Wealth Management

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.


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.

2019 Financial Review Released

Presented by Scott Rainey CFA, CFPcm, AFA Senior Adviser
At the start of 2019, much of the world was in a state of turmoil.  A lot of the big issues weren’t resolved by year’s end either.  It might have been logical to expect financial markets to perform badly as well.
But, as Cambridge Partners’ Adviser Scott Rainey points out in this informative 4-minute video, what actually happened could not have been more different. 
Grab a coffee and have a look.
And if you have any questions please feel free to give Scott or any
of our Advisers a call on 0800 864 164.

What Do I Want My Money to Do For Me?

Most people HATE budgeting.

They hate the idea because it feels restrictive. They hate the process because it makes them afraid to admit where are their money is actually going. And they probably hate the word because budgeting doesn’t sound like something that’s fun to try.

Most people assume budgeting is about saving money but it’s really about how you choose to spend your money. One of the better books on the topic is You Need a Budget by Jesse Meachum, who does a wonderful job of re-framing the budgeting conversation.

He made three points worth highlighting:

  1. Design your financial life around your priorities. There’s an old adage that goes something like this: if you want to know where your priorities lie, take a look at your bank statement and your calendar.

Meachum rightly talks about the importance of prioritizing your spending:

Without a budget you have no way to prioritize your spending and may not even know where your money is truly going. You may stress about not being able to afford what’s important to you while you simultaneously spend on things you’d willingly nix if you could see the trade-offs. A budget lets you see exactly how your spending affects the rest of your life.

  1. Try to make your “emergency fund” obsolete. An emergency fund can often morph into a catch-all savings account that pays for expenses people know are coming, they just don’t know when. Most of the time these are not actual emergencies, but infrequent expenses you can plan ahead for.

Meachum breaks things down by your true expenses:

Whether expenses happen like clockwork (rent), feel impossible to predict (car repairs), or are just far-off dreams (cash for a wedding), they are all part of your true expenses. The key is to prepare a bit at a time by treating them all like monthly expenses.

He recommends adding line items into your monthly budget for these infrequent expenses so you can break them up into more digestible pieces. This turns it from an emergency fund into a more well-thought-out spending plan.

  1. Budgeting is personal. Rules of thumb can help with the decision-making process when there are too many choices but you have to pick your spots with these things, especially with your finances.

There are financial rules of thumb like the one that says you should allocate 50% of your money to necessities, 30% to wants, and 20% to savings or debt payments.  The problem is the percentage approach fails to take into account personal circumstances.

Spending your money in a conscientious way will always require trade-offs. Many of those trade-offs are determined by variables like where you live, your chosen profession, your family situation, your level of savings, and your burn rate.

As Meachum says, “The point is to decide what your priorities are, and then make a plan to meet them.”

Adapted from an article by Ben Carlson of Ritholtz Wealth Management

Cashflow Modelling Explained

Many people struggle to actually ‘see’ what they will need to secure the sort of retirement they hope to enjoy. 

In this short video, Cambridge Partner Andrew Nutttall diagrams the six key variables that you need to consider if you want to enjoy a secure retirement.

Second Quarter Market Update Released

Another three months have flown by, which means it is time for another one of our Adviser Scott Rainey’s much-anticipated quarterly market updates.

In this informative video you’ll learn:

  • Why New Zealand isn’t just a great place to live, but the NZ Sharemarket has also been good place to invest
  • How two record OCR lows in a row may not be the end of interest rate drops
  • Why the last 12 months have been very much a year of two halves, and what this has meant for investors
  • Plus plenty more interesting, informative and useful information

So grab a coffee, take 12 minutes, and have a look.

All The Financial Advice You’ll Ever Need (On One Page)

Here’s another excellent article from our own Andrew Nuttall.  This ran in last month’s local law society publication ‘Canterbury Tales’ and contains the sort of advice we’d love to see taught in High School, but is equally relevant to people of all ages.

Jim Rohn, the author of ‘The Art of Exceptional Living’, once said, “success is nothing more than a few simple disciplines, practised every day”.  Many of the most successful investors aren’t necessarily the smartest, or blessed with amazing talents, but do have the discipline to do the simple things well, and to do them over and over again.

Try following this simple set of rules, repeating them regularly and see how close to achieving your financial goals they will take you.

  • Rule Number 1 – Make your own lunch and drink the boss’s coffee (and save $2,500 + per year).
  • Rule Number 2 – Don’t borrow to buy a car! (or anything that depreciates)
  • Rule Number 3 – The worst advice you can get can come from a well-intentioned friend or your neighbour.
  • Rule Number 4 – Remember that the media is not interested in your financial success (they just want your attention to sell advertising).
  • Rule Number 5 – Too many people spend money they earned…to buy things they don’t want…to impress people they don’t like.
  • Rule Number 6 – Your investments shouldn’t be your entertainment.
  • Rule Number 7 – Contribute to KiwiSaver and make a choice about where you want to invest (don’t just go with the default fund).
  • Rule Number 8 – Save 10% of your income. (i.e. pay yourself first)
  • Rule Number 9 – Pay off your personal debts as soon as you can and your credit card balance in full every month.
  • Rule Number 10 – Insure for what might happen, set aside savings for the inevitable.
  • Rule Number 11 – Remember that thrift is a virtue.
  • Rule Number 12 – Diversification. It is investors only free lunch.
  • Rule Number 13 – Remember that risk and reward are related – if it looks too good to be true it probably is.
  • Rule Number 14 – Stop, think, plan, write it down, act, review.
  • Rule Number 15 – Keep it simple and reduce your clutter to help you clarify your thinking.
  • Rule Number 16 – Remember the above rules.

Please drop Andrew an email on andrew.nuttall@cambridgepartners.co.nz if you have some rule of your own to add and he will put you into a draw for a voucher at one of Christchurch’s new restaurants, The Permit Room in Victoria Square.


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.

Cambridge (Partners) goes to Oxford

Cambridge Partners Principal Adviser, Jacob Wolt, is on his way to Oxford University to take a major role in the annual conference of GAIA (The Global Association of Independent Advisors).  This is a hugely significant event on the international financial scene and will be attended by major, independently-owned investment advisory firms from around the world.

The global conference will be held this Wednesday and Thursday and, on Friday, Jacob will be chairing the Australasian session, which is traditionally attended by member companies from other parts of the world as well.  “It is an enormous honour and privilege to be chairing this event,” Jacob explained on the eve of his departure.  “GAIA firms are identified by their independence and their over-riding commitment to fiduciary excellence and to ensuring they always put their clients’ needs first.  So these get-togethers are always an opportunity to learn from the world’s best and to reinforce our commitment to unified global thinking.”

Cambridge Partners are the only company in the South Island with GAIA membership, and one of only two New Zealand wide. GAIA  membership is limited to those companies who meet stringent standards of total independence and transparency in wealth management practices.  GAIA member companies must also be certified by CEFEX – an equally demanding independent global assessment and certification organization which provides an independent recognition of a firm’s adherence to a defined standard representing the best practices in the industry.

Everyone at Cambridge Partners would like to wish Jacob safe travels and all the best for this demanding and prestigious role – we have no doubt he will do us all proud.

“I’m at the top of my game – and I don’t feel old!”

Here’s a very interesting interview from retirement commissioner, Diane Maxwell, which screened on TV3 this morning. Well worth a read or watch in its entirety, but here are some of the key points:
– Most ‘retirees’ don’t feel old – ‘they are fit, healthy and active and want to get up in the morning and do something’.
– Most kiwis want to retire when they are aged between 68 and 72 NOT 65
– 63% of people don’t believe they will have enough to retire on when the time comes
Diane Maxwell was reluctant to put a figure on just how much any one person needs for retirement as needs and expectations vary.  But she did suggest that one of the key tools to help was to always have a three month buffer – in other words enough money in the bank to tide you over for three months if you weren’t able to earn money during that time.
This was necessary regardless of age because it helped protect against a downward spiral of additional debt which could happen at any time, and seriously compromise long-term savings plans.
And what was the message she was getting back from those she talked to who had either reached or were close to retirement? “Don’t write me off – I’m at the top of my game, and I don’t feel old!”

Read or watch the full interview here



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.



Welcome to James Howard

We’re delighted to welcome James Howard to Cambridge Partners. A Canterbury local, James received his BCom at University of Canterbury majoring in accounting, finance, management and information systems.

Following his graduation, he joined EY, working in the International Tax and Transfer Pricing department. His involvement with the company spanned almost a decade, and included three years in the Netherlands working in the Operating Model Effectiveness team.

Along with New York, London and Singapore, the Netherlands is one of EY’s key hubs for Operating Model Effectiveness, so this was an excellent opportunity for James to challenge himself and gain valuable professional experience in this area. On a personal level, it provided him and wife Kate with an opportunity to fulfil a dream to see more of the world.

“I had a blast and learnt a lot and, to be honest, if it was a bit closer to home we might have stayed,” he says with a smile. “But ultimately the 26-hour flights home become a bit much for both of us. And, as much as we loved our time overseas, we’re very happy to be back in Christchurch closer to our family and friends.”

After initially returning to EY in Christchurch on his return home, James moved to Otakaro Ltd – the crown-owned entity which is responsible for delivering the anchor projects currently underway as part of the Christchurch rebuild.   Here James provided Commercial and Economic Advisory in the Strategy and Planning team. “It was great learning and a good experience but ultimately not what I was looking for” explains James. “I missed developing relationships with clients and working with those clients to create value and achieve their goals.”

James loves skiing, mountain biking “Basically any outdoor activities. I also used to be an avid rower, however it’s been a few years since I’ve sat in a boat…” He is still involved in the sport though, as he sits on the board of Southern Rowing Performance Centre.

Billionaire David Booth’s Investment Tips for New Zealanders

Investment guru David Booth visited New Zealand to talk about his mission to change people’s lives through investments, reports Richard Meadows.

When a billionaire gives you investment advice, you listen.

When it’s backed by the research of several Nobel-prize winning economists, you really pay attention.

David Booth is co-founder and chairman of Dimensional Fund Advisors, which manages almost US$400 billion (NZ$600b) of assets.

Here’s his advice:


What Investors Should Ask Themselves

What if You Knew the Future?

One common fantasy among investors is that if they knew the price of certain assets in the future they could deal with today’s volatility. The trouble is that these investing fantasies are based on the false assumption that uncertainty can be eliminated. Barry Ritholtz has more.

