The Australian share market has had its worst day in three weeks with the financial and energy sectors weighing heavily as analysts await economic clues from the US and China. The benchmark S&P/ASX200 index finished 26.1 points, or 0.41 per cent, lower to 6,359.5 points at 1615 AEST on Monday, while the broader All Ordinaries slipped 23.6 points, or 0.36 per cent, to 6,449.6 amid thin volumes. Data out of China later this week will be significant to watch, and the US Fed meeting will be particularly important, something we might feel the impact of here.

The domestic energy sector suffered a 0.74 per cent drop after US President Donald Trump pressured the Organisation of the Petroleum Exporting Countries to raise crude production to ease petrol prices at the weekend.
Santos, Woodside Petroleum, Oil Search, Origin Energy and Beach Energy were down between 0.4 per cent and 1.24 per cent.

All four major banks were lower as all but CBA prepare to release their first-half results over the next week, dragging down the heavyweight financial sector by 0.6 per cent. ANZ was down 0.26 per cent to $27.33, Commonwealth was down 0.45 per cent to $75.11, NAB was down 0.9 per cent to $25.44, and Westpac was down 0.58 per cent to $27.58.

The relatively small property trusts sector was the biggest loser in percentage terms, dropping 1.76 per cent. In materials, mining giant BHP was up 0.59 per cent to $37.82, Rio Tinto was up 0.13 per cent to $97.75, and Fortescue Metals was up 0.83 per cent to $7.25.

In overseas markets, the S&P 500 set an intraday record high on Monday, bolstering the view that the decade-long bull market has further to run after consumer spending rose in March and inflation data was benign. The benchmark index topped its intraday record of 2,940.91 hit on Sept. 21, rising to a session high of 2,949.52. The S&P 500 is now up more than 17% for the year to date. The index along with the Nasdaq posted another record close as well on Monday.

What this means for you:

The day to day market movements in different industries and also around the world can give all of us reason to become distracted by short term news headlines. And while it's important to be aware of the broader economic environment, a more fundamental issue is to stay focused on your investment objectives and follow through with those in a disciplined manner. Markets will move up and down, leaders will come and go, but a few core elements remain:

1. Investing needs to be for the long term - if you don't want to hold an investment for 10 years, don't bother holding it at all

2. Diversification will help to smooth your investment ride over the years ahead

3. People who create wealth over a long period of time always spend less than what they earn, and they invest what's left over wisely.

Remember we're only a phone call or email away if you'd like to discuss any of these ideas in more detail.

Ladies, It's Your Time to Invest

Last week was International Women's Day, and it brought to our attention to the idea of women as investors. Thankfully, there's some good news around this, ladies (and gents), as, on many occasions, women make great investors. And while we realise these are some broad generalisations, there are some very real characteristics and data that show why women can make great investors.

These include:
1. Women are better savers. On average, women save an additional 1% of salary compared to men, which adds up over a working life.
2. Women actually log on to their investment accounts 45% less frequently than men, and they change their asset allocation 20% less frequently than men.
3. Generally, women are less erratic than men and they make less rash moves with their investments.
4. Women are not afraid to ask for help or speak up when they don't understand something.

Some downsides for women are:
1. They are often more risk-averse and prefer to invest in lower risk investments such as cash and term deposits
2. Women can often think a property is the only asset class available for investing in over cash and term deposits

For any investor, be they male or female, the biggest regret anyone will ever have is not starting their investment journey sooner.

Our tips for success include:
1. Set yourself some financial goals –Be bold in what you set and be accountable and reward yourself when you achieve little milestones.
2. Have a plan –Having a strategy provides direction and helps set up some discipline around achieving what you want and how you are going to get there.
3. Take a risk –Whether it is starting a business or taking a chance on something you have wanted to develop. From day one, consider how you can turn your business into an asset to use as a cash cow or for future sale.
4. Earn more and save more –Invest pay rises and windfalls, instead of spending them and increasing your cost of living. If you put these amounts away, you will be surprised how much they amount to. If you don't, your cost of living will increase with your pay.
5. Structure –Having the right structure can certainly save you big dollars so think about in whose name you should hold particular investments and businesses as this can save you tens of thousands of dollars down the track.
6. Take on debt and pay it off smartly –Using the bank's money to make you money is a great way to get ahead as it magnifies your gains… but don't forget it also magnifies your losses if things go wrong.
7. Have buffers –Always have an emergency fund or back-up plan for contingencies such as being out of work, time off work for children or health, business is slow, an investment property being vacant for six months and the list goes on. Ensure you have between three to six months' worth of your expenses and commitments in an emergency fund or accessible if needed.
8. Don't forget about super –Putting a little extra into super or salary sacrifice pays off in the long run and helps minimise tax. Putting a little away now will mean a big difference at retirement.
9. Get great advice –Seek the advice of a reputable professional who understands your goals and explains things in easy-to-understand language. They will be able to provide you with the knowledge, figures and most importantly will give you options around your plans and keep you accountable for your goals.

As a woman in today's modern society, it is important to understand your options and take action to secure your own future. If you need any advice or general information on the options, the team at Schuh Group would love to help. Call us anytime for an obligation-free appointment on 5482 2855.

How to Know a Good Time to Invest

With some things in life, a good start is everything. Take the 100-meter sprint, the whole race is over in 10 seconds or less. The importance of getting out of the blocks quickly to ensure success can't be understated. In the 100-metre sprint's extended athletic cousin, the marathon, a bad start, while annoying, must be put in perspective. There are two plus hours ahead and ample time for them to regroup and overcome.
When investing, the thought of a bad start can be a psychological hurdle. A common question an investor will ask their adviser will be a variant of "is this a good time to invest?" Concerns come with that initial investment commitment. In contrast to dollar cost averaging, where the entry is incremental and ongoing, a large sum in one hit can provoke more hesitation and second-guessing. It's a bigger unknown. It's not that the investor doesn't want to invest, but it's the fear of making a mistake – is it the right time?

This occurs because we understand investment markets are volatile. They react to news and can quickly move in one direction or the other. This can make us feel either foolish for not waiting, or smugly satisfied for buying when we did. Overall, it's those feelings of foolishness and believing that we should have timed a better entry that we're most trying to avoid.

Since 1980 the ASX has finished 36% of months in negative territory. So historically, the odds have been in an investor's favour, but no one wants to start their investment journey in those 36% of red months, but does it really matter?

Whether a decline month happens in the first month or the tenth month, there's no avoiding your portfolio going down at some stage – unless it's exceptionally conservative. The concern with the first month is the psychology of immediately giving up some of your capital.
To illustrate the futility of focusing on a poor start, we've looked at the worst month to invest during each year in the 1990s on the ASX.

Using $1000, we've tracked market performance for a full decade. With a 10-year time hold, it's long enough to put a frustrating beginning back into perspective. There are no additional contributions, it's just tracking that initial $1000 for the next 120 months or ten years.

Examples of market returns are often done on a calendar basis, but rarely does an investor enter the market on the first day of a particular year. They are more likely to commit to a strategy sometime throughout the year. While this experiment doesn't take into account individual days, it would be indicative of an investment experience.
To lessen chart clutter, we've split the returns across two charts. 1990-1994 and 1995-1999.


