture your wealth.

Chasing last year’s winner can be disastrous

Irrespective of the warnings that past performance is no indicator of future performance many do-it-yourself (DIY) investors seem to use past performance as one of their major criteria in investment decisions.

New research from Morningstar has demonstrated the impact of this behaviour for investors over the past 10 years. They have done this by calculating an “investor return” which is a money-weighted calculation that accounts for aggregate monthly purchases and sales by all of a fund’s investors.

Read more about this research and its impact in this interesting article by Robin Bowerman of Vanguard Australia. (Read more here…)

To me the article reinforces the following points:

  • Don’t rely on past performance figures
  • Don’t chase last year’s winners. Assess future potential.
  • Focus on your personal returns based on the timing of your actual investments. Be objective – maybe your investments have not been as good as you first thought?

The key ingredient to wealth

Imagine for a minute that you’re on a ship sailing the seas; perhaps a cruise along the Alaskan coastline. The ship hits an iceberg, starts taking on water and the Captain announces “abandon ship – everyone to the life boats”. Traditionally, who are the first to be saved?

The women and children.

But why the children? They probably have very little knowledge and skills, will panic and once they get on the life boat will make life hell for all the other survivors by whinging the whole time. (Yes, I am a parent.)

So, why save the children?

Because they are the future. The embodiment of massive potential.

You were once a new born baby with massive potential for future greatness. Ask your parents what they were thinking when they first held you in their arms.

What Happens?

Why don’t so many people achieve their stated dreams?

According to the great achievers the key ingredient to wealth is our minds. And conversely the greatest obstacle to wealth is ourselves.

What happens is…life happens, and the choices we make in interpreting each life event. The choices create positive and negative beliefs about success, achievement, wealth, and what it means to be “rich”. The negative beliefs become blockages to achieving the level of financial success we desire.

Just walk into any good book store and there is ample information about how to get rich. You can easily discover what to do and how to do it. So why aren’t more people really wealthy?

…well the excuses are endless. But they all boil down to the same thing – they made choices away from wealth rather than towards it. And most of our choices have a large emotional undercurrent.

To get wealthy the most important thing to master is your own mind and your own emotions.

An Example

Conceptually most of us understand that we can achieve higher investment returns and greater wealth by investing in more growth oriented investments, compared with investing in income oriented investments. So if you want to get richer you would invest maximum amounts in growth investments.

However research shows that most people cannot emotionally handle the short-term volatility of growth oriented investments. They are more comfortable having at least 30% of their long-term investments in defensive assets.

In other words, most people are allowing their short-term emotions to compromise their long-term wealth creation potential.

Does that sound like it could be you?

You can still achieve what you want

Do you still feel that you have the potential to achieve greatness? To achieve whatever you dream. To be as wealthy as you desire and to use that wealth to live the life you desire. Do you still believe it?

I believe you do have massive potential, no matter what age you now are.

As well as learning about the details of investment strategies and products, invest in learning about yourself. That will have the greatest return-on-investment. And you will reap the rewards in many diverse ways, including wealth.

P.S. Thanks to Colin James for sharing the sinking ship story.

What are realistic expectations of market returns?

When talking to people it amazes me how high people’s expectations are of returns they could achieve from investments – often so high as to be unrealistic. When pressed, most cannot describe the evidence on which they base their expectation.

What are your expectations of the returns you will achieve from your specific investments? What evidence have you used to shape your expectations?

To help you manage your expectations it is useful to consider what has been achieved in the past. Vanguard Investments Australia has created a flexible tool for looking at historical market returns since 1970. You can even select individual years and see what the best, worst or average return was for each investment market. Check out the Vanguard tool here.

(If you know of any other great tools out there on the internet please let me know by leaving a comment below.)

How to reclaim trail commissions

Do you have investments, superannuation accounts and/or insurance policies sitting around? If you’ve had them for years then it’s quite possible that some company somewhere is receiving an ongoing (trail) commission from that product, and you possibly don’t know who they are.

If you’ve had no contact from them then they are just receiving the commission rather than earning it. Would you like to reclaim that money and put it towards your own wealth creation?

Here are the steps I suggest that you take to reclaim lost trail commissions. They are in a specific sequence:

  1. Contact the product provider and find out the contact details of the adviser appointed to your account/policy. Also ask the level of upfront and ongoing commission they receive at the moment. This is likely to be a percentage figure. You will find the contact details of your product provider on your latest statement.
  2. Contact the appointed adviser and ask them to define the level of service that you are eligible to receive in return for the income they have earned from the commissions. Plus the service you will continue to receive if they remain the appointed adviser. (Here, I strongly suggest you call with a tone of genuine enquiry rather than an adversarial tone.)
  3. If you are not satisfied with the existing adviser find a fee for service financial adviser who will either rebate the commissions or offset them against their quoted fees. You can use the Financial Planning Association’s Find A Planner service. Or contact me as that is precisely how I operate.
  4. If you are a die-hard do it yourself wealth creator who doesn’t even seek fee for service expert assistance then you may be interested to know that there are now a few discount brokers who will rebate most of the commission to you. You appoint them as the adviser to the policy and they send you a cheque. You can find out about two such discount brokers in this article published yesterday in the Sydney Morning Herald.

Update: I have compiled a public list of commission refund services. Follow the list using your Google account and you’ll be automatically advised whenever I come across a new provider.

If you do choose to use a discount broker and receive a rebate cheque then be sure to use it to boost your wealth creation by reinvesting it.

Mindless eating, mindless investing

I have written before about the importance of our money mindset in creating wealth. From our mindset comes our beliefs, thoughts and feelings which drive our behaviours.

Gareth Abley, Senior Asset Consultant at MLC Implemented Consulting has written this interesting article which includes an examination of the links between our eating behaviours and our financial behaviours. Read the article.

(The article appears to be inspired by the observations of James Montier in reading Brian Wansink’s book called “Mindless Eating“)

You don’t have to be smart to be rich

One money mindset that I come across is the belief that “I’m not smart enough to do that”. It is a major limiting belief that has wide ranging negative consequences for wealth creation.

If you relate to that belief then here’s some good news for you. Research on over 7,000 Americans has demonstrated that there is no correlation between your level of intelligence (as measured by IQ) and the level of your wealth. Read more about the research here.

You are smart enough to understand all the major elements of money management and to use that knowledge to create enough wealth for a very comfortable life.

But are you perhaps too smart? The research study notes that high intelligence does not necessarily mean greater wealth. To quote the study author, Jay Zagorsky: “Professors tend to be very smart people; but if you look at university parking lots, you don’t see a lot of Rolls Royces, Porsches or other very expensive cars. Instead you see a lot of old, low-value vehicles.”

Wealth creation takes wisdom – applying good judgement to the knowledge that you do have to create positive action.

You have what it takes to get rich. But resist the temptation to get too smart by complicating things to the point of ineffective action. The “basic”, simple and easy strategies often provide a much bigger benefit than any of the sexier, more complex and more time consuming strategies.