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Financial Happenings Blog
Thursday, July 30 2009

Our firm's investment philosophy is based on an index appoach to investing.  We follow this approach because we believe you should get a better than average result from investing this way.

The theory goes like this, if you accumulate the returns for all investors before fees and costs, the average investor will receive the market or index return.  Some will do better and some will do worse.  Therefore if you implement a lower cost strategy than the average market you should expect to come out slightly above average.  For instance, if the average market return for a period was 10% and it cost you 1% to get that return your net result would be a 9% return.  If on the other hand the average market costs were 2% then the average investor should earn a net return of 8%.  By taking a lower cost approach, which using index funds would provide, you will be doing better than average.

Over time this effect compounds period over period so that over a number of years you should see a significant difference between the investor who has used a low cost index based approach compared to the avaerage investor who has utilised an active approach which has cost more to implement.

Theories are all well and good unless they are backed up by actual data.  Standard & Poors have recently published their latest scorecard comparing active funds to the index.  The latest report is for the period leading up to the 30th June 2009.  So what have they found?

  • Over a five year horizon, benchmarks have outperformed a majority of actively managed funds across equity and bond fund categories. Shorter horizon results are mixed.
  • The S&P/ASX 200 index has outperformed two-thirds of active Australian general equity funds over the last 5 years. Year-to-date, the S&P/ASX 200 has only outperformed about half of active funds.
  • The S&P/ASX Small Ordinaries index has out-performed just over half of the active Australian small-cap funds in the last five years. Year-to-date, the index has outperformed 60% of the actively managed small cap funds.
  • The UBS Composite 0+Y Bond Index has outperformed 97.22% of actively managed bond funds in the last five years. However, in first six months of 2009, the index has outperformed only 25.81% of actively managed bond funds.
  • Over a five year horizon, approximately 10% to 30% of funds have disappeared. This makes it important to consider survivorship in industry analysis.

This report is very interesting and provides some compelling evidence that an index based approach will outperform over the long run.  Some may comment that if an index only beats just over half active managers like it has in the past 12 months then this is not a great result.  The point is that an index approach should consistently do this year after year.  The active managers that beat the index each year will be different so that after a number of years you would expect the index approach to be ahead of well over 1/2 of the active managers.  S&P have found that over a 5 year period the index is ahead of more than 2 thirds of active managers.

I encourage you to take a look at the report.  It makes for interesting reading -

Scott Keefer

Posted by: Scott Keefer AT 06:35 pm   |  Permalink   |  Email
Wednesday, July 29 2009
In a recent article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis takes a look at the details of ANZ's recent capital raising rights issue.

Scott comments that the capital raising may have disadvantaged some existing shareholders.

To take a look at the full article please click on the following link - Did ANZ short-change its loyal shareholders?
Posted by: AT 06:00 pm   |  Permalink   |  Email
Tuesday, July 28 2009

A website I like to keep an eye on is published by Merriman Inc - a registered investment adviser in the USA.  Paul Merriman is the founder of the firm and regularly comments on investing including his regular Sound Investing radio program.

This week I came across an article written by Merriman back in 2003 which still has some valuable lessons for those planning for retirement.  Even though it is US based and does not talk about the nuances of the Australian superannuation and pension system, the general pronciples are really useful.  So here is an abridged version of the 10 steps Merriman sets out:

Step 1: Determine what investment return you need
Figure out your essential living costs per month - the amount below which you simply cannot make it. Your definition of this will be uniquely your own.

This first step can be discouraging. But it's essential because it will force you to face up to reality - ideally while you still have options available to you.

Step 2: Determine the investment return that you desire
Your goal is to arrive at a figure that, if you added it to your base monthly income, would make your life much better, giving you a future worth looking forward to.
A good rule of thumb is that you can conservatively count on withdrawing 5 percent of your portfolio every year. If you invest that portfolio well, you can keep doing that with a high probability that your portfolio's value - and thus your annual "draw" - will gradually rise over time without much risk of running out of money.

The flip side of that rule of thumb is that you can know you have enough to retire if your investments are worth 20 times the annual income you desire from those investments.

Step 3: Determine your tolerance for risk
Figure out how much you are willing to lose and invest accordingly.

Most retirees invest in stock funds and bond funds. And for most of them, the basic way to control risk is by increasing or decreasing the percentage allocated toward bonds. More bonds means lower risks (and generally lower returns as well). More stock funds means higher risks (and generally higher returns).

