Index Funds


Nobody Told Me

For the last 30 years, I have had the opportunity to attend great seminars, training courses, conferences, and read many good books and articles.  I very much enjoy my role as a financial adviser, constantly trying to learn more so I can provide better advice.

Jonathan Clements, a long-time personal finance columnist for The Wall Street Journal, is one of my favourite authors. He recently wrote an article on his website reflecting on his learnings and what he wished he had been told in his twenties, or told more loudly so he would have listened.

  1. A smaller home will enable you to save and invest earlier to accrue retirement income-producing assets.
  2. Pay off your mortgage as soon as you can. Your mortgage interest rate will typically be higher than the post-tax return from many investments.
  3. Watching the market doesn’t improve portfolio performance. It’s just a huge time waster.
  4. Nobody knows what the short-term investment performance will be. Clements wrote that one of the downsides of working as a columnist for The Wall Street Journal  was that “…you hear all kinds of smart, articulate experts offering eloquent predictions of plummeting share prices and skyrocketing interest rates that – needless to say – turn out to be hopelessly, pathetically wrong.”[i]
  5. You will end up treasuring almost nothing you buy. Most of the stuff we buy gets thrown away. This is where millennials seem to be wiser than us baby boomers.  They are more focused on experiences than possessions.
  6. Will our future self approve of the decisions we make today? Pondering our future self doesn’t just improve financial decisions. It can also help us make smarter choices about eating, drinking, and exercising.
  7. Relax, things will work out. As I meet with younger lawyers and professionals, I sometimes see a glimpse of the anxiety that I suffered in my 20s and 30s. In the early years of your career there is so much uncertainty. What sort of career, you will have? How will financial markets perform? What misfortunes might come my way? Clements encourages by saying “…if you regularly take the right steps – work hard, save part of every paycheck, resist the siren song of get-rich-quick schemes – good things should happen. It isn’t guaranteed. But it is highly likely. So, for goodness sake, fret less about the distant future, and focus more on doing the right things each and every day.”[ii]

Some great thoughts from Jonathan Clements on the Humble Dollar website.  I trust one or two of his observations resonate with you.

Andrew Nuttall is an Authorised Financial Adviser with Cambridge Partners, a fee only financial advisory practice based in Christchurch.  Andrew’s Disclosure Statement is available free of charge and on demand.  He can be contacted at www.cambridgepartners.co.nz telephone 03 364 9119.

 

[i] https://humbledollar.com/2020/02/nobody-told-me/

[ii] https://humbledollar.com/2020/02/nobody-told-me/


A Market Update on the Effects of the Coronavirus

Presented by Richard Austin, Cambridge Partners Managing Partner 

Watch Richard’s video presentation, or read on for a detailed analysis.

The world is, as we are, watching with concern the spread of Coronavirus (COVID-19).  Uncertainty is being felt around the globe.  It is unsettling on a human level as well as from the perspective of how investment markets will respond.

Market declines can occur when investors are forced to reassess expectations for the future.  The expansion of the outbreak is causing worry amongst governments, companies and individuals about the potential impact on the global economy.  Earlier this week the OECD predicted that global GDP growth could now be 1.5% in 2020, which was half the rate it was predicting before the outbreak.

But what should you do regarding your investments?  As always, we lean into the evidence to determine our advice.
Looking back to recent pandemics, particularly SARS, helps provide context.

There are no definitive timelines for when SARS started and stopped, but broadly speaking the virus was active over an eight month period between November 2002 and July 2003.

It was certainly an unusual time.  For anyone travelling overseas in that period, they may recall individual health screening at country borders.  At the time travellers felt unsettled, but people continued to go on with their lives.  Business and commerce still functioned.

Interestingly, our model portfolios performed well over that eight month period.  Despite SARS and increased global uncertainty, our portfolios were up between 4% and 5% after funds management fees.  One year after SARS was first observed, our model portfolios were up between 6.8% (for an 20/80 portfolio with 20% in growth assets and 80% in cash & fixed income) and 11.6% (for a 98/2 portfolio with 98% in growth assets and 2% in cash).