Even if you knew ‘the future’ price of stocks, it wouldn’t eliminate uncertainty:


Crisis or Opportunity?

When the media blandly reports that “sellers were out on force on the market today” it’s worth asking who they were selling to. For every seller, there has to be a buyer. And these latter individuals tend to hold the long-term view that falling prices mean stocks are on sale. Ben Carlson explains.

The best times to put your money to work are often when things seem like they’re never going to get better:


Price vs Value

Spend the Money for the Good Boots, and Wear Them Forever

By Carl Richards, Feb 1 2016.

Many people, in considering whether to pay for any good or service, will rank price ahead of everything else. But seeking to pay the lowest dollar for everything can come at a cost. In this article, Carl Richards says consciously paying for quality can deliver greater value in the long term.

When making a decision about a purchase, it’s sensible to distinguish between price and value. Read article here:


Responding to Stock Market Volatility


By Robert Powell, Special for USA TODAY

How should the average investor react as global stocks experience volatility? Charisse Jones with five tips for the every day investor.

If you haven’t figured this out by now, it’s time you did: Stocks are risky. They are risky — as in volatile — over the short and the long term.

But that doesn’t mean you should avoid investing in stocks … except maybe Chinese stocks. Nor does it mean that you should just ride out the jaw-dropping volatility in the market, either. What to do?

  • First, turn off the TV. Joseph Tomlinson, a certified financial planner with Tomlinson Financial Planning, in Greenville, Maine, suggests “turning off CNBC” and not reacting to these sorts of events by trying to time the market. “Don’t attempt a strategy of bailing out temporarily until things ‘calm down,'” he says.
  • Second, think big picture. The longer your investment time horizon the more likely it is that you can not only ride out this current crisis, but continue to invest in stocks as they go “on sale,” as some investment experts like to say during times like these. People today can expect to live on average to nearly 80. So someone in their 20s has an investment time horizon of at least 60 years, and for someone in their 40s its four decades. And, while past performance, as the famous investor warning goes, does not guarantee future results, stocks over the long term have gained on average 10% to 12% per year since the late 1920s.

“Millennials shouldn’t be concerned with volatility,” said Dirk Cotton, a financial adviser and author of the Retirement Café blog in Chapel Hill, N.C. “They have decades to recover from losses, and risk enables them to earn higher returns.”

On the other hand, pre-retirees — those in their 50s and early 60s — as well as retirees have shorter investment time horizons, say 20 or 30 years, and can’t afford to put their retirement lifestyle at risk. They just don’t have as many years to recover from bear markets as do Millennials and Gen Yers. So they might revisit how much they invest in stocks.

As a general rule, consider subtracting your age from 100. That should tell you how much to invest in stocks. So, if you’re 50, consider investing 50% in stocks and 50% in bonds. And if you’re 25, consider investing 75% in stocks and 25% in bonds.

  • Third, review (or create) your investment policy statement. Investors, no matter their life stage, should always have an investment policy statement (IPS) for their portfolio. It’s a blueprint outlining how much to invest in stocks, bonds and cash given their time horizon, risk tolerance and investment goals.

Your IPS — not your emotions — should tell you when to rebalance your portfolio, when to sell and buy. Again, regardless of life stage, the tumult in the Chinese market, might be a chance to buy, not sell, stocks.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch.

It’s Not All in the Timing

Went to cash? Here’s the next mistake you’ll make

By Eric Rosenbaum, January 24, 2016 3:00 PM

How about that 550-point intraday dive last week in the Dow! Did that finally get you to sell?

Or was it one of the many headlines about the trillions of dollars that have been wiped out of the stock market in the worst start for the Dow in history — since 1897! And worst start for the S&P 500 since the Great Depression began in 1929.

Oh, c’mon, that was “so last Wednesday.”

Surely, when all the major indices ripped higher on Friday, and stocks registered their first positive week of the year, and that diving-Dow had two straight days with triple-digit gains, you had plowed right back into the stock market and banked all those big gains.


It seemed like the panic and the paranoia were over — until the Dow dropped by another 200 points on Monday.

Vanguard Group CEO Bill McNabb said on Monday that investors should expect the volatility to last longer — and expect less from stocks for up to a decade .

And so far in January, investors have yanked near-$7 billion from U.S. stock funds, according to Thomson Reuters Lipper data. Investors have also put more than $3 billion into money market funds — the market’s under-the-mattress cash equivalent. But the more alarming data comes from last month, when investors pulled $48 billion from stock funds. That is eerily similar to 2008, as the financial crash hardened: Investors took $49 billion out of stock funds in Sept. 2008 and $55 billion out of stock funds in October 2008.

Kudos to investors for the great timing. Except for the fact that from 2008 to 2012, the S&P 500 generated a cumulative return of 8.6 percent.

Here’s the problem: If an investor missed the 36 percent drop in the S&P 500 in 2008 — or even worse, bailed on the markets mid-carnage — they probably also missed the 26 percent gain in the S&P 500 in 2009, and the next three positive years for the index that followed.

In 2011, investors pulled another $94 billion from stock funds, and in 2012 another $129 billion, when the S&P 500 was up 16 percent. Hundreds of billions of dollars pulled out of stocks during a period of time when a stay-the-course strategy would have netted an 8.6 percent cumulative gain. Not a shoot-the-lights-out strategy, but nothing to sneeze at either in today’s low-return — not to mention nil savings rate — environment.

 “The global financial crisis created such a high level of risk aversion that people didn’t just wait for the start of the rebound. In some cases, they waited for years,” said Kristina Hooper, U.S. investment strategist at Allianz Global Investors. “I can’t tell you how many investors I came across in 2011, 2012 and even 2013 who had missed out on a lot of the comeback in the stock market and were still sitting in cash.”

It’s what Lipper’s head of Americas Research, Jeff Tjornehoj, calls the dilemma of the do-nothing investor: More often than not, the do-nothing investor does better.

“It’s a rocky ride, but the do-nothing investor would have been fine and avoided headaches,” Tjornehoj said, referring to those who stayed invested through the crash. He added, “If you know precisely how to move between stocks and bonds and everything else, you would have done better, but how many investors know how to do that?”

“The big issue is that when you go to cash, you have to be right twice,” said Mitch Goldberg, financial advisor and president of Dix Hills, New York-based ClientFirst Strategy. “First, you have to be right about getting your timing correct when you sell. If you are selling because it is your panic reaction in a down market, I think it’s fair to say you probably got that part of the decision wrong. The second part you have to get right is the timing of your buy orders. And if you are waiting for the perfect time to buy, you’ll never pull the trigger.”

And here’s a key that many investors who plan to be smarter than the “herd” miss, especially in markets like the one investors faced last week, with huge swings in the norm day-to-day. A move to cash works against the investor to a greater degree when there is greater volatility.

“Friday’s rally in global equity markets is a case in point of how investors who just binged on cash are missing out on a big rebound,” Goldberg said. “It’s tough to time, and missing out on the best days of the year has a restraining effect on long-term performance,” Goldberg said.

Allianz Global Investors provided an example of just how much investors can lose out in just a few days. The Allianz economic research and strategy team looked at the period from 1973 to the end of 2014, comparing four different approaches to investing in the U.S. stock market. Investors who missed the three biggest days of each year see their gains go down dramatically.

In the first approach, $100 is invested on the first day of the year and another $100 dollars added at the start of each year thereafter. The total return over the four decades was $52,251.

In the market-timing approach, if an investor invests the same $100 at the start of each year but misses the top three days of the year, the total return was $2,953.

The best return of all came from investing $100 on the day of the lowest index level of the year — the best day of the year to invest — and adding $100 on the lowest-index-level days of subsequent years. That approach netted a total return of $54,355.

“The problem is that we can never predict when the best days will occur, so we have to stay fully invested all the time to experience them,” Hooper said, adding that most days in any given year (both positive and negative) will typically produce a net flat performance.

Those “big day” misses, or gains, compound over the years.

The key problem I see when investors go to cash has a lot to do with procrastination,” Goldberg said. “They think about getting back into the market in a conceptual way, but when it comes right down to it, they often don’t because they didn’t implement a disciplined strategy to get back in. If the stock market bounces and rips higher, they say to themselves, ‘I could’ve gotten in lower, so now I’ll wait for another pullback.’ Then the market pulls back and they say to themselves, ‘I’ll wait to see if it goes lower.’ And so on.”

Tim Maurer, director of personal finance for The BAM Alliance of financial advisory companies, said that the field of behavioral finance has demonstrated how our brains often think (wrongly) when it comes to evaluating the pain of losses versus the pleasure of gains.

Maurer said to consider the decision between staying invested after a market decline or moving to cash as a four-step process:

  1. The pain of staying invested is that I could lose even more.
  2. The pleasure of moving to cash is that my worry is eliminated and I’m guaranteed not to lose any more.
  3. The pain involved in moving to cash is that I’ll miss the upside, thereby eliminating my opportunity to recoup recent losses in the next market up move.
  4. The pleasure in staying invested is that I’m giving myself a better chance to achieve my financial goals in the long term — the reason I invested in the market in the first place.

He said the four-step process has one purpose: to bring the vast majority of investors back to the conclusion that they shouldn’t get out of the market.

“The market has historically paid investors a premium over cash and bonds precisely because it requires investors to endure times of volatility,” Maurer said. “Without volatility, we’d have no reason to expect higher long-term gains.”

A few weeks ago — amid one of the many recent bouts of extreme daily selling — a friend asked me whether they should sell their Facebook shares. I asked, “And replace them with what?” She didn’t have an answer.

Another friend, in his 40s, texted in a panic to ask if it was the time to get out of stocks. I asked him what stocks, in particular, he meant to sell. He said no stocks, just moving his retirement portfolio as a whole out of equities. I replied with several exclamation points — you can imagine the words that preceded the punctuation yourself.

“At the start of December, I addressed a roomful of high-net-worth financial advisors and asked them, ‘How many of you expect the market to fall more than 10 percent in 2016?'” said Allianz’ Hooper. “Nearly every hand in the room went up. And yet now that the market has experienced the sell-off, many are not viewing it as a healthy correction but are panicking and fearing the worst.”

Hooper said the psychology is easy to understand. Sell-offs are by nature disorderly and create a contagion of fear, and investors believe that when stocks go down 10 percent in value, there’s something “the market knows” but a Main Street investor doesn’t.

“In reality it is just a herd, and herding is a dangerous activity for investors,” Hooper said.