These first three steps are the most important ones in our 10-point plan. But even when you have completed them to the best of your ability, you are far from finished if you want to maximize your ability to enjoy your retirement.

Step 4: Base your decisions on what's probable, not what's possible
In planning your retirement, you'll always be better off to use conservative assumptions rather than optimistic ones.

Step 5: Determine what assets have the highest probability of giving you the returns you need
If you diversify among asset classes that have performed well over very long periods, you won't get snookered into putting all your trust in whatever has been performing well lately.

Step 6: Determine what combination of assets will produce the return you need within your risk tolerance
You may want the expected returns that come with an all-equity portfolio. But such a mix of assets is too risky for most retired people. Remember the general rule that the higher the return you seek, the more risk goes with it.

There are three steps in this process.

First, find the best combination of equity assets.
Second , identify the best fixed-income assets to stabilize your portfolio.
Third, find the right percentage combination of equity assets and fixed-income assets to give you the best balance of return and risk.
Merriman's advice: Give priority to the risk measurements, not past returns.

Step 7: Keep your expenses as low as possible
There are two kinds of expenses: ongoing and one-time-only. Almost all investments involve some type of recurring expenses. Savvy investors always want to know what the expense ratio is. Na´ve investors ignore this, focusing instead on marketing hype and recent returns.

Expenses in actively managed funds, which depend on stock-picking, vary widely, though they are almost always higher than in index funds.
Here's a little formula that Wall Street doesn't want you to know: Higher expenses mean either less return or more risk. This is true in general for almost every investment you can make. If you pay higher expenses, you will either get lower expected returns or take more risk - and often it's both.

Step 8: Minimize your taxes
The comments made here by Merriman were more relevant to the US situation.  In Australia it is about determining the best structure for your financial investments - e.g. super, pension, discretionary trust, directly held and in who's name should each asset be held.  Part of this discussion needs to way up the tax implications including the tax status of the particular structure and the implication of applicable tax offsets such as the Senior Australian Tax Offset (SATO).

Step 9: Put the management of your portfolio on automatic
This is the best way to keep your emotions from subverting your intentions and your plans.

Economists who study human behavior say people make financial decisions based on their emotions. Yet the outcomes of those decisions are not determined by emotions. The outcomes are determined by hard, cold reality. I believe this difference is one of the biggest challenges facing investors.

If you're still accumulating money, sign up for automatic investment plans whenever you can. That way, you'll know the money goes to work for you when it should. Dollar-cost-averaging will make sure you automatically buy more shares when prices are lower and fewer shares when prices are higher.

Index funds will make sure you automatically diversify and adjust your portfolio for the comings and goings of various companies.

If you are using a timing system, hire somebody to do it for you. That way you know for sure that the timing system you have chosen will be followed.

Putting your portfolio on automatic is also the way to give yourself the highest probability of success and to defend yourself against sales pitches from brokers who want you to do something different.

Step 10: Determine the best strategy for withdrawing your money
This can be tricky, and you may benefit from sitting down with a professional to make sure you understand the decisions you must make and their ramifications.

One of the most important decisions you face is whether to take out a fixed amount from your investments every year or whether to let your withdrawal vary from year to year depending on the performance of your investments.

This is essentially a choice of what type of risk you want to take. If you take a fixed amount from your portfolio, you will know what you can count on and plan your life accordingly. But you take the risk that you could run out of money because your withdrawals won't have anything to do with your investment performance.

If on the other hand you take a variable amount, say 5 percent or 6 percent of the portfolio value each year, you can be pretty sure you won't ever run out of money, and you'll most likely have some left over to leave in your will. Consequently, you'll know that the amount you withdraw is an amount you can afford. On the other hand, with this plan you won't know what you can count on for living expenses in the future.

You also must figure out a way to make withdrawals that will keep your portfolio properly balanced in the assets that in turn will keep you within your risk tolerance.

If you would like to read the full article please take a look at - A perfect retirement in 10 easy steps

A further step which Merriman has not included but is relevant for Australians contemplating retirement is to factor in the possibility of accessing the Age Pension or Commonwealth Seniors Health Card and the benefits that come with this access.

In conclusion, planning for retirement is not an easy task but there are some important steps that can be taken to help provide a little more confidence that you are well positioned financially to make the most of this stage of your life.

If you would like to make an appointment to sit down to discuss any of these issues or have a chat over the phone or via email please do not hesitate to get in contact.

