Risk Management


Seven Ways to Fool Yourself

By Cambridge Partners’ Managing Partner, Jacob Wolt

The philosopher Ludwig Wittgenstein once said that nothing is as difficult for people as not deceiving themselves. But while most self-delusions are relatively costless, those relating to investment can come with a hefty price tag.

Psychologists call this tendency to select facts which suit our own internal beliefs as “confirmation bias”. A related ingrained tendency, known as “hindsight bias”, involves seeing everything as obvious and predictable after the fact.

These biases, or ways of protecting our egos from reality, are evident among many investors every day and are often encouraged by the media. Here are seven common manifestations of how investors fool themselves:

1.  “Everyone could see that market crash coming”. Have you noticed how people become experts after the fact? But if “everyone” could see a correction coming, why wasn’t “everyone” profiting from it? You don’t need forecasts.
2.  “I only invest in ‘blue-chip’ companies.” People often gravitate to the familiar and to shares they see as ‘solid’. But a company’s profile and whether or not it is a good investment are not necessarily correlated. Better to diversify.
3. “I’m waiting for more certainty.” The emotions triggered by volatility are understandable. But acting on those emotions can be counterproductive. Uncertainty goes with investing. In the long term, discipline is rewarded.
4.  “I know about this industry, so I’m going to buy the stock.” People often assume that success in investment requires specialist knowledge of a sector. But that information is usually already in the price. Trust the market instead.
5.  “It was still a good call, but no-one saw this coming.” Isn’t that the point? You can rationalise a stock specific bet as much as you like, but events or external influences can conspire against you. Spread your risk instead.
6.  “I’m going to restrict my portfolio to the strongest economies.” If an economy performs strongly, that will no doubt be reflected in stock prices. What moves prices is news. And news relates to the unexpected. So work with the market.
7.  “OK, it was a bad idea, but I don’t want to sell at a loss.” We can put too much faith in individual stocks. And holding onto a losing bet can mean missing opportunities elsewhere. Portfolio structure is what determines performance.

This is by no means an exhaustive list. In fact, the capacity for us as human beings to delude ourselves in the world of investment is never ending.

But overcoming self-deception is not impossible. It just starts with the idea of recognising that as humans we are not wired for disciplined investing. We will always find one way or another of rationalising an emotional reaction to market events.

But that’s why even experienced investors engage advisers who know them, and who understand their circumstances, risk appetites and long-term goals. The role of that adviser is to listen to and acknowledge our very human fears, while keeping us in the plans we committed to at our most lucid and logical.

We will always try to fool ourselves. But to quote another great philosopher, the essence of self-discipline is to do the important thing rather than the urgent thing.

Our thanks to Jim Parker for his assistance in creating this article.


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/


Tips To Help You Manage Growing Cyber Security Issues

By Cambridge Partners Adviser, James Howard

Criminals are using the COVID-19 pandemic as an opportunity to carry out phone scams and online malicious cyber activity. Knowledge and awareness of threats is proven to be the best defence against cybercrime.
At Cambridge Partners, we take our cyber security very seriously and, to keep our business and client information safe, we work closely with our cyber security and IT providers, Inde Technology and Mobius Network Solutions.
Together with Scott, a Security Architect at Inde Technology, we have put together some key tips for our clients and connections, to help manage this growing cyber threat, within their bubbles.

Security Tips
• Be aware of news or advice that does not come from official sources, particularly if it has been sent to you unexpectedly. How professional does it sound – for example are there spelling and grammatical errors?
• Don’t give out personal or financial information – always check the source is legitimate.
• If you’re unsure whether an email, call, text or any other communication is from a legitimate source, don’t click on the email link or open the attachment. Contact the organisation via their official contact channels.
• Set your social media privacy settings, so only family and friends can see your posts.
• Set up two-factor authentication (2FA) – choose to get a code sent to another device when logging in online. This stops hackers getting into your accounts.
• Protect your passwords and login credentials, do not enter these into any websites relating to the COVID-19 virus. Also make sure you update your passwords regularly and create unique passwords for each account.
• Keep your devices and apps up to date. When you are alerted to an update don’t ignore it — install it as soon as possible. Updates aren’t just about adding new features, they often fix vulnerabilities that hackers have found to access your system. If your device can’t receive updates anymore, we recommend upgrading to a newer model if possible. 
• Back up your data. Ensure all your important information is backed up and stored in a secure location.