As shown by the chart above there were varying outcomes in each of the five years.
The best result of the bad bunch began in June 1992. $1000 invested would be in the red for the first 11 months, but across the full ten years, patience was rewarded. If an investor set aside their bad start, an average annual return of 10.76% was their reward.

The worst result of the bad bunch began in November 1993. $1000 invested recovered quickly from its initial bad start, before encountering an ongoing rough patch that kept it mostly in negative territory until the 18-month mark. End result? An average annual return of 8.5%.

A good return, but 2.26% lower than the leader. Yet there's no argument that the start made a difference. At varying points, it was neck and neck with the others, that time frame just had a poor finish in this experiment.
While not part of this experiment, if both starting points extended to 25-year periods the difference between the two narrows to 0.76%. You never want to leave three-quarters of a percent on the table, but it highlights with time, things begin to even up.


The returns in the second half of the 1990s had an even wider variance over their ten-year periods, but again, their outcomes had very little to do with any poor beginning.

The worst time to start in 1995 was January, which wasn't that bad. One negative month before delivering a 20.73% return for the calendar year. Across the ten years, the return for the ASX was 12.07%.
Yet it didn't compare with October 1997 as a start month. In contrast to the charmed first 12 months of January 1995, an investment beginning in October 1997 was still under water 12 months later. However, the poor start meant nothing to its return over the decade, delivering an annualised return of 13.46%.

The worst start month in the whole experiment was May 1999. The tail end of the ten-year period took in the full financial crisis along with the beginning of the recovery. This severely impacts the annualised return. Respectable at 6.29%, but anaemic in comparison to the other returns.

It is worth noting, after four years the May 1999 start was the worst of the five scenarios, yet after eight years it was the strongest performer. Share markets have a way of rearranging perspectives like that.

Many of these returns are quite strong, which sets aside any argument a poor start will define an investment journey. There's no curse or damnation involved if someone invests and the market moves down on them. It happens. Sometimes the rewards aren't initially forthcoming. They may prove elusive for some time, but there are never mistakes with timing. There is no possible way of getting an entry absolutely right unless it involves sheer luck.

The other thing to remember, one person's investment experience isn't going to be someone else's investment experience, unless they're beginning on the same day. The challenges they encounter will be unique to them because of their time spent in the market and how their capital has grown or not grown to that point in time.

Agonising over the right time to invest becomes thought and energy down the drain on something that can't be forecast. Even the best of starts will encounter turbulent markets at some point and the worst of starts can go onto flourish. Investors are better off just starting. There is no right or wrong entry point and this is a marathon, not a sprint.


Holidays Are Over & Now We Are in Election Mode!

Nearly everyone is back from holidays now and as expected, that means Australia is basically in election mode. And while more details will no doubt emerge over the coming months, there are a few issues that are becoming increasingly clear from both major parties:

1. Housing will likely play a big role in the final election promises of both parties. Housing prices in most capital cities have been declining for over 15 months now, and the tightening credit may see the fall continue. For years, as housing prices boomed, our politicians were wringing their hands over what to do about housing affordability. With little room to push borrowing costs lower, the only way to truly make housing more affordable is to make it cheaper. As prices fall, it's likely to spur demand from first home buyers who have been locked out of the market for years. Ultimately, that will put a floor under the market. If the housing prices continue to drop it may also mean the Labor thinks twice about its planned changes to negative gearing, as this investment strategy would naturally become less attractive if property values are not growing.

2. Possible Negative Gearing changes.
This proposed policy was announced some time ago by Labor apparently in an attempt to slow down the property market – something the banking credit slowdown has probably already achieved. Labor's proposed policy is to limit negative gearing to new homes and to also cut the capital gains tax discount from 50 per cent to 25 per cent. Suffice to say, the building industry is not in favour of this proposed policy.

3. Franking credits.
We've previously spent some time discussing the possible changes here, but this will certainly impact the self-funded retiree population more severely, and even more so those with high exposure to Australian shares. With certain sectors of the population, this proposed policy is widely unpopular, but it appears as though little would be changed to the policy if Labor is elected.

4. Wages.

Up to now, wages growth may have been the slowest on record but unemployment is low, inflation is barely registering and the economy has been growing at an impressive clip. That's not all. Despite coming through the financial crisis in better shape than any other developed nation, we've been clocking up budget deficits ever since. That, however, is about to change as we do legitimately appear to be getting closer to a budget surplus. If the superannuation guarantee is immediately lifted to 12 per cent, as proposed under Labor, this may increase pressure on small businesses quite quickly, and actually, mean wage growth stays low for a much longer time to come.

The next few months will be an interesting time ahead for Australia, but no doubt the fundamentals of wealth creation remain as strong as ever: Spend less than what you earn, try to minimize your tax where possible, and invest what's left over for the long term.
How far do we get without commitment and perseverance? Any task we begin in life is going to require some commitment and perseverance if we wish to pursue it thoroughly. That commitment may begin early in life. As children, we may show an interest to pursue a particular sport or hobby, alternatively, our parents may force us into various activities they think we should pursue!

How long any of these endeavours will last, largely depends on whether we find them fulfilling in some way or how much persistence we have. As children, we can be fickle. Toys can fly out of the cot over the slightest thing. We lack any real experience. Our inability to rationalise time or where resources come from, allow us to get away with being fickle. As a child, we may well give something up at a moment's notice or not find ourselves sufficiently motivated.

That luxury of having support provided for by parents instead of having to sweep chimneys for our keep is particularly valuable before we're in the real world. It provides a platform to determine what we'd like to dedicate our time to. Hopefully a task rewarding enough in some way to remain motivated for. The older we get, the less fickle we can afford to be. Commitment and perseverance become more important in achieving goals – as long as we're actually on the right path. In the 2016 book, Grit: The Power of Passion and Perseverance, author Angela Duckworth challenges the idea that it's talent that propels us towards success in life. Instead of talent, it's grit that's the most reliable predictor of success.

Duckworth developed her own questionnaire that measured this intangible thing called grit. Her questionnaire reliably predicted things such as who might graduate from West Point military academy, or which competitors would get the furthest during the US National Spelling Bee.

What exactly was grit?

First, these exemplars were unusually resilient and hardworking. Second, they knew in a very, very deep way what it was they wanted. They not only had determination, they had direction. And skipping around from one kind of pursuit to another-from one skill set to an entirely different one-that's not what gritty people do.

When we're investing, it's no different. The primary hurdle is settling on an investment philosophy. Importantly, one that works and has evidence behind it. The second thing is sticking with it. Investing has nothing to do with talent, nor are gains just handed out for making an appearance on the first day. You also don't get the choice of when you show up to collect the gains before leaving again. If only it was that easy. No one can predict when they'll appear – so it's important that an investor be prepared to commit to a long-term endeavour and have the persistence to ride out all types of markets.

Often some of the best gains will come in short spurts, as the following chart shows. Take away the best day on the ASX 300 between 2001-2017 and the average annual return over that timeframe falls 0.35%. Take away the best five days between 2001-2017 and the average annual return falls 1.61%.

As the chart shows, if an investor starts with $1,000 in 2001, by 2017 they've left behind over $800 if they missed those best five days. That doesn't seem a huge amount, but start with $100,000 and then it's over $80,000 left on the plate. The ability to commit to the process and persevere provides rewards, you just don't know when they'll appear – that's why perseverance is required.