If investors had chosen to sell out of their investments, it would most likely have been a poor investment decision, given the subsequent performance of markets. 

It may also be worth noting that SARS had a mortality rate of approximately 9.6%.  How is this relevant?  Well, perhaps it isn’t, but the Coronavirus has a mortality rate currently hovering around 2% and doctors are predicting it will ultimately be less than 1%.

Whether that makes it less scary than SARS might be a moot point, but regardless, markets treated investors well through the SARS outbreak and there is no reason that the same won’t happen through the Coronavirus outbreak as well.

As at February 27th, most of our model portfolios had been only modestly impacted by the increased market volatility experienced.  Year to date, the approximate performances of our model portfolios ranged from +0.3% for our lowest risk portfolio (a 20/80 portfolio) to -7.0% for a 98/2 portfolio.  For many, a better indicator may be something closer to a balanced 50/50 portfolio which is currently showing a year to date return of -2.0%.

The media are doing their best to paint a picture that markets are crashing, but these sorts of returns, whether Coronavirus was an issue or not, are not out of the ordinary for portfolios containing allocations to higher risk assets.
Of course, SARS hasn’t been the only global health scare to hit the headlines in the last 20 years. The following table highlights a few of the higher profile pandemics in recent history.  We have identified an estimated start date for each of these pandemics and then looked at the subsequent performance of a balanced 50/50 model portfolio over the next three months, six months and twelve months.

The results may surprise you…

 

 
Start date
Model 50/50 portfolio returns:
After 3 months          After 6 months        After 12 months
SARS November 2002 -2.2%  0.8%  9.0%
Avian Flu June 2006  0.1%  4.3%  7.4%
Swine Flu April 2009  6.9% 11.7% 19.5%
Zika Virus January 2016  4.5%  7.4% 10.2%
Coronavirus Early 2020    ?    ?    ?

 
Source:  Consilium.  A 50/50 Portfolio has 50% allocated to growth assets and 50% allocated to cash and fixed income.
Within the first few months, the performance of markets and portfolios can be mixed.  During SARS, which was the first global pandemic to emerge in quite some time, the early reaction of equity markets was quite negative.  During the Avian Flu outbreak a few years later, it was relatively flat.

What is even more striking is that markets within six and twelve months from the start of each of these outbreaks, regardless of their perceived severity, generally rebounded strongly.

What will happen in the weeks ahead with respect to the Coronavirus outbreak?

The truth is that no-one knows.  Markets today are reflecting heightened uncertainty in the form of lower prices.  As soon as there is new information (good or bad) this will also be priced in.  When the tone of the news flow gradually changes from contagion to containment, and eventually cure, then market risk and uncertainty should reduce, which is likely to be positive for risky assets.

While this heightened uncertainty may be uncomfortable for investors, don’t be surprised if the Coronavirus can be added to the list of issues that might make an investor think about selling, our general response is that it’s unlikely to be a good idea to sell investments.  Although we can’t see into the future, we can observe the past and we have witnessed the best recommendation is to stay focused on the long term and maintain your strategy.
      


Ten Years On From The GFC – What Have We Learnt?