There is always a good case to be made for rebalancing from stocks that have run up a lot into stocks that seem undervalued. Maurer said it’s good to be “greedy” like Berkshire Hathaway chairman and CEO Warren Buffett through stock rebalancing. But when Lipper fund-flows data shows net negative flows in equity funds, that’s not what’s going on with the mass of retail investors.

Goldberg is a “big proponent” of raising cash at times , but said the time to do it is when stocks are rising and then wait patiently for new opportunities. “I never feel pressure to be fully invested at all times. But I do not believe in going to cash as an ‘all or nothing’ trade,” he said.

Cash proponents will argue that staying invested is a disaster-in-the-making for retirees. Goldberg said retirees are naturally the most fearful, but it’s the cash mentality rather than staying in equities that is the “never-ending wealth destroyer pattern.”

“You’re now giving up on an asset class that historically has been a hedge against inflation,” Goldberg said. “Sure, inflation is nonexistent according to headline statistics. But if you pay for health insurance, which as a senior could easily be sending a big proportion of your income on health care, you know you are ground zero for inflation pain.”

In fact, if any retiree has a portfolio constructed with investments that would collectively go to zero in a stock market correction, the only question worth asking is, Who designed your portfolio, and how quickly can you fire them?

There’s a reason that famed investors like Vanguard Group’s Jack Bogle and Buffett sound like a broken record with the “stay the course” mantra .

It’s not just because their millions and billions allow them to do so with comfort — though that helps.

It’s because they’re right.


Original Article posted here.

Avoiding “Lucky Fool Syndrome”


Watching the Olympics a few weeks ago, I got pulled in to the drama of short-track skating. It has to be one of the more entertaining Olympic events. The races are fast, and almost anything can happen. If you had a chance to watch the women’s 500-meter final, you saw a perfect example of the fine line between skill and luck that drives this sport.

Seconds after the race started, Elise Christie of Britain made a passing move in the second turn that caused her and Arianna Fontana of Italy to crash. Park Seung-hi of South Korea then slipped in the next turn. Only one skater, Li Jianrou of China, didn’t fall down. While the other skaters managed to get back up, there was no way for them to catch Ms. Li, and she won the gold medal.

Ms. Li is clearly an exceptional athlete (she was overall world champion in 2012), but it’s impossible not to see the role that simple luck played in the race. Even she described her win as “very lucky.” Skill may have gotten her to the Olympics, but luck played a role in her gold-medal victory.

So if Ms. Li, a world-class athlete, is willing to acknowledge the role of luck in her success, what makes it so hard for the rest of us? Well, we like thinking we’re just that good, particularly if we’re talking about our investment success. As a result, we become the lucky fools that Nassim N. Taleb described in his book “Fooled by Randomness.”

“Lucky fools do not bear the slightest suspicion that they may be lucky fools — by definition, they do not know that they belong to such category. They will act as if they deserved the money. Their strings of successes will inject them with so much serotonin (or some similar substance) that they will even fool themselves about their ability to outperform markets (our hormonal system does not know whether our successes depend on randomness),” Mr. Taleb wrote.

What sets off the lucky fool syndrome? Psychologists call it the self-attribution bias. It means we’re inclined to take all the credit for things going well, but we have no problem blaming outside forces when things go wrong. On top of our bias, we have a very difficult time separating skill from luck.

As a result, we’re susceptible to the lucky fool syndrome and the problems that come with it. In a 2013 study, the researchers Arvid Hoffmann and Thomas Post highlighted how a self-attribution bias can hurt investors and lead to repeated mistakes because they “simply attribute bad returns to factors beyond their control.” The same study also showed that when we ignore the role of luck, we’re also blind to bad investment behavior like overtrading or underdiversification.

Knowing that these issues exist, we have a choice. We can continue to float along on a cloud of serotonin, playing the fool and suffering the consequences, or we can challenge our biases. It’s not easy to make the right choice, but it’s doable. It starts with getting a better handle on the difference between skill and luck.

Michael Mauboussin, the managing director and head of global financial strategies at Credit Suisse, suggests clearing up the confusion with a simple question:

“There is actually a very interesting test to determine if there is any skill in an activity, and that is to ask if you can lose on purpose. If you can lose on purpose, then there is some sort of skill. Investing is very interesting because it is difficult to build a portfolio that does a lot better than the benchmark. But it is also actually very hard, given the parameters, to build a portfolio that does a lot worse than the benchmark. What that tells you is that investing is pretty far over to the luck side of the continuum.”

So if investing involves a fair bit of luck, then the next step is to measure where our success falls on the luck-skill continuum. Plus, the more we measure, the more likely we are to avoid the bias and act the lucky fool. After all, investing leaves a pretty clear trail of breadcrumbs.

Start by pulling out tax records and year-end brokerage statements that lay out the facts. If we’ve been cruising along and assuming we’ve done something special, it’s time to put on our no shame/no blame hat and look at all the data. For instance, many investors I know designate a small portion of their portfolio as a play account. Because it’s a play account, they feel comfortable betting on riskier investments, and sometimes those riskier investments deliver an excellent return.

But it doesn’t take much for us to project that small success across our entire portfolio. So we need to ask ourselves how our whole portfolio did. Then, we need to calculate our rate of return and compare it with the return of index funds representing the broad market.

My experience shows this test will surprise almost every investor. The numbers will invariably make the case that what we thought was a spectacular success can’t compete when it’s measured as a part of the whole and compared with a benchmark. With this knowledge, it becomes a bit easier to counter our bias and avoid the lucky fool syndrome.

It’s easy to get sucked into believing that investing success is all about skill. I suspect it follows the rule that the smarter you are, the smarter you think you are, and that’s a problem for investors who believe intelligence determines our investment returns. It becomes a self-confirming cycle if they see great investments returns. The great returns verify the original idea that our smarts determine our investing success, and the next investing success starts the cycle all over again.

We can interrupt the pattern, and avoid the mistakes that come from it, by testing the context of our success with a second, simple question: Were the markets already going up? Even though it’s tempting, we shouldn’t confuse being a genius with a rising market. For instance, if we experienced superior returns in 2013, it’s very difficult to attribute our success to skill. However, we’re inclined to be very selective when we look at our success. We highlight the events that confirm our bias and ignore the facts that point to outside forces.

In this case, we’ve got the data to test our theory. How did we do in a non-record-breaking year? Did we see incredible results or were they close to the benchmark? If it’s the latter, it’s hard to argue that our smarts have built a portfolio that does a lot better than the benchmark.

Look, I understand that we really like how the lucky fool syndrome makes us feel. Besides all that lovely serotonin flooding our system, we love the idea that we’re really that good and capable of beating the market. That said, I doubt any of us wants the consequences of being the lucky fool. So it comes back to the choice I raised earlier: Do we float along or do we challenge the bias?

Read original article here.

Daniel Kahneman: The Trouble With Confidence

The Trouble With Confidence

Nobel Prize-winning psychologist Daniel Kahneman lists the “over-confidence effect” as one of the most common ways people fool themselves. In this short video, Professor Kahneman explains that over-confidence often runs in tandem with the contrary tendency of loss aversion.

Human beings can at once be irrationally over-confident and unnecessarily loss averse. How is that?

Don’t Make the Trading Gods Laugh

Fighting Illusions

People who attempt to make money from short-term trading in the financial markets can get hooked on particular views of the future. This view often stems from an illusion of control. The alternative approach, says Barry Ritholtz, is to ignore the noise and stick to a long-term plan.

Your greatest strength in investment is not in showing how smart you are, but in admitting how little you know. Read more here:

Doing Nothing is a Decision

“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” – Blaise Pascal

Making constant changes to your carefully chosen investment portfolio can give you the illusion of control. The problem is that more activity does not necessarily correlate to better results. This article notes that simply doing nothing can be a positive decision.

Investing is one area of life where staying “busy” is not necessarily equated to better results.

Read full article here:

Staying Apart from the Herd

Don’t Be Afraid to Stand Apart From the Herd

Just because everyone else is investing or spending in a certain way doesn’t necessarily make it safe. The herd often moves according to cycles of fear and greed. In this article, Carl Richards says you should always start from the basis of what is right for you.

When it comes to investing, sticking out from the herd is not always a bad idea:


14 Meaningless Phrases That Will Make You Sound Like a Stock-market Wizard

Weasel Words

Media insiders will tell you that market pundits save their blushes when their forecasts prove to be wrong by using “weasel words” — slippery phrases that provide an easy out. In this article, the writer lists 14 meaningless phrases that can make you sound like a market guru with actually saying much.

Being a financial forecasting pundit often comes down to mastering a few meaningless phrases.

Here are 14 of them:

Avoiding Mistakes

The path to financial security is less likely to be paved with perfect investments than with prudential decisions. Indeed, it’s the avoidable risks that often stand people in good stead—whether it is not paying too much in fees or not listening to television finance gurus. Sound investing often comes down more to avoiding mistakes than kicking perfect goals every time. Read Original Article here.


Ben Carlson was spot on this week when he wrote “there are many different ways to make money in the markets. But I think that there are a few universal ways to lose money.” Here are some ways to ensure you are unsuccessful managing your finances:

  • Spend more than you earn.
  • Refuse to budget.
  • Track your investments daily.
  • Do what the “experts” on CNBC recommend.
  • Frequently change strategies.
  • Purchase products with high fees.
  • Avoid having a plan at all.

So much of being successful, financially and otherwise, simply consists of not making the big mistakes. You don’t have to hit homeruns – just don’t strike out. To paraphrase Shane Parrish, avoiding stupidity is easier than seeking brilliance. Charlie Munger said “It is remarkable how much long-term advantage people like  [Warren Buffett and myself] have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” Rather than focusing on perfection, look to minimize the errors.




Minimising Regret

Originally posted by Ben Carlson, CFA

Investors have a habit of thinking in terms of extremes. Active or passive. All-in the markets or all-out. Stocks are either topping out or about to bottom. Markets are perfectly efficient or wildly inefficient.

It’s much easier to go to the extreme viewpoints because it acts as something of a mental shortcut. The brain is constantly looking for these shortcuts as a way to conserve energy. This line of thinking leads people make binary decisions, which is a difficult place to be because (a) markets are hard and (b) things aren’t always black or white when it comes to financial choices.