When we look at returns on a monthly basis over the same time frame, we find that the majority of months are positive. Over 63% of the time, but there are some concerning outliers to the left.

As you might expect, those three worst months came during the financial crisis. It's never pleasant to see those sorts of declines are possible and it's even less pleasant to experience them, but it's important to acknowledge and understand they happen. It's doubly important to understand they're not fatal. The investors who doubted there would ever be a recovery after 2008 eventually lost their nerve and crystallised their loss at the worst possible time. When an investor encounters these periods, it is beneficial they have the grit required to emerge out the other side. It's also important they understand their portfolio isn't just their local equity index, holding a diversified portfolio means these months are never that extreme.

Is there anything else to be learned from the distributions of monthly returns? Well, some of the worst losses tend to cluster. There are sixteen instances of two or more consecutive negative months and six instances of three or more consecutive negative months. Is this an indicator of anything? Can you turn your mind to predicting the bad stretches, extending perseverance and grit to figuring out when to get out of the market ahead of the declines?

It would be folly to try. The last month of 2002 and the first two months of 2003 were all negative, surely that was the beginning of something bad? No, over the next 23 months, only three were negative. Or there were the last two months of 2011 which were negative. Maybe that would be the start of a bad run? Wrong again. There was only one negative month in the next fourteen.

As the old saying goes, "it's time in the market, not timing the market that counts". The gains are there, but it takes grit and perseverance to endure the declines, the volatility and the months of mundane sideways movement that will test an investor's resolve.

In the past few weeks, our politicians have continued to make a lot of noise, but one issue that's simmering quietly in the background is that of franking credits and proposed changes under a Bill Shorten government.

Put simply, a franking credit is a tax credit that can be attached to dividends paid to shareholders. Franking credits are designed to offset the income tax already paid by the underlying share or company, and the intention is for the shareholder to pay their own individual rate of tax on the profits instead. The aim is to prevent double taxation (i.e. paying tax twice on the same income).

The Leader of the Opposition, Bill Shorten, has proposed abolishing franking credit refunds. It is important to note that he is not proposing to abolish franking credits but simply preventing investors from claiming a cash refund from franking credits that they cannot offset against income tax.

An exception to this will be those who the Labor government terms "pensioners," who will still be able to access cash refunds from excess dividend imputation credits. Under the Pensioner Guarantee, every recipient of an Australian Government pension or allowance (including Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance) with individual shareholdings will be protected from the abolition of cash refunds for excess franking credits. Self-managed superannuation funds with at least one pensioner or allowance recipient before 28 March 2018 will also be exempt from the changes.

The biggest issue with this proposed legislation is for those people who are self-funded in retirement, with significant portfolio investments in Australian shares, who access those shares through a self-managed super fund. The issue is further compounded for those whose fund is in pension mode, where they receive the franking credits refund as cash as there is no taxable income to be offset. By receiving the franking credits as cash in an SMSF, the benefit of the franking credits is more obvious to members. However, even those in an industry and retail super funds will be affected, but the benefits of franking credits are less obvious when they get "washed through" both the accumulation portion and the pension portion of the whole collective fund.

So what is to be done?

Firstly, be aware of what the ALP proposals are and how they would impact you. Secondly, we may see people slightly adjusting their retirement portfolios away from Australian shares in order to be less impacted by these proposed changes. This would be a great shame if people are forced to make investments decisions based on tax implications rather than the merits of the actual investment.

Time will tell, but the outcome of the 2019 election may have more riding on it than people are aware of.
The last week or so has seen the Australian share market drop to a 6 month low, with the ASX200 finishing at 5,837.1 points on Monday. And while this may be a worrying sign for some, for others this dip in prices also presents a better buying opportunity than what was on offer just a few weeks ago.

In a nutshell, our financial sector continues to struggle due to a concoction of international factors: US stocks falling heavily, the US Federal Reserve hiking interest rates and trade tensions between the Trump administration and China escalates. Right now Australia is basically at the mercy of what is happening overseas, but our own Royal Commission isn't helping our banking shares either.

On the upside, energy stocks, have closed higher supported by oil prices due to supply concerns. This is due to international pressure on Saudi Arabia over the disappearance of a prominent Saudi journalist has stoked worries about geopolitical tensions. Telecommunication stocks also rallied late on Monday to join the energy shares as the only sectors in positive territory.

The US benchmark S&P 500 had snapped a six-day losing streak on Friday, while the Nasdaq and Dow also finished the session higher, but analysts have warned that until the US and China reach a trade deal, the rebound in the stockmarket could be vulnerable, with investors anxious about the impact of tariffs on corporate profits.

So what is to be made of all of this?

History and time tell us that we've just passed the ten year anniversary of the Lehmann Brothers collapse – a pivotal moment during the GFC downturn. At that time no one really knew if it was the beginning of the end, an ongoing crisis or not far from a recovery. History shows the market bottom took another six months and if investors could stand the uncertainty, they also got the recovery. The majority of what people know of investing is arrived at through media reports, where the market has $50 billion 'wiped' in a day. Where people are ripped off left, right and centre. Those are the ongoing disaster stories. The balance? The success stories the media focus on Are usually get rich quick schemes or strategies built on sand.

For those who want the best long-term investment journey available, an important element is having emotional resilience and a knowledge base that aligns with an evidence-based investment philosophy. We believe this is the most important component that gives someone a better chance of success. So, with the market moving around, hang in there and look for buying opportunities with excess cash.
It may come as a surprise to learn that the biggest regret most people have with their investing is not where they've placed their money. Nor is it the fees they've paid or the types of investments they've made. Instead, the number one regret people have with their investing is that they didn't start sooner.

When we make investment projections for our clients, we often look at what the projected result will be based on a number of years of investment timeframe. For example, if we invested $100,000 for 10 years and received 5% as an annual rate of return over that time, the end result may be around $163,000. Sometimes a client will answer by saying "that's all well and good, I just have to live long enough!" and while this is true, it's not the whole part of the story. The other way to extend your investment timeframe is to begin at an earlier start date rather than wait until all the stars have aligned perfectly.

So how do you start an investment plan earlier in life, particularly when that timing usually lines up with having the most financial commitments? There are certainly a lot of drains on cashflow in the younger years – you may have mortgage repayments, kids to put through school, and simple living costs thrown in on top. It's not always easy to find that little bit "extra" to put towards an investment.

The message we'd like give this week is that you don't necessarily have to start your investing with a large amount, but you do have to start! One practical investment amount for many people is that chunk of money that comes back into circulation after doing a tax return. But for this idea to work, you need to be willing to set that amount aside, rather than bringing it back into circulation for spending. This is generally possible to do, provided you remember you've already been without that money for 12 months and the world hasn't stopped spinning.

Did you know the average tax return figure in Australia is $2,300? So let's see what this can grow to over time:

If you invest your $2,300 and add to it every year with the same amount of tax return income, and you hold that investment for 10 years earning just a 5% rate of return, your lump sum at the end of 10 years is now almost $33,000. If you're a couple and both working and you apply this idea, your investment amount is doubled. This is before assuming that the average tax return figure will likely increase over time. So who wouldn't like a $66,000 lump sum that you've generated from money that you haven't missed in the first place?

Our suggestion is to make a start with your investing and to also make use of the resources available to you to do so. If you've felt hesitant about committing to an investment plan, however small, ask yourself the question "If not you, who? And if not now, when?" And if you've got any questions at all about this or any of our other ideas, please don't hesitate to contact us for help on your personal position.