The GFC (Global Financial Crisis) is widely considered by economists to have been the worst financial crisis since the Great Depression. Its effects were so wide-spread and profound that even Queen Elizabeth, whose personal fortune had fallen by more than $50 million, demanded economists explain why they hadn’t seen the crisis coming.
Around the world blame was distributed far and wide – lax regulations, too much regulation, excessive debt, irresponsible lending, complex financial products, compromised ratings agencies, an over-reliance on mathematical models, and just plain old greed were all cited as culprits.
But aside from a temporary seizure in short-term money markets, global share and bond markets performed as you would expect at a time of heightened uncertainty. Prices adjusted lower as investors demanded a higher expected return for the risk of investing.
And it wasn’t long before the markets started to see a reversal – By the end of 2009, the New Zealand market rebounded by more than 19% after a near 34% decline in 2008. Australia’s S&P/ASX 300 index performed even better, returning to almost the same levels as before the GFC.
Emotions are hard to keep in check during a crisis and there can be an overwhelming compulsion among investors to “do something”. But, as it turned out, those who listened to their advisors and stayed disciplined within the asset allocation designed for them have done considerably better than many people who capitulated and went to cash in 2008−2009.
An investor who had begun investing in the New Zealand market at the start of 2008 would still have experienced a 7.6% annualised return by the end of 2017.  Using a global balanced strategy of 60% equity and 40% fixed interest, the return was 5.4%p.a.These results show we can do ourselves a favour, both materially and emotionally, by accepting that volatility is a normal part of investing and by sticking to a well-thought-out investment plan agreed upon in less stressful times.

This blog has been taken from an article by Jim Parker of Dimensional. Read the full story here

Putting the recent market volatility into a longer term context

In the first three weeks of January 2018 alone the S&P 500 crossed ten new record closing highs in 13 days of trading.  Then, in February, the index lost all its gains from 2018 in a few days.  Over the next 7 months it built up gains again, and then lost all them over the course of three weeks in October. What’s going on?
Let’s remind ourselves how markets work.
Prices went down because some investors decided to sell.  But for every seller there is a willing buyer.  The aim of the buyer wasn’t to lose money.  The buyer bought because they felt that the discounted prices offered them enough return to justify the risk.
Markets bring optimists and pessimists together by finding a price at which they are both willing to trade.
This is our shorthand way of saying at least half the market participants transacting in the last few days thought it was a good time to buy.  Not everyone believes the sky is falling, even if the sensational headlines promote such a view.
But what about our investors?
For our clients with a 50/50 portfolio, we recommend a seven-year time horizon at a minimum, and most have a 20 or 30 year time horizon.  In other words, any of our investors that are planning to spend money out of their portfolio this year or next year probably have that money sitting in bonds and cash, not in shares.
So, the portion of the portfolio suffering the most from this recent volatility is the portion that an investor has almost no chance of spending or using any time soon.  That’s important, because it means that, whilst it’s not particularly comfortable to see volatility like this, it has little practical implication on their portfolio or current lifestyle.  For most of our clients, we hope they’d look on this current situation with a level of disinterest.
For clients that are regularly purchasing assets in their portfolios or via KiwiSaver, this is fact a positive development, because they’ll be able to buy more shares with their same regular savings contribution and that will help grow their long-term wealth.
And let’s remember, when we as investors agreed to purchase shares, we accepted this would generally lead to more volatile returns.  However, it’s volatility such as this that gives shares their wonderful return characteristics.  Without temporary dips such as this most recent one, shares would have the returns of cash – which would not help us reach our financial goals.
Shares are volatile.  The chart below shows the quarterly return of a portfolio 98% invested in shares.  It goes up and down a lot; there’s no way around it.
The chart below, however, shows the growth of wealth this same portfolio has produced since 1991.  While the volatility was uncomfortable, it produced large growth despite the Asian financial crisis, the tech wreck, the Global Financial Crisis and anything else you want to throw into the last 20 years or so.

The critical point to remember in all this is the outcome that long term investors get to experience.  It’s that share markets, on average, go up more than they go down, and that consistent exposure to these markets is a key driver of long-term wealth creation.
We know the markets can be volatile in the short term, but this is already factored in to our long-term strategies.  The worst decision investors can make is to react to short term volatility in a way that jeopardises the achievement of their long-term plans.
If you are still concerned, we want to talk.  Give your adviser a call and we’ll be happy to talk through the recent changes to your portfolio in the context of both your short and longer term goals.

Our thanks to Ben Brinkerhoff from our associate company, Consilium, for this great article.