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 Financial Happenings Blog 
Tuesday, December 18 2012

A piece in the Sydney Morning Herald last month reported on a study conducted by Goldman Sachs.  The study found that Australians plan to stick with local shares or cash and term deposits - Investors stay close to home.

Recent history has shown that this investment philosophy has provided mixed results.

On one hand, Australian shares over the past decade (to the end of November 2012) have significantly out-performed international developed country markets as a whole when those exposures have not been currency hedged.

On a currency-hedged comparison basis (i.e. removing the impact of the rise of the Australian dollar over the past decade) returns from those same international markets have still been lower but much closer.


On the other hand, international fixed interest and international listed property have significantly out-performed their Australian counterparts.

Emerging Markets exposures have out-performed Australian shares slightly.

Cash and term deposits have under-performed fixed interest (bond) exposures.

But what has happened more recently?

International shares on a currency hedged basis have significantly out-performed Australian shares over 1 and 3 year periods.

International shares without currency hedging have out-performed Australian shares over 3 years and slightly under-performed over 1.

International listed property has significantly outperformed Australian listed property over 3 years with performance equal over 1 year.

International fixed interest has beaten Australian fixed interest over 1 & 3 years with both beating cash and term deposit indices over the same time period.

Whichever way you look at the data, an Australian centric basis for choosing investments has provided mixed results at best.

The data along with the theory should remind all Australian based investors that there is more to building a successful investment portfolio than simply using Australian shares and Australian cash and term deposits.

Regards,
Scott

Posted by: Scott Keefer AT 12:00 pm   |  Permalink   |  Email
Monday, December 17 2012
The Australian has published an article today reporting the Stroke Foundation’s assessment of Australia’s response to chronic disease.  It doesn’t make for pleasant reading suggesting that 4 in 10 stroke victims miss out on the best quality of care on the onset of a stroke.

A major health event such as a stroke or heart attack not only has major implications for your future personal and family lifestyle but also in turn has ramifications for the financial outcomes achieved by households.

Major health events can cause a loss or reduction in future income, major expenses for treatment and rehabilitation along with a natural reassessment of life’s priorities.

There are a number of ways we all can endeavor to limit the impact of these types of event on our lives:

  • Eat healthily
  • Keep fit
  • Invest in a good quality private health insurance policy
  • Set aside savings for a rainy day

Unfortunately incidents of major health issues do not only target those of us who eat unhealthily are and are unfit.  Our private health insurance and or level of personal savings may not be able to adequately provide for the required treatment, rehabilitation and life reassessment required after the onset of such an event.

This is where life insurances can play a critical part in ensuring that the outcome after a major health event is as good as can be hoped for.

An essential element of this cover is income protection.  Many of us have some cover through an employer sanctioned superannuation scheme but often the extent and scope of the cover is not sufficient and should be regularly assessed.

Unfortunately some die or are totally and permanently disabled after the incidence of a major health issue.  Death benefit and TPD (Total & Permanent Disability) cover are important to protect a family’s financial situation in such an event.

However, the most directly related level of coverage is Critical Illness or Trauma coverage. 
This insurance pays out a lump sum to the holder of the policy on the onset of a list of pre defined major health events including strokes and heart attacks.

Trauma insurance is often avoided because it comes at a significant cost. The challenge as with all insurance is to weigh up whether the peace of mind and security this cover provides outweighs the financial drag these costs have on future financial outcomes.  There is no “RIGHT” answer to this question but it is important that the discussion is had and all possible consequences weighed up rather than just pushing the discussion into the too hard basket.

The most important aspect is that a plan is put in place for the possibility of such an event occurring.  This is where a good, unbiased adviser who is focused on you and not the sale is important inhelping balance the competing needs.

A Clear Direction has for many years have out sourced the provision of insurance coverage to another firm.  However as I have grown older (and hopefully wiser) and started to build my own family I have identified the need to bring the provision of life insurance advice in house so as to provide the best wholistic advice for clients.

So if you are looking to have all bases covered please do not hesitate to be in contact.
 

Regards,
Scott
 

Posted by: Scott Keefer AT 09:55 am   |  Permalink   |  Email
Sunday, December 16 2012
Jim Parker in his latest Outside the Flags article looks at how share markets around the world have fared in 2012.  He concludes with 4 lessons from the year:

1) Markets are forward looking and absorb new information very quickly.
2) The economy and the market are different things.
3) If you are going to invest using forecasts you are not only predicting what will happen around the globe but also how markets will react to those events.
4) Returns from various markets vary considerably, the need for diversification is evident.

Please find Jim's full article here:

December 12, 2012
Many Happy Returns
Vice President

The holiday season encourages media retrospectives about financial markets. It's fun to match these up with what people were saying a year before.

In December, 2011, the publication Barron's told investors to "buckle up". The consensus prediction of its panel of 10 stock market strategists and investment managers was for the US S&P-500 to end 2012 some 11.5% higher at about 1360.1

"That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway," the writer said. "Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past."

There was so much for forecasters to get right – a negotiation of the Euro Zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election and the challenge for emerging economies to sustain high economic growth rates.

Twelve months later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high and a number of countries that share the single currency are unable to pay their debts. The US presidential election gave way to worries over the so-called "fiscal cliff", while Chinese exports have been hit by the slowdown elsewhere.

In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron's panel forecast of the S&P-500 reaching 1360, which the magazine said was ambitious, is now looking conservative. The index was 4% above that level by mid-December. What's more, some of the strongest performances have been in emerging and frontier markets.

The table below shows performances for 2012 (to November 30) and annualised returns for the past three years of 20 developed and 20 emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in Australian dollars.

Among developed markets, three members of the 17-nation Euro Zone – Belgium, Germany and Austria – were among the top performing equity markets this year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.

 

While not one of the top performers, the Australian market has delivered positive returns despite the difficult international circumstances and the uncertainties at home over the extent of the slowdown in the domestic economy.

And while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India and China, the real stars in the emerging market space these past three years have been the south-east Asian markets of the Philippines, Thailand and Indonesia.

There a few lessons from this. First, while the ongoing news headlines can be worrying for many people, it's important to remember that markets are forward looking and absorb new information very quickly. By the time you read about it in the newspaper, the markets have usually gone onto worrying about something else.

Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from what the market has already priced in. My research colleague Jim Davis has done an interesting study on this.2

Third, if you are going to invest via forecasts, you need to realise that it is not just about predicting what will happen around the globe, but it is about predicting correctly how markets will react to those events. That's a tough challenge for the best of us.

Fourth, you can see there is variation in the market performance of different countries. That's not surprising given the differences in each market in sectoral composition, economic influences and market dynamics. That variation provides the rationale for diversification – spreading your risk to smooth the performance of your portfolio.

So it's fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It's far better to let the market do the worrying for you and diversify around risks you are willing to take.

In the meantime, many happy returns!


1. 'Buckle Up', Barron's, Dec 19, 2011

2. Jim Davis, "Economic Growth and Emerging Market Returns", Dimensional, August 2, 2006


Posted by: AT 02:28 am   |  Permalink   |  Email
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