Anyone who has spoken to their parents or grandparents about the cost of living will be familiar with the idea that the relative value of money has changed over time. Most people are aware that prices for the same object gradually increase, although we often only hear about how this affects the property market. Unfortunately, the cost of living also goes up over time, and this is what inflation does. The value of a dollar today is not worth what it was last year, and this difference increases over time.

To put this in perspective, we need to keep in mind the concept of "real rate of return." This refers to what your investments are really returning for you over time, once inflation has been taken into consideration.

To use a real example, let's look at the history of the Australian share market versus inflation. For the past 30 years, the Australian share market has given an annual return of 8.4%, meaning that a $10,000 investment made 30 years ago would have grown to be worth $113,405 today. By comparison, the rate of inflation we've had over that time has been 3.0%. For investors, the real "take home return" you've had over that time is the difference between the two measures being 5.4%, or that same $10,000 has really grown to $89,374.

So what does this really mean for investors? The only way to reduce the negative impact of inflation is to place a portion of your total investment amount in assets that will also go up in value over time, such as through shares and property. Investing in cash and term deposits, unfortunately, doesn't fit this bill, as the return to the investor only comes from income (interest). To again use the 30-year figures to illustrate this, if an investor placed that same $10,000 investment in cash 30 years ago, the return would have been 6.4% or an increase to $65,127. However, this drops to just 3.4% or $41,096 once inflation is taken into account.

Hopefully, this illustration confirms why the savvy investor needs to take into consideration the negative effects of inflation on real returns. The best way to combat this is to include some exposure to shares and property in your overall mix of assets. Inflation is the "silent killer" of long-term results, so set your allocations right in order to reduce the impact on your overall outcomes.

How to Grow a Wealth Mindset

For those who are interested in building your knowledge level around wealth, this week's post is for you! Here at Schuh Group, we encourage you to become as educated as possible in the field of investing and money management. Some of this can be achieved through talking to those who are "in the know" while some information is best delivered by books and publications.

This week we'll be sharing our recommendations on which books will help you grow your wealth mindset and give you the best value for your time.

1. The Barefoot Investor, by Scott Pape

This book is a great place to start. It outlines a number of "money fundamentals" that may seem basic at first but are incredibly important habits to put in place. It's no accident that people who accumulate significant amounts over time generally spend less than what they earn, and invest the surplus in solid investments.

2. The Little Book of Common Sense Investing, by John C. Bogle

For a no-nonsense overview of the pros and cons of the sharemarket, this book has stood the test of time. It outlines why investing for the long term in a broad mix of assets and at a low cost is undoubtedly the best approach to take.

3. The Investment Answer, by Daniel C. Goldie and Gordon S. Murray

If you only read one book on investing in the share market, make it this one! The Investment Answer dispels the long-held myths about investment "out performance" and gives the reader statistical historical evidence on why a broad asset class investment mix is the best way to go.

4. Think and Grow Rich, by Napoleon Hill

When it comes to cultivating a wealth mindset, there are few better books than this tried and tested publication by Napoleon Hill. Think and Grow Rich gives you a guide on how to visualize increasing your wealth, and then how to methodically go about achieving that.

If you'd like to discuss any of these books in more detail, please contact our office. Happy reading from the Schuh group Team.

The Wonderful World of the Share Market

Following on from last week, we'd like to take a dive into the wonderful world of the share market – a place that seems to give investors both good and bad sensations. 

Once you understand that buying shares is the same as becoming a part owner of a company, it's somewhat easier to understand how prices can move up and down each day. This is a reflection of what all the participants in the market feel a particular company is worth at any one moment, based on the knowledge they have at that time. There are different approaches you can take to investing in shares. Some people prefer to actively trade their share investments on a regular basis, sometimes multiple times per day. Others will take a longer-term position and buy into an investment in the belief that returns will gradually go up over time.

Our preferred investment approach is to hold a very large spread of shares and to access these shares at a low cost. We also feel it's best to only enter the share market if you can afford to buy into these investments and hold them for at least 5 years. This is to allow for the natural market movement an investor will experience over that time. We also know that history rewards those who are patient and disciplined in their investment approach. Below is the returns history of our Australian share market over the last 118 years. At an average return of 13.2% per year, making a long-term investment in the share market certainly makes a lot of sense.

If you'd like to discuss your investment options more with us, just remember we're only a phone call or an email away.

What's Your Investment Type?

What better way to finish off the financial year than with some consideration about investments? This week we'd like to broadly discuss the different types of asset classes and how these may or may not be right for you, depending on your circumstances and preferences.

Investment Types
Broadly speaking, there are four main types of investments available to everyone. These include:
1. Cash: money in the bank, savings accounts, and term deposits.
Pros: There's a lot of certainty around having money in the back. It's easily accessible and doesn't drop in capital value. This is a low-risk investment.
Cons: This type of investment also has low long-term returns, particularly in the current low rate environment. Cash also doesn't protect against inflation as there is no underlying capital growth unless you physically add more to it.

2.  Interest: Government or semi-government bonds, or corporate bonds. These investments are issued by these organisations in an attempt to raise funds and with the promise of a fixed return to the investor.
Pros: This is still considered a "safe" investment but it generally offers a better return than straight cash investments. Long-term averages have fixed interest returns sitting at around 2% higher than cash.
Cons: Bonds can be traded on the bond exchange, meaning they can drop in capital value. Risks are also associated with lower grade bonds, meaning the issuing source may have difficulty in paying you back your initial investment amount.

3. Property: This class of asset includes residential properties, commercial or industrial premises, vacant land, and listed property companies.
Pros: We and see it and touch it! The property also gives you returns from two areas, both capital growth in the value of the property as well as some income by way of rent. These returns are generally higher than both cash and fixed interest. You can also use your equity in properties to borrow against.
Cons: Property values can drop and stay down for some time. There are also high transaction costs in buying and selling these, namely from stamp duty, capital gains tax and agent fees. Property can also often take some time to sell.

4. Shares: An ownership stake in a company is purchased by an investor, allowing them to share in the growth of that company as well as a portion of the profits, by way of dividends.?
Pros: This asset class gives the highest long-term rate of return, slightly edging out property. It's easy and cheap to sell shares if you need money quickly, and it's also simple to spread your share investment out, thereby reducing your risk. As an investor, you also generally receive your returns from two areas – growth and income.
Cons: Shares move up and down on a daily basis, thanks to the daily nature of the share market. They can drop in value quickly and take some time to return to previous highs. Because of the ease of buying and selling shares, some investors panic and sell when markets are down, thus crystallising their loss at the wrong time.

So, which one of these is right for you? For most people, the best investment strategy is to have a mix of all of the above. If your wealth accumulation is your goal, then having a focus on shares and property will be your best overall strategy. But if you can't stand the possible up-and-down movements of this type of investment, head towards the smoother ride from cash and bonds. Just remember, risk and return are related, and relatively good long-term returns can't be achieved without taking on some risk with your investments.

If you'd like to discuss your investment options more with us, just remember we're only a phone call or an email away.

Franking Credits; What You Need to Know

You may have read in the media over the last week that Labor has announced that it would abolish imputation credit cash rebates for shareholders under Federal Labor's latest tax policy were it to be elected at the next Federal election.