Investors have been asking for a number of years now whether or not it’s time to get out of U.S. stocks. Larry Swedroe discussed the idea of higher expected returns in foreign stocks in a piece from this past week:

Clearly, if investors want the higher expected returns, they should consider tilting their portfolios (have a higher allocation) to international developed-market value stocks and emerging markets value stocks. However, earning the highest expected returns isn’t generally an investor’s only objective, or sole consideration.

If earning the highest expected returns possible was, in fact, an investor’s sole consideration, we would likely concentrate portfolios to a greater degree than is prudent.

Yes, you could increase your expected return today by lowering your allocation to U.S. value stocks and more heavily weighting international developed, and especially emerging market, value stocks. However, doing this would also decrease your level of diversification, increasing idiosyncratic risks. Again, we have the same trade-off.

Swedroe brings up a great point on how to think about risk in a way that’s not very apparent to most investors at first glance. Many simply want a buy or sell answer so they can move on. Risk takes many different forms in the markets. No matter what you do, it never completely goes away. Your risks just change based on how you’re positioned. It becomes a game of pick your poison.

This is why I think it’s so important for investors to understand the concept of regret minimization. I discussed this topic in my book:

Investing really comes down to regret minimization. Some investors will regret missing out on huge gains while others will regret participating in huge losses. Which regret will wear worse on your emotions? Missing out on future gains or future losses? Diversification within a well-thought-out asset allocation is your best option to minimize these two regrets. You’ll never go broke practicing diversification, but you must be willing to accept short-term regrets in place of long-term ones. Diversification also helps control your behavior. You never completely miss out on the biggest gains while you never fully participate in the biggest losses.

Of course, diversification can’t completely protect you from poor performance over days, months, or even years. You have to be able to withstand losing money at some point to be able to make money. But diversification does protect investors from experiencing numerous poor cycles or decades, which is where real risk resides. Diversification is about accepting good enough while missing out on extraordinary so you can avoid terrible. Famed value investor Howard Marks once said, “Here is part of the trade-off with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.”

Swedroe and Marks both mentioned the word ‘trade-off.’ In many ways, every investment decision you make requires the acceptance of certain trade-offs. That’s how risk works. You can’t protect your portfolio from every eventuality. There’s no right or wrong answer for every investor. It really comes down to finding the trade-offs you’re comfortable dealing with.

But I think a lot of investors delude themselves into thinking that they can some how position their portfolios in a way that completely eliminates all forms of risk. There’s no way to completely eliminate risk from the markets. It really comes down to figuring out which risks are necessary, which risks you want to avoid and which risks will minimize your regrets over the long run.

Swede: Highest Expected Returns Not Always Best (ETF.com)

Futher Reading:

A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. Ben Carlson, CFA manages portfolios for institutions and individuals at Ritholtz Wealth Management.

Bradley Nuttall Granted DIMS Licence

New Zealand’s expert independent wealth management provider, Bradley Nuttall Ltd is pleased to announce that its DIMS (Discretionary Investment Management Services) licence from the Financial Markets Authority is effective from 30th October 2015.

Bradley Nuttall Limited - Market Service Licence

View Bradley Nuttall Limited – DIMS Licence

A DIMS licence is where buy-sell decisions about a customer’s investment portfolio may be made on behalf of a customer, without the need for their authorisation for each transaction. Licensing of DIMS was introduced as part of the Financial Markets Conduct Act 2013, which is replacing most of New Zealand’s existing financial markets conduct law. The new DIMS licensing arrangements place greater obligations and minimum standards on providers, which regulators hope will deliver better protection to investors.

The DIMS licence enables Bradley Nuttall Ltd to continue to provide the financial market services it has been offering clients for the last 25-years. Please click here for more information concerning the DIMS licensee obligations.

Contact us to find out more about our Wealth Management and Investment Management services. Our disclosure statement is available on request free of charge.

Conquer Stock Market Volatility Forever

By Bankrate.com

Global stocks fell off a cliff in mid-August and they ‘ve been showing their mean streak since.

Shock and terror are spreading as though the zombie apocalypse has arrived. But why?

Besides the famous certainty of death and taxes, there’s another bit of unpleasantness that everyone can count on: The stock market will go down. The silver lining is that it has always gone back up.

“On average, the stock market, as measured by the Standard & Poor’s 500 index, experiences four declines of at least 5% every year. The average intra-year decline is 14%,” says Andrei Voicu, CFP professional, director of market and portfolio strategy at Coury Investment Advisors in Pittsburgh.

Stock market corrections, downturns or pullbacks should come as no surprise. Even 100-year floods happen every so often. By choosing investments that reflect your needs and risk tolerance, stock market volatility should be reduced to what it really is: mostly noise.

What’s your plan?

Having an investment plan in which you are reasonably confident helps allay free-floating anxiety and address questions about what to do in reaction to events over which you have no control.

“That is the easy first thing: Do you have a plan about your investments and overall financial outlook?” says CFP professional Jonathan Duong, CFA, founder and president of Wealth Engineers in Denver.

An investment policy statement can help map out the direction investments should take. It’s also useful to have handy when anxiety starts to mount about the economy. You are prepared for contingencies and girded for worst-case scenarios.

These are the questions your investment policy statement will answer:

What is your goal?

Pro tip: Quantify your goal if possible. For instance, I need $3 million when I retire in 30 years. Armed with this data, you can calculate the rate of return needed. That will dictate the level of risk in your portfolio — or the extra amount you’ll need to save to hit that goal if the level of risk is not feasible.

“Without expectations for risk, there cannot be expectations for return,” says Duong.

How long will you be investing in the stock market?

Pro tip: “The longer the holding period, the less the probability of losing money. Historically, there were no 20-year holding periods with negative returns,” Voicu says.

What is an appropriate asset allocation plan?

Asset allocation is what financial professionals call spreading money around various types of investments, such as large-cap stocks, small-cap stocks and high-quality corporate bonds. It should be based on your goals, time frame and risk tolerance.

Pro tip: Think about worst-case scenarios, such as the recent financial crisis. The S&P 500 lost more than 55% between Oct. 1, 2007, and March 5, 2009. Some portfolios lost more than that and some lost less. Smart asset allocation and diversification can lower the risk in your portfolio and improve returns.

“If the market trends down 5%, find out how far your portfolio has fallen. If you’re down an equal amount or more than a major index like the Dow or S&P 500, you may find you’re taking more risk than you like,” says Robert Laura, president of Synergos Financial Group in Brighton, Michigan.

What is your process for rebalancing or selling investments?

Pro tip: “Maintain a disciplined investment approach. Stay invested and reallocate your portfolio to its intended target allocations if they get out of range. Rebalancing may reduce risk and is an automatic way of buying low and selling high,” Voicu says.

If an investment really is a stinker, “take the time to find out if it’s a company-specific issue or something across that industry,” Laura says.

“Market pullbacks are common and every industry goes through cycles, so it’s important to develop a process to both select and sell investments based on what’s happening and not just feelings or short-term headlines,” he says.

Planning short-circuits panic

There can be unforeseen and expensive consequences to blindly selling in scary market conditions, including transaction costs and opportunity costs. It typically costs money to buy and sell investments. Depending on your holdings, it could cost money to get out and get back into the market.

Selling low also locks in losses.

“Trying to time markets in the short run is counterproductive, as the odds are against you. You have to guess right twice: when to get out and when to get back in. If you don’t guess right, long-term returns will be compromised and short-term paper losses may turn into permanent ones,” Voicu says.

Employing patience and taking the long view will help you get to the other side of market tumult battered but intact.

“Only the investors who stick with their investment plan harvest the returns from stocks,” Duong says. “Jumping out does not lead to success.”

In times of duress, use market volatility as a gauge for your risk tolerance. When market conditions return to calm, fine-tune your approach to investing to be better prepared next time.

Don’t worry, the market will tank again.


Sheyna Steiner covers investing, retirement, CD rates and other personal finance topics for Bankrate.com. She is a co-author, along with seven other Bankrate reporters and editors, of “Future Millionaires’ Guidebook.” Bankrate.com’s editorial, corrections policy
Article updated: Aug. 24, 2015.
See original article here.

How to Make Smart Decisions in a Volatile Stock Market

Article by JAMES F. PELTZ Los Angeles Times Oct 5, 2015

When the stock market swings wildly, investors naturally ask themselves: What should I do?

It’s Michael Liersch’s job to help them answer that question. He’s the head of behavioral finance at brokerage giant Merrill Lynch, a unit of Bank of America Corp.

Liersch studies how and why investors react to market moves and shares what he’s learned with the 15,000 Merrill Lynch financial advisers who deal with the public. (Some other Wall Street firms have investor-behavior departments as well.)

Investors’ mettle has been tested lately. The Dow Jones industrial average briefly plunged 1,000 points in one session a few weeks ago, setting off days of chaotic swings, and experts predict more volatility before the year is out.

Liersch, 39, was asked to discuss how investors react to such turbulence and the mistakes they often make. Here’s an excerpt:

Q: There’s an old saying that each day the stock market is a battle between investors’ fear and greed. Is it your job to sort that out?

A: It’s really helping investors take a step back from judging themselves that way. When you think of the words “fear” and “greed” there’s an automatic judgment that you’re on one side or the other.

Q: Meaning they’re not always afraid or greedy?

A: What I like investors to focus on is what matters most to them (with their money). Is it their family? Maybe they have kids they want to support, or are saving for retirement. Is it a special-needs family member they want to make sure is going to be OK?

 It’s within the context of those goals that they would ask, “Should I be behaving differently based on the market’s movements?”

Q: But when markets are plummeting there’s an urge to do something, right?

A: The major mistakes people make is thinking they either need to take extreme action or to completely ignore the markets when there’s a lot of volatility. The fact is, there’s no one correct way to behave during times of volatility.

You should always be engaged in how your money is working. The question is: Should something change about my investments based on what’s happened in the markets in the context of what I’m trying to accomplish?

Q: Is it true that individual investors are lousy at timing the markets when stocks are so volatile?

A: Yes. Time and again data show that investors tend to enter at market peaks and exit at the valleys. Some research suggests this behavior costs investors multiple percentage points annually in investment returns.

Q: How does one avoid this mistake?

A: Work with someone who can provide checks and balance for your choices. That might be a spouse, a partner, a trusted professional. That person can help you make the right trade-offs.

Read original article here.

The Volatility Response

Why Volatility Leads to Poor Decisions

There’s no getting away from it. Market volatility tends to make investors feel uncomfortable, leading to knee-jerk decisions. Investor educator Brian Portnoy, CFA, Ph.D., recommends asking yourself at these times whether you are trying to resolve a long-term financial problem or a short-term emotional need.