Zoom/Microsoft Teams Video Conferencing
Increasingly we are using video conferencing for meetings or catching up with family and friends. Ensure the “waiting room” functionality is enabled if you are setting up a video conference meeting. All our Cambridge Partners meetings are set up this way to ensure confidentiality is maintained.

At Cambridge Partners we are constantly looking to strengthen our cyber security, stay vigilant and protect important information. For us, this task is simplified when those people we are working with are also vigilant in protecting themselves. We highly recommend speaking to experts in the security field.

The CERT NZ website is a great source of information on how to keep yourself cyber safe and report suspicious activity.

 

Autumn Update 2020

For all of us, the last four or five weeks have been like no other.  The COVID-19 health crisis we have been fighting is effectively a war that has simultaneously been waged all over the globe. And, as in all wars, there have been significant human casualties.

The different containment measures many countries have employed to contain the spread of the disease have created sudden and significant shockwaves for all markets. 

Our Autumn Update attempts to provide a detailed explanation about the market reaction to COVID-19.   This is significantly longer than normal because the unique and complex nature of what we are experiencing, couldn’t easily be condensed into just a few paragraphs.

As the year unfolds, we look forward to continuing to update you with the progress of investment markets in, we hope, much less turbulent times.


10 Things You Should Do Right Now

From Jacob Wolt, Managing Partner Cambridge Partners

We live in history making times. Feelings of uncertainty, worry and anxiety are understandable. The challenge for us all is to focus on the things we can control and to let go of the things we can’t.

Humanity has been through many difficult periods in the past such as; the Great Depression, Spanish Flu’ pandemic, two world wars  and the global financial crisis. They were all difficult times but the world got through them.

This current crisis too will pass and, thankfully, the seeds of optimism are evolving that there is a way through this.  From an investor’s perspective this period of significant market volatility also will eventually pass.

Every market decline is driven by a slightly different set of circumstances and events, but the best response to each is usually the same.  Here are ten time-proven tips, to help keep things in perspective:

  1. Cambridge Partners has helped you establish a balance between your growth (equity) and defensive (high quality bond) assets to ensure that you can withstand temporary falls in the value of your portfolio. If necessary, we’ll rebalance your portfolio to make sure you have the right level of equities to benefit from future market rises.
  2. Be confident that your defensive assets will come into their own, protecting your portfolio from some of the equity market falls. Be confident that you have many investment eggs held in different baskets.
  3. If you’re taking an income from your portfolio, remember that if equities have fallen in value, you’ll be taking your income from your bonds, not selling equities when they’re down.
  4. Remember that without risk there wouldn’t be any reward. Whilst short term movements in share markets can be unsettling, by holding growth assets you are positioned to reap higher long-term returns.  Remember also that you most likely hold fixed interest bonds in your portfolio, so any decline in your portfolio won’t be as much as headline market falls indicate.
  5. Don’t measure your portfolio’s performance from the top of the market, but over a longer and more sensible time-frame.
  6. Don’t look at your portfolio value too often – get on with more important things. If you’re looking every day, then think about how this behaviour is affecting you, and if it worries you, then stop.
  7. Accept that you cannot time when to be in and out of markets – it’s simply not possible.
  8. If markets have fallen, remember that you still own everything you did before. A fall does not turn into a loss unless you sell your investments. If you don’t need the money, why sell?
  9. Research has found we perhaps feel twice as much pain from losses as we experience pleasure from gains.
  10. Control what you can – financial markets may be volatile, but your financial life doesn’t have to be. There’s so much that you can control including your own emotional response to the market’s turmoil.

 

 

 

 

 


Lessons from History – And Why They Matter Now

By Jacob Wolt, Managing Partner Cambridge Partners

“The only thing in this world is the history you don’t know”. Harry Truman, the 33rd President of the United States had a profound love of history. Truman looked to history for guidance on many of the issues he faced during his presidency, including the establishment of the United Nations, the ending of World War II, the economy, civil rights, the recognition of Israel and the Korean War. Although each of these issues were “new”, in Truman’s view they were also “old”. Truman reflected on history to help make better decisions in the present.

The current Coronavirus pandemic is new, but a crisis having an impact on share markets is not new at all.