Scott Keefer

Posted by: Scott Keefer AT 06:05 pm   |  Permalink   |  Email
Monday, July 27 2009

Users of our website, through our User Voice feedback forum, have requested that we regularly update the graphs outlining the performance of the Dimensional trusts that we use in building portfolios for clients.  In response to this feedback we have updated these graphs to reflect performance up to the end of June 2009.




The graphs show strong monthly returns over the month for the Australian share asset classes with international share investments relatively flat for the month mainly due to the impact of currency movements.


Over the long run, the graphs continue to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist:


Australian Share Trusts - 7 Year returns



7 Yr Return

to June 2009

Premium over ASX 200

Accumulation Index

ASX 200 Accumulation Index



Dimensional Australian Value Trust



Dimensional Australian Small Company Trust




International Share Trusts - 7 Year returns



7 Yr Return

to June 2009

Premium over MSCI World (ex Australia) Index

MSCI World (ex Australia) Index



Dimensional Global Value Trust



Dimensional Global Small Company Trust



Dimensional Emerging Markets Trust




NB - These numbers are average annual returns for the 7 year period which are slightly higher than the annualised returns.


Please click on the following link to be taken to the graphs - Dimensional Fund Performance Graphs.


For anyone new to our website, it is important to point out that we build investment portfolios for clients based on the best available academic research.  Take a look at our Building Portfolios and Our Research Based Approach pages for more details.  In our view, this research compels us to use the three factor model developed by Fama and French.  In Australia, the most effective method of investing using this model is through trusts implemented by Dimensional Fund Advisors (  We do not receive any form of commission or payment from Dimensional for using their trusts.  We use them because they provide the returns clients are entitled to from share markets.


However, academic theory is nothing if it can not be implemented and provide the returns that are promised by the research.  Therefore, we like to provide the historical returns of the funds that we use to build investment portfolios.

Posted by: Scott Keefer AT 07:56 pm   |  Permalink   |  Email
Tuesday, July 21 2009 is an American website I regularly refer to in gleaming important issues that need to be addressed with clients and those seeking general information through our website and email service.

On their site they regularly publish video pieces for those who prefer to take in information visually.  The latest video covers the topic of whether investors whould be looking for a new financial adviser.

Why not to change adviser?

This is an interesting topic given the turmoil of 2008.  Tom Cock, the presenter of the video, suggests that one reason for not jumping the gun is because you lost money in the bear market.  I think this is backed up by research conducted by Dalbar which looks at the habits of investors suggesting that investors on average tend to switch investment strategies at the wrong time and actually harm the returns they should have received.  Reminds me of the saying "Jumping out of the frying pan into the fire".

Tom Cock goes on to say that you should be careful chasing the next "hot idea" promoted by some advisers or by moving to an adviser or investment strategy that has a solid 1 year track record.  He suggests that anything less than 10 years is noise.

So why should you change adviser?

Tom proposes 3 key criteria:

  1. An adviser who can save you money.  i.e. provide the same or similar advice for a lower cost
  2. An adviser with a better long term strategy.
  3. An adviser who is more in tune with your individual needs.

If you would like to view the video please take a look at - Should you switch financial advisors?

If you want to see how this firm stacks up on those 3 points please take a look at our website or get in contact directly.

Scott Keefer

Posted by: AT 05:25 pm   |  Permalink   |  Email
Monday, July 20 2009
In a recent article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis reconsiders the debate about whether to invest in shares or cash.  He takes us through two pieces of analysis which shows the premium from investing in shares over the long term.

The key points:

A review of Australian stockmarket returns between 1958 and 2005, (see A Re-Examination of the Historical Equity Risk Premium in Australia) by academics Tim Brailsford, John Handley and Kirshnan Maheswaran, found that the market returned a 6.8% premium, even though the period included:
  • A number of recessions.
  • The recession of the early 1970s.
  • The 1987 stockmarket crash.
  • The Asian economic crisis.
The actual return from investing in shares over this period was 14.5% a year.

The authors reviewed data going back to 1883 but, to get the fairest possible result, 1958 was used as a starting point because the authors considered it the start of the period of reliable data in the Australian environment. (For the period 1883 to 2005, they found the average return from shares was 11.8% a year, with an equity risk premium of 6.6%.)

