Risk Management


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.

 

 


Many Happy Returns

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

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

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

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

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

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

Annualised returns for the past three years of 20 developed and 20 emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in New Zealand dollars.

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

New Zealand was one of the top performers this year driven by better than expected growth and Haier’s bid to purchase Fisher and Paykel. What is perhaps more amazing is that New Zealand has had the highest 3-year returns (9.4%) of any country in the developed world… by a big margin. Further, the United States is number 3 (5.7%), just behind Denmark (5.8%). Show me the media outlet that predicted this?

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

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

Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from what the market has already priced in.2

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

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

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

In the meantime, many happy returns!

By Jim Parker, Vice President – Dimensional & Ben Brinkerhoff, Head of Partner Growth at Consilium NZ Ltd

1. ‘Buckle Up’, Barron’s, Dec 19, 2011

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