Franking and Refunds Explained
Dividend imputation was introduced by the Hawke-Keating Labor government in 1987, to prevent so-called double taxation of company profits. This meant that shareholders did not need to pay tax on their dividends, for which the company had already paid tax.

But there was a shift in 2000, when the Howard-Costello Coalition government amended the policy, making it more generous for SMSFs and self-funded retirees - a policy which still exists today.

The effect of this change is that shareholders who pay no tax - or pay a lower rate of tax than the company (30 per cent) - can convert excess franking credits into cash refunds from the Australian Taxation Office. When companies pay dividends, they can include franking credits (or imputation credits) for shareholders who can then use it to offset their personal tax. Without franking credits, companies would be taxed on their profits, and individual shareholders would then be taxed on those same profits. If it is introduced in July next year, as Opposition Leader Bill Shorten hopes, it will be a massive change to the dividend franking system that was introduced by Paul Keating in the late 1980s and extended to include refunds for low rate taxpayers by John Howard nearly 20 years ago.

What Would This Mean For You?

The people most affected by Mr. Shorten's proposals will be individuals who pay little or no tax, given that the ability to use franking credits to offset taxable income will remain intact. Anyone whose tax liability is greater than the franking credits to which they would be entitled will not be affected. This includes members of large superannuation funds. Pooled, or traditional, super funds pay tax at the entity level and have sufficient tax liabilities across the fund, such as contributions and capital gains tax, against which the franking credits can be offset. This is the case regardless of whether the saver is still adding to their super in the accumulation phase or drawing a private pension.

And yes it does mean that fund members with pension accounts are effectively subsidising members with accumulation accounts.
The problem that self-managed super fund trustees find themselves in is that if they have a pension account – which by definition was commenced with less than $1.6 million of assets – they have no taxable income that can be used to offset the franking credits. Individuals who have reached the age pension age and are able to earn up to $29,000 tax-free under the seniors and pensioners tax offset (SAPTO) rules will also be affected.

Under the current system, of course, if these groups of investors own fully franked shares, they are able to claim a refund from the Tax Office for a sum that is equal to the amount of tax paid by the company. This can add between 10 per cent and 20 per cent to the amount of income derived from a share portfolio. Some commentators are saying that these changes if introduced would follow rather too quickly from the January 2017 changes to the means testing of the age pension. Those changes cut 100,000 retirees off from the age pension altogether and reduced the amount of age pension 300,000 more individuals were entitled to. The political argument about the policy centres on who would be most affected and how well off they are. Labor's policy said it would be wealthier retirees who are most likely to claim cash refunds because share ownership is highly concentrated amongst wealthier households. Opposition Leader Bill Shorten said half the benefits of the total benefits of the cash refund scheme go to the biggest 10 per cent of super funds which have balances above $2.4 million.

Finance Minister Mathias Cormann said Labor could not claim no-one would pay more tax when the policy raises $59 billion over 10 years. Senator Cormann called it a $59 billion tax hike. "More than a million retirees, many of them pensioners or part-pensioners, will pay more tax under this proposal," Senator Cormann said. The Opposition said its policy had been costed by the independent Parliamentary Budget Office (PBO). The ALP would not release the costing, but said the PBO found that the policy would save $11.4 billion in 2020-21 and 2021-22. Labor said charities and not-for-profit institutions, including universities, would be excluded from the change. The new system would start in July 2019 if Labor was to be elected at the next Federal Election which should occur early in 2019.

If you would like to discuss any financial options with the team, we are always just a phone call away

The Volatility Beast Returns in 2018

Well, there it is. The correction that we've been told has been coming every month since January 2017, finally arrived. Over? Probably not, but it was needed.

Needed? Yes needed. Nothing in life comes for free. 2017 was an extremely rare year where the entrants enjoyed a free pass to the park and none of the rides had any bumps, jumps or scares. The biggest decline happened early in 2017 and then equity markets happily chugged upwards. How should you deal with the correction we've had in recent weeks? Ignore it. Like all downward movements, there are the regular tea leaf readings, inferences about past crash behaviour being an indicator of the future, along with the unveiling of scary stats and charts reminding us of uncharted territory. In other words, we're expected to believe it's eerily similar to 1987, 2008 and the great depression, but it has the possibility to be much worse!

The first Friday in February saw the fall on the Dow Jones being 665.75 points. Rounding up it was 666 – the devil's number and apparently to some that were a harbinger of hell about to be unleashed. Unlikely. The Tuesday following's fall was 1175 points and to put the fall in some sort of perspective, the Dow Jones wasn't even worth 1175 points until April 1983. 35 years later the whole weight of that index is a 4.6% daily loss!
Could a correction become a bear market or a crash? This is always possible, however, the time has shown almost no corrections go further to become crashes. Given enough time, most turn into buying opportunities. As one of our favourite charts shows (now updated through to the end of 2017), on average, the ASX portion of a portfolio will get bashed downwards 12% every year, but 75% of the time (since 1985) you're still getting a positive return for the overall year. In addition, you can expect three 5% declines in any one year.

It's usually a recession that sets off serious bad times in equities. So why are sharemarkets tumbling when we have the opposite economic conditions in the world's biggest economy? It's because investors are starting to realize what that growing economy means – inflation and more interest rate hikes.
Rates fell to historic lows in the financial crisis and have only recently started to rebound, although not yet in Australia. Low rates make investors turn away from fixed interest and cash to embrace shares. With rates rising, shares become less attractive. At the same time, an expanding economy means companies can expect greater long-term growth and corporate profits remain robust. While President Trump's giant corporate tax cut hasn't even worked its way into the equation yet.
As usual, if the rough times aren't over, don't sell the good stuff that has served you well in hopes of avoiding the market carnage. If you are inclined to, remember there is no way you'll know when to buy again. Despite a correction often being the best time to buy, most investors don't have the fortitude to don their floaties and enter the choppy water to grab a bargain.
As for the headlines, you'll note they still haven't become more inventive: "50 billion wiped off the market". While we're still waiting for "50 billion wiped on the market". And while the market falls led the news earlier this month, during 2017 the US markets had 12 consecutive months of gains and Australia had 10 positive months. Reporting on any of this good stuff was still relegated to the business section. It's partially why we feel the loss more than the gain. Though the downside happens significantly less, it's afforded significantly more attention. Last year was an anomaly with the markets. Now it's normal programming.

"A budget is telling your money where to go,
instead of wondering where it went..."
John C. Maxwell

Sometimes it happens at 15, for others, it is 17 or maybe a bit later around 19 or 20. No matter when it happens, it is an exciting, daunting significant milestone. It is your first job! Entering the workforce for the first time is an exciting step for any young person. It brings with it the unmistakable sense of independence – you now have your own money and you can make decisions about what you do with it – and freedom (did someone say shopping?!).