Hello, volatility. It’s been a while.

As stock market investors, we should appreciate that we’ve had it relatively easy for years.  It’s hard to understate how smoothly the equity markets have climbed since things settled down after the 2007-09 crisis. Since then, returns have been way above average while volatility has been way below average.

Profiting from a risky asset always involves a cost – a “price of admission.” That price is not only the uncertainty of whether the asset’s expected returns will be reached in the time frame relevant to us, but also the ride along the way. Contrary to the conventional wisdom of legends like Warren Buffett, Howard Marks, and Gene Fama, volatility is indeed a form of risk because lots of volatility often compels us to make bad decisions. (I’ll offer a full rant on that topic in a subsequent blog.)

Volatility’s return is a source of discomfort for all of us as it forces us to pay more attention to near-term market moves, which is mentally tiresome. And it tempts us to make more near-term decisions than we’ve been used to. It’s hard to resist counterpunching. In the moment, a rope-a-dope strategy means you’re getting pummeled.

Some basic tenets of behavioral finance can prove insightful at times like these. The goal is not to change your mental make-up – that’s impossible – but to appreciate that our hardwiring leads to some quirky behavior. Self-awareness can help us hedge bad decisions.

It’s the disposition effect that is top of mind for me now as I speak with financial advisors about how they’ve begun to brace themselves and clients’ expectations for choppier times. This effect states that you are wired to invest differently depending on whether you’re winning or losing.

We tend be to risk averse when we are sitting on gains and risk seeking when we are sitting on losses.

But why? The godfathers of behavioral finance, Amos Tversky and Daniel Kahneman, wrote in a 1979 seminal paper: “Our perceptual apparatus is attuned to the evaluation of changes or differences rather than to the evaluation of absolute magnitudes.”

To interpret the academics: It’s the journey that counts, not the destination. Life (and our portfolios) happens incrementally. So you measure progress based on where you now sit relative to your starting reference point.

Zero, it turns out, is a powerful reference point. When you’re ahead – great. But then we tend to sell winners quickly because we crave the psychic gratification of being right and the financial joy of booking a real gain. This is sometimes the wrong move, especially as stocks with positive momentum tend to keep going up.

On the other side of zero, we tend to feel the pain of losing far more than the joy of winning; this is the powerful notion of “loss aversion.” Thus, we’ll go further out of our way to avoid realizing a loss by holding on to a position in the red. Selling a loser? Boy, can that sting.

Realizing a loss renders us “officially” wrong. For advisors, that can prove to be a painful conversation with clients. Overall, advisor and client alike are often desperate to get back to scratch, even when it doesn’t matter much to the bottom line (“absolute magnitudes” to the academics). Sometimes, we’ll even “double down” – add more to a losing position – in the hopes of recovering from losses even more quickly. We look like a hero when we get off the ropes and land a haymaker.

With a more-heightened alert to choppier markets and the hard-to-shake feeling that we must “do something” during such times, please be cognizant of this disposition effect. It says nothing about the underlying value or risk in any of your investments. From a purely analytic point of view, there can be both good reasons to sell a loser (e.g., you were in fact wrong on the thesis) or to hold a loser (e.g., the value’s still there, perhaps even more so now).

But it does speak volumes when emotions trump analysis. Doubling-down, or any other number of trading strategies, might feel like the right thing to do in the moment. At those times, take a breath and ask whether you are solving for a short-term emotional need or a long-term financial problem.

The answer to that question will likely put you in good stead.

Article written by Brian Portnoy, CFA, Ph.D. and posted Sep 21, 2015 at 8:32 AM. See original article here.

Hedge Funds

Warren Buffett, widely known as the Wizard of Omaha and acknowledged as the most successful investor of the 20th century, famously said about hedge funds:

“Hedge funds are in the midst of a fad. It’s distinguished by an extraordinary amount of fees. If the world is paying hedge funds 2% and a percentage of the profits, and the losers fade away, then it won’t be good for all investors. Obviously, some will do well, but not in aggregate.”

The term “hedge fund” was coined because hedge fund managers could “hedge” their fund’s positions by going long (betting on positive performance and investing in securities) or short (betting against the performance of the underlying securities and selling them short).

The theory is that hedge funds can maximise returns and eliminate risk.

The reality is often quite different.

In a study published in the Financial Analysts Journal, Burton Malkiel (Professor of Economics at Princeton University) and Atanu Saha concluded that “ hedge funds are far riskier and provide much lower returns than is commonly supposed.”

Hedge funds are typically private, aggressively managed funds that take leveraged, speculative positions in currencies, equities, commodities, financial derivatives, and interest rates in the hope that the speculative position will pay off.

Hedge fund managers typically charge a management fee and a performance fee. Performance fees are marketed as providing an incentive for the fund manager to generate positive performance. However, because of the one-sided nature of performance fees, fund managers only share in profits not losses, they actually incentivise excessive risk taking. Some of the most spectacular financial blow-ups of all time have involved hedge funds.

Hedge funds are often incorporated in jurisdictions with minimal disclosure requirements and relaxed regulatory oversight, provide fund prices only once a month, have wide investment latitude and require lock in periods of investors so that getting out can be a time consuming and expensive process.

Unfortunately, due to the opaque nature of many hedge funds, it is very difficult for investors to understand what the hedge fund is investing in and, consequently, what types and how much risk the hedge fund is taking.

It is precisely for this reason that Bradley Nuttall advises against investing in hedge funds.

Contact us now if you would like to know more.

Berkshire Hathaway Annual Meeting 2004 Tilson Notes http://www.thebuffett.com/quotes/The-Investment-Industry.html#.VVKfv8KN19A

Empower and Inform Book Launch of Legal Tender by Laetitia Peterson

On March 25th 2015, Bradley Nuttall gathered an expert panel to launch Laetitia Peterson’s new book, Legal Tender: Enduring Wealth Management for Busy Legal Professionals. The panel discussed the question “Why do lawyers need help managing their money?”

Watch the trailer on YouTube

What Do the New FMC Regulations Mean for Investors?

Late last year, with very little media coverage Phase 2 of the implementation of the Financial Markets Conduct Act (FMC) and full FMC regulations came into effect resulting in some of the most modern financial markets regulation in the world. The intention of the changes is to provide greater protection for investors and more user friendly information about investments. It also means that financial professionals will be required to be licensed to make investment decisions on behalf of their clients.

This regulatory change will significantly impact all financial advisory businesses, Bradley Nuttall included. However, Bradley Nuttall will, as usual, continue to strive to attain a standard far in excess of the minimum set by the regulator.

Rob Stock’s brief opinion piece from the Dominion Post at the time  identified two key changes for investors.

1. New licensing requirements for Financial Advisers, and
2. Short-form disclosures for investment products.

New Licensing requirements
The new licensing requirements apply to advisers who provide a discretionary investment management service or DIMS. That includes us here at Bradley Nuttall. Essentially, this license will hold advisers who exercise investment making discretion on clients’ behalf (that’s what a discretionary investment management service or DIMS is) to a more rigorous standard.

Bradley Nuttall is applying for a DIMS license. This is not simple and it will definitely add a further layer of complexity to our business and having started the application process, it is very apparent that a license will not be given easily and it will come with far greater ongoing monitoring by, and engagement with, the regulator.

For our clients, while the way that we do things won’t appear to change, the new rules will require us to update our paperwork with you in the near future and we’ll explain what is required as it is needed.

Short-form disclosures
Investment products in New Zealand must now conform with new short-form disclosure requirements. All new investments must have a short-form product disclosure statement (PDS) that is concise and easier to understand.

All product disclosure statements for investments in New Zealand (and any changes to those documents) must now be registered on the NZ Companies Office Disclose website.

Fund managers have a two year transitional period to comply so there’s nothing on the website yet but once it is up to date it should be a treasure trove of funds management information which will make it easier for both the public and the FMA to monitor funds.

Bradley Nuttall have always made the information required in the short-form product disclosure statements available to those that were interested. The key benefit of having all of this information on the one website is to make it much easier for all of us to ‘look under lots of bonnets’ in one place. That will enable everyone to compare like with like without having to trawl the internet for the information.
We think that’s a great change.

Scott Rainey is an Authorised Financial Adviser.
Disclosure statement is free and available on request

So You’re Worried… Should You Be?

Many years ago, my grandmother told me that 90% of what we worry about either doesn’t happen or we can’t control. I’m sure she was right, however, over the years I’ve found that, at times, I still worry. I’m sure most people feel the same.

How often do we see ourselves and our colleagues and family members spending time and energy worrying unnecessarily? How often does worry create relationship problems, paralyse decision making, cause conflict and even ill health? Imagine how much more productive we could all be if we didn’t consume so much mental energy worrying?

It is not surprising that we worry. The media constantly reminds of things to worry about such as; Ebola, ISIS, and economic uncertainty. Combine that with centuries of programming through being fearful for our lives on a daily basis and it’s surprising we don’t worry all the time.

By itself, worry might not be the issue. It is more about how we react to worry. Typically, we don’t worry about just one thing, we tend to get caught up in all the ‘what ifs.’ Those ‘what ifs’ can often lead us to make to decisions we wouldn’t otherwise make. It is interesting to observe that worry can feed on itself and thoughts that are emotionalised become magnetised and attract similar and like thoughts.

By Andrew Nuttall

Can a Couple Retire on $1.2 Million?

Can a couple retire on $1.2 million? You are both aged 60 and have another five years to wait for government super, but you are wondering if it’s possible to retire early?

Scott Rainey of Bradley Nuttall helps Janine Starks to answer that question in this article in The Press. Click to read the full article.

The Battle Between Your Present and Future Selves

At the time of writing this article, our family has a major milestone pending; our youngest children (twin boys) are turning 21. As you can imagine, they have planned quite the event and we have all spent some time sorting through the numerous collections of photos taken over the past 21 years. This has proven to be an interesting exercise, as we have been able to look back and reflect on the experiences and moments that have helped make us who we are today.

The photos have reminded us of many things; how busy we have been, the very happy moments, the times that were not so easy, and those we missed altogether by being too tied up with work.

While we can’t turn back the clock, I have found myself thinking how interesting it would be to relive some of those times; to have another chance to reconnect with those personalities of five, ten and fifteen years ago. Essentially we are the same people, but in many ways we have all changed a great deal.