The table below shows all the major downturns on the S&P 500 since the start of WWII, and their subsequent recoveries.

Notes:  This table is based on the price only version of the S&P 500 Index and therefore ignores the effects of dividends.  Returns after 12 and 36 months are shown on a total return basis i.e. they have not been annualised.

Given the wealth of historical information, what can we learn?

Here are a few important observations:

  1. In the past we’ve experienced events that have significantly impacted markets on average every five years. If you plan to be an investor over the next 20 years and this average is maintained, you could experience four or more market downturns.
  2. There’s never been a bad time for long term investors to buy into markets. Even if you had the worst timing in the world and bought in at the peak of the market in September 2000, and sold at the low point in December 2018, you would still have more than doubled your money.
  3. Since the end of WWII, approximately 75 years, the market has increased in value about 150 times. You might ask yourself, how could you possibly lose money in this sort of market? Yes, it would be hard, but those that did were probably trying to predict or avoid the downturns. They only succeeded in missing out on too many of the strong gains that occurred on either side of a downturn.
  4. Markets recover fast. Although we can never pick the bottom of the market, based on the data in the table above, the average return for the next 12 months, following a low point, has been positive 35%, and over 3 years it’s positive 61%. These historical recovery rates provide encouragement to all investors to stay in their seats in a crisis.

Investors may ask themselves, “Given all I can see throughout the history of capital markets, how should I respond to this latest drop in prices?”.

History is critical in answering this question; it provides an important basis for making better decisions.  Although a history buff himself, Truman expressed his frustrations of humans often being too slow to learn from the past.

Truman once told the American author and novelist Merle Miller, “the next generation never learns anything from the previous one until it’s brought home with a hammer…. I’ve wondered why the next generation can’t profit from the generation before, but they never do until they get knocked in the head by experience.”

It’s fair to say that many investors have now been ‘knocked in the head’ by experience, and some younger investors are going through this for the first time. But here’s hoping, despite Truman’s scepticism, that we can all profit from the generations before us and use our knowledge of history to help us make better decisions today.

Our thanks to Consilium for helping to supply the original material in this article.

 


Coronavirus Update from Cambridge Partners March 19th 2020

Presented by Richard Austin, Cambridge Partners Managing Partner 

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

Introduction

These are extraordinary times.  It has been just two weeks since we provided our last update, but a lot has changed.

  • The World Health Organisation officially declared Coronavirus a ‘pandemic’ on 11 March 2020
  • Travel bans have been put in place around the world, schools are being shut and large events cancelled
  • Anyone coming to New Zealand, except those from some Pacific Islands, must go into self-isolation for 14 days
  • In the US the Federal Reserve cut its overnight rate to between 0% and 0.25%
  • Closer to home, the Reserve Bank of NZ has made an emergency cut to the official cash rate this week, from 1.0% to 0.25% (a drop of 0.75%), which will last for at least the next 12 months

 
Governments in NZ and around the world are putting in place financial packages to help support business.  This may help reduce the impact of the slowdown, but it is likely the economic effects of the virus will be widespread for weeks and months to come.
 

What is happening in markets? 
 
Share markets react to new information and reflect general investor sentiment.   As the scale of the effects of the virus have become known, markets have priced in the expected reduction in company earnings and outlook, causing share prices to fall.
 
As we release this update, the fall in the US S&P 500 from its recent peak in February has been around 30%.  While the Dow Jones has fallen 33%. Returns differ depending on each country, but the falls are of a similar magnitude around the world.
 
It’s fair to say that investor sentiment has turned almost 180 degrees from being very positive at the start of 2020, following nearly 10 years of gains, to one of being fearful and full of uncertainty.
 
As we know we know markets are driven by both fear and greed, and we are now seeing a high level of fear return to markets.


 
What effect will the downturn have on my portfolio?
 
New Zealand is a relatively small economy and as a net exporter, we are exposed to events that happen around the world.
 
However, our portfolios contain many thousands of underlying investments to ensure we are not overly exposed to any one specific company, sector of the economy or country.
 
We also have an approach of holding a high proportion of the portfolios in offshore assets.  The benefits of this approach are generally two-fold – our clients receive greater country diversification, but also any losses experienced offshore are dampened if the New Zealand dollar falls.
 