The seduction of money is in the instant gratification of what you can buy with it now. From clothes and accessories to cars and technology… The allure of "things" can be great, and the consideration for long-term wealth is often forgotten with a mantra of "YOLO" (You Only Live Once). However, your first job can also become the foundation of greener pastures and long-term sustainable wealth (someone say, early retirement and travel?). The key to getting ahead is understanding where you are going, how your money can work for you and exactly where your money is going – is it being invested or wasted? The following tips outline the key considerations for anyone new to the workforce (who is keen to get ahead):

1. Get Clear on Your Super
Being from Gen Z (oh to be young again) you may not yet have discovered that it is a legal requirement that your current employer invests a portion of your wages from each pay-check until you reach retirement. This investment is called Superannuation. Over a lifetime in the workforce, your regular instalments of Super can really add up and if planned for effectively and tracked can serve to ensure you enjoy a comfortable and enriching retirement. It is really important to understand what your Super is doing and keep track of it from the beginning. Make sure you've only got one Super fund and that your employer is directing their required payments just into this fund and not another one they've set up for you. Given you'll have a long investment timeframe ahead of you, set your investment choice to a high growth option. This will give you a better chance of getting a higher rate of return on your Super money, and over a 40 year period, an extra percent or two in return makes a huge difference. Put a nominated beneficiary in place on your Super fund. This is nominating where you'd like to direct your Super if you die prematurely, and given there will likely be a life insurance component, there will be a decent amount of money to direct. Supplement your Super personally for a big impact. If you nominate even $20 of your own money each pay-check as a Super Contribution, this amount will compound the effect of your investment and make your returns bigger.

2. Allocate Your Weekly Spending
Now that you're earning more money, you'll also be spending more. Get into the habit early on of splitting up your money into these categories:
Take the time to work out what your weekly allowance will be for those daily expenses that can't be avoided, such as rent, board, groceries, public transport, car costs, fuel etc. (these are your general living costs) and set up a separate bank account for this allowance to go into. Then, set up another different account to receive a nominated personal spending allowance each week. This is the amount you can spend guilt-free on whatever you want – think shoes, clothes, computer games, entertainment (like going out or to the cinema). Lastly, the rest of your money should be allocated to savings and investing and transferred to another account. An aside from this can be an allocated saving into a separate account for bills, but it's vital to be working on your savings from the get-go. Once you have some surplus in this account you can begin to learn about different investment opportunities such as shares – which only need a small amount of capital to start investing. When you start early and take small steps often, you will find that your portfolio will progress quickly set you up early for a prosperous future.

3. Protect Your Income With Income Protection Insurance
Lastly, it is important to understand what protection is available and how it supports you. It won't take long for you to enjoy the benefits of having your own money from your first job, but it's never too early to protect your new found independence in case something happens (accident or illness) and you are not able to work. For a young person, the cost of insurance is relatively low and the benefits in case of emergency are worthwhile, so take the time to research your options and protect your greatest asset – yourself.
If you or someone you know is new to the workforce or would simply like to understand how to use your money to serve you better, contact us today for an obligation-free chat – we'll buy the coffee!

This week, the share market has edged higher as the property sector was boosted by the $33 billion takeover of Westfield, and the consumer staples sector also rose. The benchmark S&P/ASX200 stock index was up 0.14 per cent at 6,021.8 points at 1630 AEDT, after a session in which the index moved within a narrow range. Shares in Westfield jumped 13.7 per cent to $9.66 after the company agreed on Tuesday to a takeover from Europe's biggest property giant that values its securities at $10.01. The retail sector was mixed, with JB Hi-Fi and Premier Investments posting small gains, and Harvey Norman and Super Retail Group modestly weaker. The Australian dollar is stronger due to improved sentiment in some metals markets, and a fall for the US dollar after the Democrats won the Alabama Senate race, which could have implications for the passage of US President Donald Trump's US tax reforms through Congress.

What this means for you:

The major news in our market this week is the sale of Westfield Corporation which will be taken over by European commercial property company Unibail-Rodamco. Under the deal, shareholders will receive $10.01 per share. They last traded at $9.66 when the market closed on Wednesday. The Westfield name will remain and while Mr. Lowy will step down as chairman, he will still chair an advisory board for the new company. Mr. Lowy and his two sons Steven and Peter will also still keep a $1,323,450,000 investment in the company. Westfield Corporation currently controls 35 shopping malls in the US and the UK. Its Australian centers are managed by Scentre Group, which is separately listed. While one big move by a company will dominate headlines for a few days, don't get caught up in trying to pick and choose the short-term movements of shares. Take a diversified position, and hang on for the long haul. As Warren Buffett has said, if you're not willing to hold an investment for at least 10 years, don't make it in the first place. 

At its final board meeting for 2017, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50 per cent.  Conditions in the global economy have improved over 2017. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy continues to be supported by increased spending on infrastructure and property construction, although financial conditions have tightened somewhat as the authorities address the medium-term risks from high debt levels. Australia's terms of trade are expected to decline in the period ahead but remain at relatively high levels.

Wage growth remains low in most countries, as does core inflation. Equity markets have been strong, credit spreads have narrowed over the course of the year and volatility in financial markets is low. Long-term bond yields remain low, notwithstanding the improvement in the global economy. Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high. Employment growth has been strong over 2017 and the unemployment rate has declined. Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. The Bank's central forecast remains for inflation to pick up gradually as the economy strengthens. The Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast. The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Behavioural Investing

When it comes to money and investing, we're not always as rational as we think we are – which is why there's a whole field of study that explains our sometimes-strange behaviour. Where do you, as an investor, fit in? Insight into the theory and findings of behavioural finance may help you answer this question. A lot of economic theory is based on the belief that individuals behave in a rational manner and that all existing information is embedded in the investment process. This assumption is the crux of the efficient market hypothesis. But, researchers questioning this assumption have uncovered evidence that rational behaviour is not always as prevalent as we might believe. Behavioural finance attempts to understand and explain how human emotions influence investors in their decision-making process. You'll be surprised at what they have found.

The Facts
In 2016 Dalbar, a financial-services research firm released a study entitled "Quantitative Analysis of Investor Behaviour", which concluded that average investors fail to achieve market-index returns. It found that in2016, the S&P 500 returned an average of 11.96% for the year, while the typical equity investor achieved only 7.26% for the same period – a startling 4.7% difference! Why does this happen? There is a myriad of possible explanations.

Regret Theory
Regret Theory deals with the emotional reaction people experience after realizing they've made an error in judgment. Faced with the prospect of selling a share, investors become emotionally affected by the price at which they purchased the share. So, they avoid selling it as a way to avoid the regret of having made a bad investment, as well as the embarrassment of reporting a loss. We all hate to be wrong, don't we? What investors should really ask themselves when contemplating selling a share is, "What are the consequences of repeating the same purchase if this security were already liquidated and would I invest in it again?" Regret theory can also hold true for investors when they discover that a share they had only considered buying has increased in value. Some investors avoid the possibility of feeling this regret by following the conventional wisdom and buying only shares that everyone else is buying, rationalizing their decision with "everyone else is doing it". Oddly enough, many people feel much less embarrassed about losing money on a popular share that half the world owns than about losing on an unknown or unpopular share.

Mental Accounting
Humans have a tendency to place particular events into mental compartments, and the difference between these compartments sometimes impacts our behaviour more than the events themselves. Say, for example, you aim to catch a show at the local theatre, and tickets are $20 each. When you get there you realize you've lost a $20 note. Do you buy a $20 ticket for the show anyway? Behaviour finance has found that roughly 88% of people in this situation would do so. Now, let's say you paid for the $20 ticket in advance. When you arrive at the door, you realize your ticket is at home. Would you pay $20 to purchase another? Only 40% of respondents would buy another. Notice, however, that in both scenarios you're out $40: different scenarios, same amount of money, different mental compartments. Pretty silly, huh? An investing example of mental accounting is best illustrated by the hesitation to sell an investment that once had monstrous gains and now has a modest gain. During an economic boom and bull market, people get accustomed to healthy, albeit paper, gains. When the market correction deflates investor's net worth, they're more hesitant to sell at the smaller profit margin. They create mental compartments for the gains they once had, causing them to wait for the return of that gainful period.

