One of life's lessons ...

Our 100% growth investors have had a bumpy ride, like most over the last few years, but it's very interesting to note how quickly the recovery can happen - you can't afford to miss it.

To 2nd April 2012, our 100% growth investors - diversified across domestic, developed international hedged markets and emerging markets experienced a - 6.17 % return for the 12 months.  But when you look at what has happened in just the last 92 days - they've had an 11.09% recovery.

To look at a longer period, if you invested $1,000 in the ASX 300 in June 1992 through to December 2011 - you would have achieved 8.8%pa average return - $5,232.  Not a bad average given that we've had the Gulf War, 911, the Afghan War and a GFC during that period.  However if you missed only the best 15 days in that 19 year period, because you retreated to cash when the world looked uncertain and markets got volatile, or perhaps you got concerned about what the European Debt crisis would mean for stock prices, then your average annual return would have dropped to 5.1%pa or only $2,641.

Unfortunately fear drives many investors to miss the returns that are available to them.  They're convinced that they know something that the market doesn't.  It's just not true - the market is efficient at taking all new information and factoring it into prices very quickly.  We are more globalised than ever and whilst pricing mistakes can happen, it's not as often as you think.

It doesn't help investors that most economists don't get it right either.  In the SMH/Age Economists survey on Jan 6 2008, 28 leading economists forecast that the $AUD would go up to $0.90 US cents (from 88c), the cash rate would go up to 7.5% (from 6.75%) and that the ASX 200 would go up 8% to 6800.  What actually happened was that the AUD dropped to 70 US cents, the cash rate dropped to 4.35% and the ASX 200 was down 41% to 3722.

Then in Dec 2010, the same SMH/Age Survey (21 economists) forecast the AUD down 10% - it went up 5%, forecast the cash rate to go up to 5.25% from 4.75% and it went down to 4.25% and that the ASX 200 would go up 8% to 5169 and it went down by 14.5% to 4056.

The video clip below, The Investment Answer, provides some useful insight.

The lesson is to realise that market timing will cost you more than it will save you.  Successful investing does not require a crystal ball - it requires discipline.

Can You Manage Yourself?

Happy February everyone!  I don't think "Happy New Year" sounds right anymore now that we are in February ... and where did January go already?

Anyway, year 2012 is in full swing and 2011 is over!  We might have seen Aussie Cadel win the Tour de France in 2011 but it was a forgettable year for investors.  This fact was reinforced with me just last week when my neighbour (one up and one across) called me to ask if he could catch up to discuss setting up a Self-Managed Super Fund.  In case you were wondering, he called because it was 8pm, otherwise it would have been a chat on the front lawn.  His primary reason for wanting to set up a Self-Managed Super Fund ..... Control.

When super fund returns are negative, the urge for control is understandable and perfectly rational.  There are of course, a few things to know about Self-Managed Super Funds before jumping in the deep end. This article by Bina Brown in The Sydney Morning Herald does a good job of explaining what you should consider so I won't say it all again here.

What I do want to say about SMSFs is that the administration costs of having one can vary greatly.  Often these costs are billed on an hourly rate and that means that the final bill can come as a surprise.  We prefer a fixed fee service agreement and if you already have an SMSF or are thinking about one, take this as a suggestion: Speak with your accountant about setting a fee so that you know what you can expect to pay.  As a guide, if you have less than ten investments in your fund and you transact infrequently, you should expect to pay no more than $2000 for the accounting and audit costs combined.  How does this compare to the costs of a personal super fund I hear you ask.  This would be equivalent to having around $350,000 - $400,000 in a personal super fund which means there are no real cost savings to have an SMSF for less than $400,000 but of course, there is that control factor.  If you are disgruntled with your super fund return and you think an SMSF is the answer (just like my neighbour), just make sure you know what you are getting yourself into.... and consider how much your time is worth as well.

P.S.  The Sydney Morning Herald article states "since 2007 that DIY funds could borrow to buy residential property. More recently, the ATO clarified that DIY funds could "value add" and increase the worth of a property through renovation..".   As detailed in our News Update post in December, borrowed funds cannot be used for property improvements in an SMSF but can be used for repairs and maintenance.  An SMSF can however use its own funds (not borrowed funds) for improvements.

Image: Salvatore Vuono / FreeDigitalPhotos.net

An investment not worth paying for

When you’re making any purchasing decision, you make a judgement about whether you believe you’re getting value for money.  Along with price, other things that may come into the calculation include convenience, great service or in the case of luxury goods, the perceived effect on your social status.  

But when it comes to money management, the one factor that should not sway the decision is the promise of “great investment returns”.  As alluring as this sounds, we know that this is a very bold promise and you should know how to check if your money manager (read: stockbroker, fund manager or financial adviser) delivers.

So here is a proposition for you:
 

If these stock-picking pros promise great returns, their performance should be measured against the market in which they are investing.  If they are picking Aussie shares for your portfolio, then you should know if they are getting a better return than the market itself.  Why?  Because you can buy the market yourself at a much lower cost!

Don’t get me wrong, these stock-picking professionals are trying to beat the market.  It’s just that it is really hard to do.  You don’t want to pay extra if the result is more due to chance than skill.  And that is what the evidence from Karaban & Maguire (2011) is telling us:  

The S&P/ASX 200 Accumulation Index has outperformed approximately 70% of active Australian equity general funds over the last five years, increasing to approximately 77% over the last year (mid year 2011).  At least 69% of active international equity funds underperformed relative to the benchmark over every time horizon. Over the last year, the index has outperformed approximately 80% of actively managed international equity funds. 

So if the odds of beating the market are that bad, why would you pay more for the promise of better returns? 
 

The Trusted Adviser.