My reflections have reinforced how quickly the years pass, and how important it is to continue trying to maintain a balance between living for today and preparing for tomorrow.

Our present self is the product of our experiences and past decisions. Although many of our successes may be the result of earlier planning and hard work, the past has gone and we no longer have any influence on it. We can, however, influence our present and our future.

But we humans do not find it easy to visualise ourselves five or ten years from now. As a result of this, the battle between our present and future selves is fought on particularly uneven footing. Typically, living for today takes precedence over securing options and choices for the future. As prominent English Lawyer and Economist, Nassau William Senior wrote in 1836:

“To abstain from the enjoyment which is in our power, or to seek distant rather than immediate results, are among the most painful exertions of the human will”.

Take some time to create a vision of your future self, ten years from now, and answer these questions: Where am I living? What does my balance sheet look like? What debt do I have? In what type of work am I involved? What income do I earn? What is the source of my income? What is my weight? What are my pastimes? Who am I close to? What experiences and opportunities have I provided for myself and those close to me over the last ten years?

Asking these questions may help you identify gaps between your present financial self and your future financial self, but there may also be gaps that we ourselves can’t see. This is why many of us gain benefit from seeking the opinion of an independent person such as a lawyer, accountant, or financial adviser.

I trust this article has given you some things to contemplate. You may find that you are now able to bridge the gaps between your present and future self, so that in ten years’ time you can look back with a sense of fulfilment and contentedness, free from regrets.

Interested readers might also like to view Ted Talks Daniel Goldstein

Andrew Nuttall is an Authorised Financial Adviser at Bradley Nuttall Limited. Readers should be aware that this article is of a general nature and not personal advice.

His Disclosure Statement is available on request and is free of charge.

Solutions to Financial Challenges

In light of interviewing a number of lawyers and allied professionals, financial adviser Andrew Nuttall makes some suggestions for working toward financial security.

A number of the people I interviewed mentioned that the best earners are not necessarily the most wealthy. Some senior practitioners indicated concern for younger practitioners that may not be financially ‘savvy.’

Nearly all senior practitioners reported that now more than ever there is a greater need to plan for the future, as business life can change rapidly. The 2008 Global Financial Crisis reminded all of us of this. A senior commercial partner suggested I emphasise to readers that life is about having options. He advised that it was very important to take time to think about how you would like to be positioned 10 years from now, and to engage in deliberate planning. He went on to suggest that everyone needs to think carefully about the next stage of life and explore their own expectations, goals, and desires for themselves and their families. They then need to put plans in place that will help move them in that direction.

Take time
It is widely acknowledged that lawyers lead very busy lives with constant demands and high expectations from clients, partners, and family members. This can result in what might be called the ‘plumber’s leaky tap’ syndrome, where people spend more time planning their summer holidays than planning the finances to fund them. Most people tend to put off the important-but-not-urgent tasks.

We suggest taking time to consider the following:

1. Establish where you are now
2. List your assets and liabilities
3. Think about what you want to achieve with your money, then write it down
4. List what you want to achieve for you and your family in the next three, five, and 10 years
5. Assess the level of income you require to maintain your desired current lifestyle
6. Think about the level of income you will require to enjoy the lifestyle to which you would like to become accustomed
7. Consider the level capital or investment assets you will require in order to reach your goals and fund your lifestyle (this is often the missing link to good planning)
8. Write down the date by which you would like to be in a position to have the choice to ‘untie yourself from the time sheet’.

It is not a simple task to answer all these questions, however determining the answers – particularly to question 8 – can help bring you peace of mind, knowing that you are stewarding your family’s financial resources prudently.

Coach or mentor
Many of us have experienced the benefit of having a coach or mentor. The coach is someone we can discuss things with and who helps us to set achievable goals. Sometimes a coach will point out poor technique or an area that requires attention.

A coach will also pick us up when things are not going so well, helping us to stay motivated and get back on track.

A coach will also identify when an external expert is required, and engage with the best person. A coach will facilitate thought and discussion, help set targets, evaluate progress, and fine-tune activities. Having a good coach helps us extend ourselves and reach a level of performance that we may not otherwise attain.

All lawyers know the benefit their clients receive from seeking expert advice, as well as how it saves time and money. Why not take your own advice and get your financial house in order by working with an experienced independent wealth manager?

Over the years I have found that through working together, in a consultative manner, you will have a far greater probability of achieving your financial and lifestyle goals. You will also save yourself time, enabling you to be more efficient at home and at work.

I would suggest that lawyers spend time with their life partners and address some of the above questions, in addition to considering the possibility of ‘outsourcing’ and using a trusted adviser. l hope that many readers will be encouraged to plan their finances so they are able to achieve balance and financial well-being in their lives.

Finally, if your goal is to enjoy life more and worry less about finances, try not to pay too much attention to the financial media. The media’s focus is almost exclusively on headline grabbing, short term opportunities and disasters, rather than long-term strategy and planning.

Andrew Nuttall is an Authorised Financial Adviser. His disclosure statement is available free of charge and on request. He can be contacted by phone on 03 3649119 or via email at andrew@bnl.co.nz

Bradley Nuttall Issued With CEFEX Certification

Bradley Nuttall Ltd is proud to announce we have achieved a prestigious certification from CEFEX an independent global assessment and certification organisation. This is an exclusive accreditation which establishes global best practice standards for investment selection, monitoring and reporting. CEFEX works closely with investment fiduciaries and industry experts to provide comprehensive assessment programs to improve risk management for institutional and retail investors. CEFEX certification helps determine the trustworthiness of investment fiduciaries.

View CEFEX Certificate

On the 21/11/2013 fi360 Pacific announced:

Bradley Nuttall and New Zealand Wealth, both based in Christchurch, have recently been issued with CEFEX Certification for adherence to the Fiduciary Practices set out in the fi360 handbooks.

NZ Wealth provides support services to a growing number of advisers in NZ, including Bradley Nuttal.

As a certifying organisation, CEFEX provides an independent recognition of a firm’s conformity to a defined Standard of Practice. It implies that a firm can demonstrate adherence to the industry’s best practices, and is positioned to earn the public’s trust. This registration serves investors who require assurance that their investments are being managed according to commonly accepted best practices.

Visit the website for more information on CEFEX certification.

See original post here.

fi360 Pacific trains and supports investment fiduciaries in New Zealand, Australia and the wider Pacific region. Trustees, Superannuation Funds, professional legal and accounting firms and financial advisers utilise our unique training programs and services to ensure appropriate knowledge and processes are applied for sound investment governance.

Market Timing: A Picture is Worth a Thousand Words

They say a picture is worth a thousand words.

I could easily spill a thousand words on market timing. I could talk about how each trade involves a willing buyer and seller; each with equal interests, each with the same access to information.

I could talk about the fact that, over about 85 years, the S&P 500 has gone up on only 51.02% of the days.[i]

I could talk about the concentrated nature of returns.  I could show that being out of the market, and missing the best month each year, drops returns by about 7% per year.[ii]

I could talk about a psychologist from Berkeley, named Philip Tetlock, who studied over 82,000 varied predictions of 300 experts from different fields over a period of 25 years, and concluded that expert predictions barely beat random guesses.  Ironically, the more famous the expert, the less accurate his or her prediction tended to be.[iii]

I could talk about Nobel Prize winner Bill Sharpe’s contention that timers need to be right 74% of the time to overcome the frictions and costs of their moves.[iv]

I could talk about magazine covers, like the Death of Equities[v], that featured just before five years of 14.44% average compound returns for the S&P 500.[vi]

I could talk about how studies – ranging from the landmark paper by Brinson, Beebower and Hood[vii], to the most recent study on NZ managed funds – have found that the average contribution of market timing to returns is negative.[viii]

I could talk about a study of 1,557 managed funds and 210 institutional funds, where the author concluded timing ability of managers is, on average, negative.[ix]

I could talk about how the majority of market timing newsletters underperform the market.[x] I could talk about how, on average, market timing newsletters underperform the market by over 4.00%.[xi]

I could talk about how the market timing gurus whose calls are tracked have less than 50% accuracy.[xii]

I could talk about evidence that shows economists can’t time markets either.[xiii]

I could talk about how the predictive power of last year’s return to correctly forecast this year’s return is 0.01%.[xiv]

I could talk about the wise words of Warren Buffett, who said “The only value of (share) forecasters is to make fortune tellers look good.”[xv]

I could talk about the simple logic that all market timing calls offset each other.  If you buy, someone must sell.  If you sell, someone must buy.

I could talk about a lot of things.


I could show you this picture of monthly returns and simply ask you to find the pattern.

Wishing you the very best of luck…

[i] www.ifa.com, “Positive vs. Negative Returns in Various Time Periods”, 85 Years, 5 Months (1/1/1928 – 5/31/2013); S&P 500

[ii] NZX and Returns 2.0. Calculations performed by NZ Wealth. Returns gross of all fees and taxes

[iii] Burton Malkiel and Charles Ellis, “The Elements of Investing”

[iv] Sharpe, William, “Likely Gains From Market Timing”, Financial Analysts Journal, March – April, 1975

[v] http://www.businessweek.com/stories/1979-08-13/the-death-of-equitiesbusinessweek-business-news-stock-market-and-financial-advice


[vii] Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower, “Determinants of Portfolio Performance”, Financial Analysts Journal, July-August 1986, pp. 39-44; and Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, “Revisiting Determinants of Portfolio Performance: An Update”, 1990,  Working Paper.

[viii] Rob Bauer, Roger Otten, Alireza Tourani Rad, “New Zealand mutual funds: measuring performance and persistence in performance,” Accounting and Finance 46 (2006) 347–363

[ix] Wei Jiang, “A Nonparametric Test of Market Timing.” Journal of Empirical Finance 10 (2003) 399– 425

[x] Hulbert Financial Digest, Businessweek 9/3/1998

[xi] Market Timing Ability and Volatility Implied in Investment Newsletter Asset Allocation Recommendations” National Bureau of Economic Research Paper #4890

[xii] www.cxoadvisory.com/gurus/

[xiii] SMH/Age Economists’ Survey, Jan 6, 2008; Jan 3, 2009; Jan 2, 2010; Dec 31, 2010;

[xiv] http://www.ifa.com/12steps/step4/step4page2.asp#ChartFlashID86


Are You Ready for Retirement? (part 3) A Strategy That Works

This is the third in a series of ‘are you ready for retirement?’ articles.