Separately, researchers working for the leading brokerage Credit Suisse discovered a number of key factors:
  • Over the long run (1900 to end 2008) shares have provided an investment return (combined result from all global stockmarkets) of 4.2% a year higher than investing in cash.
  • They argue that going forward they expect the return from shares to be about 3.5% a year higher than the returns from cash investments.
  • In Australia, the return has been 6.5% a year greater for investing in shares rather than cash over the same period (1900 to end 2008).
  • Their analysis confirms that higher returns have been achieved from investing in value and small company shares.
  • They emphasise that shares are a volatile asset class, although they don't provide as much effort into trying to quantify this volatility.
  • They studied the performance from shares after really good and really bad years. There did not seem to be any extra return following really good or really bad years.
  • Dividends (the income from investing in shares) in Australia between 1900 and end 2008 has grown at the rate of 5.6% a year, higher that the rate of inflation over the period of 4.5% a year.
The other aspect addressed by Scott is the power of franked dividends.  In Australia, the Credit Suisse study found that dividends in Australia between 1900 and 2008 have grown at the rate of 5.6% a year, higher that the rate of inflation over the period of 4.5% a year.

To take a look at the full article please click on the following link - Shares or cash? Look to the long term
Posted by: AT 09:23 pm   |  Permalink   |  Email
Monday, July 20 2009
In a recent article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis looks at the use of debt recycling.  This is the practice of taking on some investment debt while at the same time repaying your mortgage, a non-tax-deductible debt.

Scott points out that there are clear risks with the strategy. Borrowing to invest is intentionally risky: you are increasing the volatility of your situation in the expectation of providing a long-term benefit to your position.

For example, if you had started this strategy two years ago, you would be significantly underwater and probably preferred to have just paid off your mortgage instead. But recognise that the long-term average return of the sharemarket over the past 30 years is 12.6%, which can produce sizeable benefits.

The benefits of the strategy are three-fold:

  • You are reducing your non-tax-deductible debt.
  • You are building a passive income stream from the shares.
  • The increasing stream of dividends from the share investments helps pay the mortgage off faster.

There are a lot of problems with the most frequently used approach to borrowing to invest, whereby a lump sum is borrowed and invested using a margin loan.

Three of these problems include:

  • Margin loans are often very expensive.
  • There is the risk of a margin call when the value of a portfolio falls sharply, forcing you to sell at a time when markets have fallen.
  • Investing a big lump sum at one time means that you are very exposed if the market drops suddenly.

A debt recycling strategy provides a solution to all of these problems. Borrowing against your house is usually cheaper that a margin loan, without the concern of a margin call.

Because you are investing on a regular basis (each year, for example), if markets do fall you have the advantage of making further contributions over time and buying more assets at lower prices.

A debt recycling strategy is certainly more suited to those people comfortable with investment risk. At the end of the day it won't work unless there is a reasonable return on the investment involved.

For those willing to take that risk, it provides a way to build an investment portfolio over time, reduce your non-tax-deductible debt and start to build a passive income stream from your investments.

To take a look at the full article please click on the following link - Recycle your debt.

Posted by: AT 08:54 pm   |  Permalink   |  Email
Tuesday, July 07 2009

The start of a new financial year sees the financial media crystal ball gazing into what might be the prospects for the economy and investment markets for 2009/10.  At this firm we recommend investors tread very cautiously if basing their investment decisions on these forecasts as more often than not they are way off the mark.

Jim Park from Dimensional Fund Advisors has provided more evidence of the need for skepticism in his latest Outside the Flags commentary piece.  Jim concludes that investors would be better served ignoring the forecasts and remaining as diversified as possible in their chosen asset allocations. The only thing that should shift them is a change in their life circumstances or goals.

The following is the full article:

Many Happier Returns

The end of the financial year in Australia always generates a fair degree of both reflection and crystal ball gazing as the nation's media and market pundits seek to position themselves as sages and seers.

And this past financial year ? one in which the global financial system faced its sternest crisis in decades - has really got the industry's collective brain cells working in overdrive. Just what will happen next?

On this score, there is a decent debate between several camps. At one extreme are those who think the foundations of a new bull market are being built. At the other are doomsayers who think the real carnage still lies ahead.

Between these two poles are those who think the worst is probably over, but that more volatility is in store. The disagreements here focus on the strength of the economic recovery and what will happen when governments and central banks start withdrawing the extraordinary stimulus from the system.

Still others are fretting about inflation and the risk that policymakers have overcooked the goose by cutting interest rates too far and by running up large public sector debt to keep demand ticking over while the business and household sectors sort out their own balance sheets.

This many-sided debate - and the above list of arguments is by no means comprehensive - understandably leaves many investors confused about how they should approach the new financial year.

The short answer to that question is that all those opinions and complexities and risks are reflected in the prices of securities. You can join the debate, of course, but you won't learn anything that the market doesn't already know.