In addition to holding growth assets like shares, our portfolios also hold defensive assets, such as New Zealand and International Fixed Interest.  In times like these, the aim of the defensive assets is to reduce the overall effect of the fall in share prices. 
 
For example, a 50/50 portfolio with 50% in growth assets and 50% in defensive assets is down around 13% from the recent peak in February and around 6% over the past 12 months. 
 
Whilst these are significant falls, and no doubt concerning for investors, its less than the 30% fall that equity markets are experiencing.


 
Should I sell shares and reduce risk?
 
Share prices react very quickly to new information.  A good starting point is to assume that all the information that is currently known about the virus and other events around the world is effectively ‘priced in’.
 
As new information becomes available – markets react.  If the news is negative or worse than previously predicted, markets generally fall, whereas if the news is positive, or not as bad, markets generally rise. 
 
Whilst we cannot predict tomorrow’s news, or events that are yet to happen, we do know that if investors sell in times of market stress such as these, they are much more likely to lose money, than to gain.
 
Not only have you got to predict the best time to sell, you have to predict the best time to buy.  When investors try and do this, or base decisions on the emotions of fear and greed, they sell after markets have fallen, and buy only after markets have gone up.  This is a sure fire way to lose money.

 
As a client of Cambridge Partners, it is also worth remembering the planning process you went through with your adviser, when you initially determined what type of investment strategy was suitable for your needs and objectives. 
 
This strategy was designed knowing that events like this can, and sometimes do, happen.  This means if your plans or objectives haven’t changed, your portfolio may still be appropriate for your long-term objectives.



 How long will it take for things to recover?
 
The short answer is that nobody knows. 
 
However, it looks like the next three months could be rough for the global economy, financial markets and investors.  It’s likely that we’ll see plenty of profit warnings from companies and some economies in recession.
 
But at some point, things will get better.  In the Northern Hemisphere the summer will arrive, which may take some sting out of the virus and, at some point, a vaccine may emerge. 
 
It’s important to bear in mind that no one waves a flag, or blows a whistle, when the markets hit their peaks or come off their lows.  But at some point, markets will recover – and it is normally before we’ve seen hard evidence of the global economy improving. 
 
If we remember the Global Financial Crisis that started in late 2007, the S&P 500 hit its low in March 2009, while the world was still in the depths of recession and investors couldn’t see a way out. 
 
However, six months later the S&P 500 had rallied 53% – anyone who was sitting on the side lines waiting for firm evidence of the improvement, missed out.
 
The message here is that abandoning your longer-term investment strategy and reacting to your fears, may hurt your portfolio’s overall performance.

 
Is there anything I should be doing now?
 
If you are feeling concerned or anxious – that’s OK and perfectly normal.  We encourage you to reach out to your adviser.
 
There is a heightened level of uncertainty and anxiety at present, but what we do know is that, at some point, markets will recover.  However, what we don’t know is exactly when.
 
In interim, there are some practical measures you could consider:

  1. If you are regular taking money out of your portfolio, then consider reducing the amount you are withdrawing, or suspend withdrawals for the next few months.
  2. While it may seem perverse, if you are holding cash in your portfolio, the fall in markets, does represent the opportunity to re-balance into growth assets at these lower prices.
  3. Work with your adviser to review your current investment strategy and objectives against the outlook for your portfolio.

 
We also encourage you not to let fear drive your decisions and sell after markets have fallen. 
 
It is a difficult time right now, but we know from experience that you’re much more likely to lose money than to gain, if you try and time the low and high points in markets.

 
How will the virus affect Cambridge Partners?
 
Last month as part of our Business Continuity Plan we conducted tests on our processes in the event we had an outbreak of Coronavirus in the office. This included how we would communicate with clients and manage the effects within the office, along with maintaining business as usual.
 
We’re pleased to advise that our tests were successful and with laptops, mobile phones and secure internet connections we are confident that we will be able to continue to operate at close to normal capacity if we are required to work elsewhere.
 
We are very conscious of all the health warnings and have advised staff to stay at home if they are feeling at all unwell.
 
Meetings are still being held in the office and we are monitoring the appropriateness of this daily.
 
We aim to continue to provide updates as the situation develops.  But if you have any questions or concerns, please reach out to your adviser or one of the team.

 
 


Suddenly Single – Financial Advice for Women in a Life Transition

It is sobering to think that around 80% of women will die single, compared to only 20% from men.