Read article one here and article two here.

“I’m happy, don’t get me wrong, but I’m also a little confused,” Jenny looked at us, still smiling, but with a slightly quizzical expression.

She continued, “You see, when we came in here asking if we were ready for retirement, you asked us some questions, did some math and told us that we had a 25% probability of having it all work out the way we desired.  Then you did some more math and told us we had a 75% probability…”

Now we were smiling.

“So, what happened?  How did you do it?”

“We did it by listening to you tell us what is most important to you; what your highest retirement priorities really are.  And that was to retire now, for the sake of Gavin.  We also listened to you tell us what you were flexible with, such as your estate and the amount you spend each year.”

“Jenny,” we leaned in for extra emphasis, “all we did was guide you to make smart decisions and to prioritise what matters to you the most.  I’ll show you how.”

Let’s recall where we started. Gavin and Jenny laid out their aspirational retirement goals, including retiring right away, leaving the children a large estate from the portfolio, and living on $120,000 per year.

The chart below gives the detail.  The first row shows that, if Gavin and Jenny do nothing and keep their retirement plans unchanged, there is only a 25% probability that the results will turn out as planned or better.


In the remaining rows, we order Gavin and Jenny’s retirement priorities, starting with low priority retirement factors such as estate and portfolio risk, and finishing with their high priority items such as the year of retirement.


Gavin and Jenny were quick to pick up the implications as we looked at the chart, “So basically, retiring now is possible.  It just means making trade-offs on all those other factors.”

“That’s right.  We recommend you think about this and consider the recommended trade-offs carefully.  You don’t need to make a decision today.  In fact, you can come back later and ask us to run other scenarios based on some modifications.  This is an important decision; this is your strategy.  The important message for today is that retirement today is possible, if the recommended trade-offs feel right to you.”

Gavin leaned back, puffed his cheeks out and exhaled.  He turned to Jenny, “This feels good to me, honey.  It’s so nice to know we have some options.”

“Yeah,” Jenny agreed, turning to us, “would you mind if we went home and thought about this a little more?  I mean, it feels right, but it’s a big decision.”

“Absolutely, we think that’s wise.”  Jenny looked a bit relieved. We continued, “It’s important for you to know that, in our experience, the goal posts will move.  What we mean by this is that life’s unexpected circumstances, good or not so good, will likely require you to adapt your financial strategy.  We understand that, and we want you to know we’ll adjust your strategy accordingly.  This could be due to something good, like a child’s wedding, a big vacation, or anything else.”

“Our daughter’s wedding’s already over, thank goodness!”  Gavin exclaimed.  “But if grandkids come along I could see a long trip to the UK for a visit.”

“Exactly,” we interjected, “we can adapt to that circumstance when it happens, and give you options.  Oh, and one more important thing,” we paused for a moment before continuing, “if markets go really well and we were tracking far ahead of plan, we may take some portfolio risk off the table.  It may not be necessary to rely on markets as much to reach our goals, so why take the unnecessary risk? But we’ll talk about it with you before we do anything, because you may have other priorities to consider together.  Likewise, if markets go badly we’re not going to sit on our hands.  We’ll discuss the implications and give you honest and decisive guidance about what you should do to stay on track.  In other words, our strategy will adapt to reality.  If it doesn’t, it’s not really a strategy.”

Gavin gave us a serious look, “I’m glad you’ve said that.  I mean, how can we plan now for the next 33 years?  I have trouble with five year plans at work – our business strategy needs to adapt to new realities each year.”

Nodding, we replied, “We know, and we agree.  It’s important to have a direction but it’s also important that you know we’ll adapt to your changing priorities and plans.  It’s our job to give you financial options and ensure that those options take your long term objectives into account.”

Gavin looks at us both, “That’s really good guys.”

With that, we give them the plan and the materials so they can consider them privately at home.  As they leave our office, they both look much less tense than they did when they walked in.  They now know they have real options and understand the implications of their decisions on the long term future.  That’s a big relief.

The next day, the phone rings.  It’s Gavin, “We had a long discussion and we want to go ahead.  We just had to make sure our lifestyle plans would work and I think we’re both happy with that now.  When can we come back in?  Let’s get started.”  Gavin paused for a moment then said, “Thank you guys, I feel so much more in control now.”

“Thank you, Gavin,” we respond. “Giving you a strategy to put you in control of your financial life is what we feel best about doing.”

Note: Gavin and Jenny are a fictitious couple but are based on the experiences of many clients we work with.

If you’d like discuss your retirement plans with Bradley Nuttall, please click here to arrange an appointment.

By Ben BrinkerhoffHead of Adviser Services

How You Can Know Your Assets are Safe

There has been a lot in the news recently regarding Ross Asset Management Ltd.  Like anyone with any knowledge of the circumstances, we are angered and disappointed by what we’ve read.  We understand that this must all be a little unsettling, and perhaps more so because Mr Ross had an Authorised Financial Adviser (AFA) qualification.

It is for this reason that we have written this article on how to ensure your assets are safe.

Fortunately, the process is straightforward:

1. Ensure an independent third party has custody of your assets

An adviser should never personally take control over their clients’ funds.  Rather, an independent third party (in our case, Aegis) should hold all assets and conduct buy and sell transactions.

2. Ensure the third party custodian is reputable

Our clients’ accounts are held by Aegis and its custodian, Investment Custodial Services Ltd (ICSL), which is a wholly owned subsidiary of ASB Bank.

3. Ensure that the third party custodian reports to you independent of your adviser

You should be able to determine what your account is worth 24 hours a day, 7 days a week, without needing to contact or notify your adviser.

4. Ensure you know what you own

You should be able to easily and independently look up the investments in your portfolio, find them online and review their statements and prospectuses. This includes both individual shares and managed funds.

5. Ensure what you own is highly diversified

If you look on your statement and find only a few shares all from the same industry, you have a problem.  A few years ago, many regretted the fact that they had concentrated their portfolio in a few finance companies.  Investment concentration is a horrible idea. You want diversification across industries, countries and investment types including shares, fixed interest and real estate.

If you can check off all of the above you may or may not have a great performing portfolio, but at least you can be more confident that your portfolio is worth what you think it’s worth.

Remember, the AFA letters only tell you that an adviser has the necessary training and expertise required to be a good adviser.  While they also carry an implicit guarantee of prudence and client-first advice, it is a sad fact that fraudsters in any profession don’t tend to care too much about best-practice.  In the case of Ross Asset Management, there was sadly a big difference between understanding the appropriate ethical and moral standards for adviser behaviour, and actually putting them into practice.

Lastly, and perhaps most importantly, investments that seem too good to be true, often are.  Those of us who do this work honestly have had a difficult time over the past 10 years.  It’s been a bumpy road involving many honest conversations with our clients. Ross was sailing along with great returns.  How did he do that?  It appears that he did it by lying.  Investments provide return because they bear risk.  It’s a simple and true statement.  Higher risk leads to higher return, but also more uncomfortable and frequent down periods.

There will always be charlatans that try to convince us otherwise.  We just hope you don’t believe them.

By Ben Brinkerhoff

Harvard Study: Are Financial Advisers Giving “Good Advice”?

Harvard and MIT Professors sponsor the largest ever mystery shop on financial advisers.  What did they find?

I’m sorry to say but there is a large, compelling and growing body of research that shows that most households make very poor investment decisions.  The reasons why are fairly well documented: we are overconfident, follow the crowd and are ruled by emotions like fear and greed.  Every single independent study that I’m aware of shows that buy and hold investors do better than the average investor fleeing in and out of markets and following hot tips.  Collectively, academic researchers call the bad investing instincts we all share “biases”.

In the academic world, all that is old hat.  But a recent study by the National Bureau of Economic Research (Massachusetts) conducted by professors from Harvard, MIT and the University of Hamburg (and commented on recently in the NZ Herald) added an interesting twist to the discussion.

“We ask whether or not the market for financial advice serves to debias individual investors and thus correct potential mistakes they might make.”

In other words, do advisers prevent their clients from making financial mistakes based on their emotional biases?  Good question!

To find their answer, researchers distinguish between “good advice” and “bad advice”.

What is good advice?  From the study:

“We define ‘good advice’ as advice that moves the investor toward a low cost, diversified, index-fund approach, which many textbook analyses on mutual fund investments suggest, see for example Carhart (1997).”

Bad advice does just the opposite: it exploits investors’ built-in biases to encourage the high cost and poorly diversified investments that are in the adviser’s best interests to promote.

Armed with these definitions, the study sent out mystery shoppers to perform 284 audit visits to financial advisers.

So what were the results?  Not good.

Again, we quote from the study:

“These results suggest that the market for financial advice does not serve to debias clients but in fact exaggerates biases that are in the advisers financial interest while leaning against those that do not generate fees.  In our index fund scenario, the advisers are even advocating a change in strategy (away from low fee index funds and towards high fee actively managed funds) that would make the client worse off than the allocation with which he or she started off.”

As much as this report looks bad for the financial advice industry, here at Bradley Nuttall we want to stand up and applaud.  Finally, researchers understand that advisers are part of the problem.  By and large, advisers do more to encourage poor investing behaviour than correct it.  Why?  Because most advisers (but not Bradley Nuttall) are paid, at least partially, by the “high fee actively managed” investments they recommend.  It’s a flawed model.

But there are other reasons bad advice is so pervasive.

Good advice is hard to give.  It often means that you tell a prospect or client what they emotionally do not want to hear.  This decreases the chance they want to work with you, because your advice doesn’t “feel right”.

Combine this emotional hurdle with the fact that advisers can get paid handsomely to give bad advice – and that bad advice often has the air of exclusivity or inside knowledge that investors love – and you can see why we have a problem.

It’s good advice to suggest that investors will be compensated for the risks they take.  The higher the risk, the higher the long term returns will be.

Bad (but emotionally satisfying) advice gives clients the expectation that, due to the adviser’s inside knowledge, there are high-return/low-risk investments out there just waiting to be picked off.  This almost always leads to disappointment, as the figure below portrays.  Good advice steers clear of get-rich-quick, can’t-lose and glamorous investments.

We strongly advocate the findings of this academic study.  Bradley Nuttall has been giving good advice, defined in the study as “low-cost diversified efficient portfolios”, for over a decade now.  And to ensure we are never compromised we do not take any revenue from investments we recommend, which is one reason the costs of the investments we use are about four times lower than the industry average.