And if you base your investment strategy on the basis of someone's opinion about the future, you may end up taking unnecessary risks.

To illustrate this point, it might be useful to reflect on what the various gurus were saying a year ago about the likely outlook for 2008/09.

In a financial year outlook published on July 1, 2008, The Australian newspaper1 asked six prominent market analysts for their forecasts on the domestic equity market, crude oil, cash rates and the Australian dollar.

The table below shows the median forecasts of the newspaper's analysts and compares them to the actual outcome at the end of June this year.

2008 / 09 Analyst Forecasts




Missed by:

All Ordinaries




Crude Oil ($US / Barrel)




Cash Rate

6.75 %

3.00 %


$A versus $US

92 US cents

81 US cents


You can see that the esteemed panel got it wrong on all the variables, most notably on the cash rate, which the Reserve Bank cut from 7.25 per cent in September 2008 to historic lows at 3.0 per cent by April, 2009.

They were way too optimistic on the equity market, expecting Australia's broad benchmark All Ordinaries index to end the financial year around 6000. It ultimately ended about a third below their forecast level.

What's also remarkable is that the big danger point for the world economy a year ago was oil-generated inflation, but as the financial year wore on and prices collapsed, policymakers started worrying about deflation.

Now in the newspaper supplements, we are seeing a range of equally learned and plausible sounding forecasts for the new financial year. What do you think their chances are of getting it right?

The proper response to all of this speculation for investors is to ignore it and to remain as diversified as possible in their chosen asset allocations. The only thing that should shift them is a change in their life circumstances or goals.

Aside from a reversal in actual market fortunes, it's the one thing people can do to give themselves the best chance of happier returns in 2009/10.

1'Worst for 25 Years and There's More to Come', The Australian, July 1, 2008

Posted by: Scott Keefer AT 09:54 pm   |  Permalink   |  Email
Wednesday, July 01 2009
In a recent article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis responds to Alan Kohler's recent article that suggests we are in a stock picker's market and should shun an index approach. 

Scott reminds readers of the following points supported by well regarded academic research:
  • Stock picking rarely works
  • Little evidence of skillful investing
  • Everyone thinks they can be above average but this is mathematically impossible

Scott concludes:

Index funds are not perfect. Any discussion of investment approaches that considers the pros and cons of using index funds is really looking at whether a market participant has the skill to beat the market or should settle for the average market return.

My opinion is that there are strategies well worth considering beyond simple index funds (including exposure to small companies, value companies, a careful asset allocation including bonds and cash). Index funds do, however, remain a reasonable way to exposure investment capital to markets.

Indeed, if I was told that my investment future was restricted to only being able to use a good quality cash account and a low-cost Australian share index fund in my portfolio I could comfortably cope with that.

To take a look at the full article please click on the following link - Should you follow the index?

Posted by: AT 09:07 pm   |  Permalink   |  Email
Wednesday, July 01 2009
In a recent article published in Alan Kohler's Eureka Report, financial education consultant Scott Francis considers the plan that a $50 million lotto winner might proceed with their winnings - and it might also apply to others who happen on an unexpected lump-sum payment.

Scott suggests the following ideas:
1: Setting aside $2 million in cash for the new home/car and any other initial costs (living costs for a while, travel costs and so on) while you structure your overall position.

2: Investing $10 million a year in the winner's own name as a portfolio of cash, fixed interest investments, shares and property assets to provide the winner with an income of well over $200,000 a year, increasing with inflation.

3: Set aside $2 million to provide for investments into superannuation over the next 10-15 years as a future source of wealth.

4: Contribute $10 million to a charitable trust, and keep $2 million in a charitable portfolio outside the trust. Each year the income from the charitable trust (likely to be $400,000 or so) has to be donated to registered charities. The other portfolio ($2 million) is likely to generate income of $60,000 a year after tax, and can be used for giving to non-charitable causes (such as a family member).

5: Contribute the remainder to a family trust (a cool $26 million). The income from this trust can be distributed each year for any of the strategies listed above.

6: Get yourself a very good lawyer.

7: Spend some time doing your will, and cancel your life insurance. With $50 million you don't need to be paying money every month for a $1 million life insurance policy. If you die your family will be fine financially. A will that reflects your wishes is crucial. This should be continually updated as your circumstances change.

To take a look at the full article please click on the following link - A lotto winner's handbook
Posted by: AT 08:56 pm   |  Permalink   |  Email
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