Prospect/Loss-Aversion Theory
It doesn't take a neurosurgeon to know that people prefer a sure investment return to an uncertain one – we want to get paid for taking on any extra risk. That's pretty reasonable. Here's the strange part. Prospect theory suggests people express a different degree of emotion towards gains than towards losses. Individuals are more stressed by prospective losses than they are happy from equal gains. An investment adviser won't necessarily get flooded with calls from her client when she's reported, say, a $500,000 gain in the client's portfolio. But, you can bet that phone will ring when it posts a $500,000 loss! A loss always appears larger than a gain of equal size – when it goes deep into our pockets, the value of money changes. Prospect theory also explains why investors hold onto losing shares: people often take more risks to avoid losses than to realize gains. For this reason, investors willingly remain in a risky share position, hoping the price will bounce back. Gamblers on a losing streak will behave in a similar fashion, doubling up bets in a bid to recoup what's already been lost. Investors often make the mistake of chasing market action by investing in shares or funds which garner the most attention. Research shows that money flows into high-performance managed funds more rapidly than money flows out of funds that are underperforming.

Investors get optimistic when the market goes up, assuming it will continue to do so. Conversely, investors become extremely pessimistic during downturns. A consequence of anchoring, or placing too much importance on recent events while ignoring historical data, is an over- or under-reaction to market events which results in prices falling too much on bad news and rising too much on the good news. At the peak of optimism, investor greed moves shares beyond their intrinsic values. When did it become a rational decision to invest in shares with zero earnings and thus an infinite price-to-earnings ratio (think dotcom era, circa the year 2000)? Extreme cases of over- or under-reaction to market events may lead to market panics and crashes.

People generally rate themselves as being above average in their abilities. They also overestimate the precision of their knowledge and their knowledge relative to others. Many investors believe they can consistently time the market. But in reality, there's an overwhelming amount of evidence that proves otherwise. Overconfidence results in excess trades, with trading costs denting profits.

Behavioural finance certainly reflects some of the attitudes embedded in the investment system. Behaviourists will argue that investors often behave irrationally, producing inefficient markets and mispriced securities – not to mention opportunities to make money. That may be true for an instant, but consistently uncovering these inefficiencies is a challenge. Questions remain over whether these behavioural finance theories can be used to manage your money effectively and economically. That said, investors can be their own worst enemies. Trying to out-guess the market doesn't pay off over the long term. In fact, it often results in quirky, irrational behaviour, not to mention a dent in your wealth. Implementing a strategy that is well thought out and sticking to it may help you avoid many of these common investing mistakes.


Tis The Season to Make Wrong Forecasts!

The year's winding down, so in the financial world that can only mean one thing – forecasts for next year.

Every mainstream media outlet will be putting them together over the next month because
A. people like lists; and
B. they're easy to string together.

The thing to always keep in mind: they're all worthless. There's no value that could be gleaned from forecasters who don't own working time machines or crystal balls.

The fun part comes from looking back because picks and forecasts are mostly made with impunity. There are so many of them that rarely does anyone ever get held to account. So a few of the clangers should always be highlighted to remind investors not to pay them any attention.

This time last year the Australian Financial Review published a 5000+ word opus: "The Best Choices for 2017: Equities". Surprisingly, despite suggesting it was important to pick carefully in the year ahead, for the most part, the article didn't offer up many picks. It did, however, allow analysts and managers to muse on the general prospects for various sectors in the year ahead: retail, infrastructure, energy, technology, healthcare, agriculture, mining, property, and banks. It named companies expected to do well but mostly stopped short of offering outright recommendations. 

However, in retail, while consensus was the sector would be subdued the suggestion was there would be some winners and losers. Leading to some necks being stuck out with explicit buy and sell calls made by Citigroup and UBS. With those names collected, it's time to see how well they've performed in 2017. The buys were Myer, Harvey Norman, JB HiFi and Super Retail Group. The sells were Woolworths, Metcash. 

So, how'd they fare? As the chart shows, had you done the opposite of all their recommendations you would have enjoyed a much better return than actually doing as they said. The four companies they recommended buys went into the red by a minimum of 16%, while the two sells gave positive returns:

From the buys, Citigroup was mostly positive on Myer, noting "we expect to see better-operating margins and positive sales trends even with the sluggish [consumer spending] backdrop." Yet it was the worst of the bunch, having fallen 47% year to date. The sell on Woolworths from UBS was reliant on the idea that price competition from food retailers may turn into a full-blown price war. In other words, a forecast on a possibility. Not exactly the most robust way to invest. Many of the forecasting articles follow a similar formula. It's always based on a perverted understanding of diversification. Where the investor needs to have a grab bag of shares from various industries. List each sector of the economy and pick the companies 'most likely to succeed' and because you've got a bit of everything, you're diversifying, right?

True diversification spans asset classes and countries. It's not reliant on whether Woolworths gets into a price war with Coles and Aldi, meaning your retail exposure should be elsewhere for that year. It allows you to remove your focus away from your portfolio and onto your life. For the media though, they need your eyes, while the analysts and brokers need you churning for a commission. So what you won't find the best choices for 2018 is the recommendation of a portfolio tailored to your needs with a minimum 10-year horizon.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation, and individual needs

When Buying Stocks, Do You Think Small?

Gains in all but one sector of the share market have lifted the All Ordinaries index above 6,000 points for the first time since the global financial crisis. The All Ordinaries index rose 0.5 per cent to 6,005.5 points, its highest level since May 2008, and the benchmark S&P/ASX200 index gained 0.5 per cent to 5,937.8 points. Energy producers set the pace for the market's gains, as oil prices hit 24 month highs. The big four banks also rose, with their gains ranging from National Australia Bank's 0.7 per cent to Commonwealth Bank's 0.05 per cent. The Australian dollar on Wednesday was slightly weaker against the US dollar at 76.62 US cents, from 76.80 US cents on Tuesday after the release of weaker-than-expected Chinese manufacturing data. The spot price of gold in Sydney at 1700 AEDT Wednesday was $US1,272.27 per fine ounce, from $US1,276.24 per fine ounce on Tuesday.

What this means for you:

We see it quoted daily in newspapers, on radio and television, but for many people the All Ordinaries shares index remains a confusing set of numbers. To some people it's those weird finance numbers read out during TV and radio news bulletins. To others, they're an important part of how their investments are performing. Put simply, the All Ords (as it's affectionately known) is a measure of the value of the biggest 500 companies that are listed on the Australian Securities Exchange. When it was established in 1980 the All Ords was given a base value of 500 points reaching a high of 6873 points in 2007.