These statistics reinforce the need for any woman who finds themselves unexpectedly in control of their finances – whether by choice or unhappy circumstances – to have access to unbiased, expert and empathetic financial advice.

In this brief video, Cambridge Partners’ financial adviser, Pip Kean, shares some of the issues faced by women who find themselves suddenly single.


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.
      


What’s Your Financial Personality?

Russ Alan Prince, one of the world’s most published authors on the topic of private wealth, has put together this list of nine financial personality types. 

We all fall into one of these categories, regardless of how much we are worth.  But the majority of the seriously rich among us fall into just three of them.

Read through this list of personality types to find out what category you fall into (or ask your nearest and dearest if you dare!).  Then see if you can pick which three belong to the super rich – answer at the end of the article.

21 per cent Family Steward: Focus on taking care of the people they love. They care about education, their children becoming hard-working and successful and passing on an inheritance.

17 per cent Phobic: Doesn’t like investing, doesn’t want to learn about it or understand it. They like to delegate and have trust.

13 per cent Independent: Wants financial freedom and flexibility to do what they want, when they want. Money is just a means to this end.

12 per cent Anonymous: Very private people who don’t like sharing their financial position. Confidentiality is everything.

10 per cent Mogul: Enjoys the power, influence and control that money can give.

8 per cent VIP: Enjoys the possessions and social respect that comes from money. Prestige is important.

8 per cent Accumulator: Saves more than they spend, doesn’t show their wealth and might live below their means as money makes them feel more secure.

6 per cent The Gambler: Wants to beat the market and likes the excitement. It’s all about the returns.

5 per cent The Innovator: Likes things that are technically clever, new funds, and trading methods. They veer to complex strategies.

The three personality types you were looking for were family steward, the phobic and the independent.  But, more importantly, which personality type were you?


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.


Now and Then

You are more likely to recognise the stairwell than the person here!  That’s because it’s from the set of The Big Bang Theory – one of the longest-running and most popular sitcoms on our screens today.  Its Executive Producer Dave Goetsch reflects here on how much his attitude to investing has changed in the last ten years.  One of the biggest differences? Finding a good financial adviser.

I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing.

Seeing all the recent headlines about the sudden downturn in the stock market has transported me back to February of 2009, when I was close to despair. It’s striking how different I feel now.

In February 2009, the stock market was down around 50% from its high, and everyone seemed to feel like the sky was falling. I was familiar with this state of panic because my relationship to the financial markets was that I didn’t trust them.

They were always going up and down in ways no one could predict, and I couldn’t trust those folks who said that they could anticipate what was going to happen. So when the market went down, I went down with it—sinking into a depression, knowing there was nothing I could do.

What a difference nine years make. I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing. I was right not to trust those people who thought they could predict what was going to happen in the markets, but I was wrong in thinking that there was nothing to do. I’ve learned that I can have a great investment experience if I just accept a few simple truths.

I have to understand the uncertainty of the market. The stock market, as measured by the S&P 500 Index, has returned about 10% per year over the last 90 years,1 but there are very few individual years in which it has ever actually returned that amount. In fact, how many of those 90 years do you think the S&P 500 was up more than 20% or down more than 20% for that year? The answer is 40. Astounding, right? I wish somebody had explained that to me decades ago. Then I would have known to look at stock market returns in terms of decades—not years, months, days, or hours. I would understand that so many of those articles and cable news pieces are just noise, designed to keep an audience obsessed and unsettled.

I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing.

In order to be a long-term investor, you have to have a long time horizon. This can be hard to remember when you’re being assaulted by noise, but if you can stay strong, the results are stunning. By results, I don’t mean the investment returns, which hopefully are good. The return I’m talking about is how I feel every day. I worry less—not just about the future, but also about the present. Of course, I know that there are no guarantees when it comes to investing, but I feel like I’m going to be okay. I have a plan.

There’s no way I could’ve done this without a financial advisor. I needed someone who could not just talk me through what my asset allocation should be, but also help me work through how I felt about investing and what exactly I could do to change my perspective.

I was a mess nine years ago. Now, my outlook is totally different. The markets haven’t changed; they still go up and down. The difference is, I don’t anymore.

Thanks to our Associates at Dimensional Fund Advisors for the use of this article.