We would suggest you don't watch the daily movements of the All Ords index, but rather remember that the Australian market has always increased in value over the long term. Daily up and down price movements is a normal way for markets to behave, but it's what happens over 10 years or more that's most important. Every night on the TV finance news, you'll hear about the ups and downs of household name stocks, like the big four banks, Telstra, CSL, Wesfarmers, Woolworths, BHP Billiton and Rio Tinto. But the market is more than that handful of names. There are about 500 stocks in the All Ordinaries index, the indicator often referred to in the media as the benchmark for the Australian share market. The combined market value of all those stocks, as of August 2016, was close to $1.8 trillion. Large-cap stocks, such as the big stocks mentioned above, make up about 80-85% of the total market cap. Currently these are roughly the largest 100 stocks by size. The remaining 15-20% of the market cap is represented by the small company stocks.

So why would you want to include these often obscure companies in your portfolio? Well, there are a couple of reasons. One is that these stocks (known as 'small caps') tend to behave differently to the better known larger names otherwise known as large caps. Sometimes, large caps will be the best performers. Other times, small caps will be in favour. So owning both parts of the market means you are getting a diversification benefit. In other words, some of the volatility of being exposed to just one part of the market is reduced.

A second reason for owning small caps in a diversified portfolio is that they are expected to earn a premium over large company stocks. Research shows this small-cap premium (alongside premiums from low relative price and highly profitable stocks) is persistent across time and pervasive across different markets around the world.
There are a few provisos to this finding. One is that the premiums are not there every day, every month or even every year. While we expect them to be there every day, there are periods when small caps will underperform large caps. This makes sense because if the premium was there all the time, it would be traded away.

A second caution is that within small caps, other premiums are at play. Research shows that among small stocks, those with high relative prices (sometimes known as 'growth' stocks) and lower profitability tend to have significantly lower expected returns than the rest. That means we need to take into account of this difference in expected returns.

Finally, diversification is critical. Over shorter periods, some stocks may do exceptionally well; others exceptionally poorly. It's difficult to identify these stocks in advance. And that's why you need a well-diversified portfolio that can capture the performance of these stocks in a more consistent manner. Diversification also helps control implementation costs which if unmanaged can be quite high for small-cap stocks.

So what's been the long-term evidence of a small cap premium in Australia? Over nearly four decades to the end of 2015, small caps here delivered annualised returns of nearly 14%, beating large caps by around two percentage points per annum on average.

The tricky thing for investors is the "on average" bit. In some years, such as 1989, small caps significantly underperformed large caps. In other years, such as in 1993, small caps shot the lights out, figuratively speaking.
Indeed, over the four-decade period shown in the chart below, you can see that only in four years has the performance of small-cap stocks been within 2% of that average premium. So the small-cap premium (the difference between the performance of large and small cap stocks) can be volatile, which is the price you pay for earning the premium.

In recent years, Australian small company stocks have struggled. In fact, in the four years from 2011-2014 inclusive, the small-cap premium (as shown above) was negative. But does that give us any information about the future performance of small cap stocks or what might drive the performance in the years ahead? In other words, can we time the premiums available from small, low relative price and more profitable stocks? It would be nice, wouldn't it? But rigorous tests show very limited evidence that we could do so reliably. That's the bad news. The good news is you don't need to be a timing wizard to get the benefit of these premiums. We've seen they are there over the long term. And we know that the best way to capture them is to apply a consistent focus within a broadly diversified portfolio.

The nature of the small-cap premium, however, is that when it does kick in, it can do so with a vengeance. And that's precisely what we have seen in the past 12 months to the end of July 2016 as small caps (as measured by the same index as in the above chart) have delivered a return of about 18% in the Australian market, well north of the flat result from large-cap stocks. So the big glamour stocks are not all that there is to our market. Small cap stocks also play an important role in your portfolio. They provide a diversification benefit because they behave differently to those big names. But they also offer an expected premium over time. The trick is riding out the volatility and staying disciplined within the asset allocation your advisor has chosen for you.

It's a small world after all.

The 'How' of Investing is Often Overlooked

The share market's recent run of gains has stalled due to weakness among telcos and miners and heavy falls from Crown Resorts and Lendlease. The benchmark S&P/ASX200 added just 0.02 per cent to 5,890.5 points, after being up to 0.3 per cent higher in the early afternoon.
Rio Tinto dropped 0.8 per cent to $70.92 and BHP Billiton shed 0.5 per cent to $27.17 after posting a three per cent drop in iron ore production in the September quarter. Telstra dropped 1.7 per cent to $3.49. The Australian Dollar was trading at 78.45 US cents at 5pm yesterday, from 78.46 US cents on Tuesday

What this means for you:
Success as an investor starts with the key questions of why, what, where, when and how. Why are you investing? What are your priorities? Where is your destination? When do you hope to get there? But it's the 'how' that's often overlooked.
'How' relates to process. It's not just what you invest in, but the approach you take to investing. This means adopting set guidelines to deal with whatever financial markets, and life generally, might throw at you on the way to where you're going.

The Seven Virtues of Process
Following on from how success as an investor starts with the key questions of why, what, where, when and how in the 'What this means for you section', of this week's Market Update, we are going to look at "process" a little more deeply and what it means in terms of investing. The process is critical when investing for many reasons. Here are seven that we believe are important for any investor:

1. Process means setting pre-agreed rules with your adviser to keep you focused on your goals. Without rules, you may be more likely to act on emotion triggered by the headline of the day or whatever other distraction everyone is talking about.
2. The second advantage of having a process is that it can be tied to broad principles. For instance, agreeing that diversification improves the reliability of outcomes may leave you less prone to chasing the latest hot new share or sector.
3. Having a process keeps you focused on elements within your control – like dividing your wealth between shares, bonds, property, and cash, diversifying within those categories, rebalancing regularly, and watching costs and taxes.
4. Process is repeatable. The focus is on skill and execution, not on luck or providence. Of course, things will always happen that you didn't anticipate. But your reliance on chance is less with a set process than when you are just winging it.
5. A process acts as a yardstick. When news breaks, having a process can give you pause for thought. "This news is interesting and diverting, but is it sufficient to change how you are proceeding?" your adviser may ask. The answer is usually no.
6. A process can be personalised. Each person is unique, with different tastes and preferences and risk appetites. Perhaps you feel more comfortable with a larger cushion of cash that can be replenished at regular intervals. If this process keeps you on track and helps you better live with volatility then it most likely a good process.
7. Finally, a process does not have to be set in stone. Circumstances change. Needs evolve. A single process can never incorporate every eventuality. The key point is that the process can be reviewed and adjusted based on experience and what is happening in each individual's life, not to what is going on externally.

Of course, processes work best when they are integrated. Otherwise, a minor change elsewhere can throw you off track. Think of what happens in a restaurant if attention to the quality of ingredients, menu, and execution in the kitchen is not matched by attention to the quality of service in the dining room. Likewise, an investor who has agreed with her adviser on following strong processes around her individual plan will not be served well if those managing her money are not delivering on what they said they would do. In contrast, integrated processes that share and maintain a single vision tend to reinforce each other. Ultimately, process provides structure for your investment journey. The world will always be complex and uncertain, and there will always be a host of potential distractions. But just having a structure in itself can deliver you a level of reassurance.

With a process, you are less likely to pursue the uncontrollable or un-duplicatable – whether wasting time and money trying to second-guess markets or chasing last year's winners or switching your investment strategy based on whatever is fashionable at any one moment. Instead of trying to ride your luck or intuition, you are methodically and steadily following a repeatable and defensible process that your adviser has designed with your goals, circumstances, and preferences at heart. Ultimately, paying attention to process makes your destination more achievable.



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