However, our experience is that investors are confused.  They hear so much noise; so many calls to buy or sell; so many worrying and conflicting reports, that distinguishing between good and bad advice is almost impossible.

Who do they trust?

How are they to know?

Here’s hoping that this report, and more like it, will start to have an influence on the hard working investors who simply want financial security and peace of mind.

Those investors, like all others, have biases.  But we know that good advice delivered with honesty and integrity can make a big positive difference.

That’s the difference we try to make every day.

Investing When Others are Fearful

By Scott Rainey and Ben Brinkerhoff

Warren Buffett, legendary US investor, has made billions of dollars investing based on a fundamental behavioural premise (coupled with ingenious business acumen): be “greedy when others are fearful”.

It sounds good.  It seems pretty clear, when share prices look like the chart below, that the logical time to invest is at the bottom of the curve.

With the situation in the world so uncertain these days, many investors are reluctant to invest.  We understand that reaction, in the current global environment.  Many conclude that, since the world has slow economic growth (measured by GDP), it must mean the outlook for shares is also poor.

After all, it is widely believed share market returns are based on economic growth.  If growth looks to be sluggish, doesn’t that mean that the share markets will also be sluggish?

How sound is that conclusion?

Fortunately we are here to shed some light and optimism.  There is simple and compelling academic evidence that the intuitive link between economic growth and share market returns is probably flawed, or at least over-stated.

Research conducted by an American professor, Jay Ritter of the University of Floridaii, on the relationship between economic growth and real share market returns from 1900 to 2002 (that’s 102 years) showed that economic growth did not at allexplain share market return over the 102 year period.  Look at the chart below.  You’ll see that the height of the blue bar (economic growth) and the height of the green bar (share market performance) are unrelated across several different countries.

For example, Australia averaged 1.6% per annum real per capita economic growth.  That’s the second worst of the six countries listed above, yet it had the best share market performance.  Japan had the best per capita growth at 2.90% per annum, but only the fourth best share market performance.  UK has the worst growth but the third best share market performance, better than the Japanese.  How can this be?

The point is simple – economic growth does not tell us much about how share markets will perform.

It’s important that this result was found for a 102 year period.  That period includes a global financial crisis (the Great Depression) and a series of World Wars, oil shocks, currency crises, a tech bubble and a terrorist attack, so it’s very robust data.

So the question remains: why?  Why doesn’t economic growth link directly with share market performance?  It seems like it should.

The paper offers multiple suggestions:

  1. When the economy grows often it’s the workers who receive the benefit, not just the owners of shares
  2. New businesses owned by private investors, not owned in public share markets, are better at catching the wave of growth
  3. Economies with poor growth have low share prices because market participants are a bit scared, so new investors can get better deals leading to higher potential returns

Buffett captures the last point best in his Berkshire Hathaway 2004 Chairman’s letter:

‘Investors should remember that excitement and expenses are their enemies.  And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful’.

Fear is a natural human reaction to the current catalogue of negative stories from the media, but fearful investors make the mistake of imagining they can sell their shares before these bad news stories affect prices.  This information is alreadyembedded in the price, so the only thing a fearful investor consistently achieves is to sell at the bottom of the curve.  Warren Buffet responds differently – he acts like it’s Boxing Day and everything is on sale.  The trouble for the rest of us is that living true to Buffett’s wisdom is very hard.

Bradley Nuttall’s approach is first to diversify so that we’re not over-exposed to any one set of market expectations for either country or company.  We invest in over 40 countries and about 8,000 underlying securities.  We resist the urges of fear and use discipline to hold on to our portfolios, knowing (as in 2009 and 2003) that patience will be rewarded. Down-markets are an unfortunate and inevitable reality of global business.  But markets have always come back and, with discipline, or even with a bit of greed, smart investors will reap the benefit.

i From Carl Richards of Behaviour Gap

ii The paper can be found at http://bear.warrington.ufl.edu/Ritter/PBFJ2005.pdf

Insights on the Global Economy from Leading Academics

This week Bradley Nuttall attended an Investment Symposium where some of the world’s leading financial academics, including 1997 Nobel Prize in Economic Sciences recipient Myron S. Scholes and former White House adviser and chairman of the U.S President’s Council of Economic Advisers, Prof. Edward P. Lazear, gave presentations.

It was an opportunity for us to talk to and hear their views on recent global economic events and their thoughts on possible future outcomes. We have aggregated the key points made at the Symposium.

  1. The risk of a contagion in Europe has been overstated
  2. Governments are too focused on often ineffective short term fixes rather than long term growth
  3. Excessive regulation and tax stifle economic growth

Four pillars drive an economy

  • Dr Scholes considers four key components when considering how economies operate:
  1. Population – impact of ageing, employment and movement of people;
  2. Technology – medical advances, innovation, internet and productivity
  3. Scarcity – of resources, people and assets
  4. Politics – the political system and legislative framework
  • Economies are such complicated systems that it is almost impossible to forecast the implications, particularly over the short term, of single changes and decisions. Too many commentators take overly simplistic views on how one factor may impact an economy.

Where is the US economy now?

  • The US economy is the world’s largest, so it is important to everyone, even though Australia and New Zealand’s economic growth has become more closely tied to China in recent times.
  • If long term economic growth trends had continued over the past 5 years (post war average has been 3.1% pa), the US economy would be 12% larger today. If government stimulus packages hadn’t occurred, the economy would be 3% smaller than today. So the value of doubling U.S government debt over the past 5 years has been minimal. The US economy was never on track for a repeat of the Great Depression as many commentators speculated – 3.5 years after the Great Depression started the US economy was 38% smaller.
  • Current US economic growth is about 2.4% pa, which is lower than some developed nations like Germany (3.3%) and Canada (2.8%), but higher than most.
  • The potential of the US economy is much greater than current output, with 8 million jobs still required to get employment back to pre-GFC levels. To some extent the share market is already forecasting a gradual recovery based on current pricing.
  • US labour market is still in quite bad shape, with the number of hires today less than in 2009. If this persists, it will take until 2017 to get employment levels back to pre-GFC levels, so it needs impetus.

The significance of Lehman Brothers failing has been overestimated

  • Dr Lazear was in the White House the day Lehman Brothers failed, and he considers it a minor event in the US recession.
  • By the time Lehmans collapsed on 15 September 2008, the following had already occurred:
    • US recession had started in December 2007
    • Bear Stearns failed in March 2008
    • In the summer of 2008 the Dow Jones lost 3000 points and 1 million jobs were lost
    • Fannie Mae and Freddie Mac failed before Lehmans, and AIG failed on the same weekend.  With hindsight, the US government should have focused on AIG as a priority rather than Lehman Brothers.
  • The fallout from Lehmans is that many people now believe that contagions can spread if one event is allowed to occur. This takes the focus off fundamental policy and onto short term policy responses. Almost all short term policies in recent years have failed to jump start the economy.
  • As an example, the US had a ‘cash for clunkers’ scheme, encouraging people to trade in their old cars to buy new ones.  The results show zero improvement in new car sales over the last few years compared to what was expected.  The ‘spike’ upwards was matched by an equal ‘spike’ downwards over the following years for no net benefit.  Australia had a similar failed scheme.

Fears of a ‘contagion’ in Europe are misplaced

  • Following on from the Lehman’s lessons, we should not believe the media hype that if one Euro country fails, more will follow.
  • As an example, the day after the recent Greek elections – when Europe received the best outcome with Greece remaining in the euro – interest rates on Spanish and Italian bonds rose, meaning the market now thought these bonds were more risky.
  • Each country in Europe has its own domestic problems – they have little to do with Greece.
  • Spain, like the US in 2008, has a housing market problem that has leaked into a banking problem as property prices fall. This is why their banks recently needed additional capital from the government.
  • Italy has a government problem, where a lack of control over government expenditure over many decades has resulted in high government debt. If not for Italy’s annual interest payments on its debt, the country would actually run a government budget surplus. So Italy’s problems aren’t new, they’re just getting greater focus with the other problems in Europe.

Governments need to focus on productivity to stimulate growth

  • Academic research clearly demonstrates that the most effective way to stimulate economic growth is by focusing on productivity, as this has the greatest impact on real wage growth and thus expands the tax base. This close linkage is true in every economy around the world.

What are potential scenarios for the global economy going forward

  • Main themes for the next decade
    • Technology will make the US more competitive, so production and manufacturing will grow domestically as the costs in countries such as China increase. Many Chinese businesses are themselves outsourcing to lower cost nations like Indonesia and Vietnam.
    • US will become more self-sufficient for energy, particularly from shale oil and gas.
    • US trade deficit should start to reverse
    • Peak oil may have already occurred due to nations like Saudi Arabia spending less on exploration and more on delivering services to their domestic populations. Some estimate that all of Saudi Arabia’s oil production will be consumed internally within 15 years.
  • Dr Edward Lazear, who was responsible for releasing US economic growth forecasts, reconfirmed how difficult it is to make short term forecasts about anything, but much easier over the longer term. However, two potential scenarios for global economic growth were discussed:
    • Reversion to a normal economic cycle from a severe recession. Europe will continue to be a drag on global economic growth due to uncertainty rather than any real economic issues. The additional cash being made available to European economies will provide sufficient liquidity to allow banks to rebuild their balance sheets. No real signs of inflation in Europe or the US may see interest rates remain low until 2014
    • Debt/deflation and fiscal concerns with monetary reflation. Various parts of the world will repeat the Japanese experience over the past 20 years, where the economy grew but at the cost of large growth in government debt to support it. In response, governments could impose greater regulation on economies that stymies innovation and increases uncertainty, which in turn acts as a drag on growth. New enterprises will be vital to provide employment opportunities for those displaced by the effects of automation. For example, Walmart employs 1.9 million people whilst Google employs 20,000 people. (Walmart’s market capitalisation is only 25% higher than Google).

The Trade-off: Preserving Your Standard of Living or Preserving Your Capital

If we had it our way, all investments would be able to deliver two things simultaneously:

  1. Have very little chance of losing money, even over short time horizons
  2. Increase considerably in value.

If only…

But in reality, successful investing and financial planning require us to balance “the trade-off”.

What’s the trade-off?  On the one hand, we want a good night’s sleep.  This is our desire to have only a low chance of making a loss, even over short time horizons.  On the other hand, we want a nice place to sleep.  This is our desire for our investments to increase considerably in value.

So which is better?

As advisers we’ve learned that neither is really better; there is no optimal solution for all.  There is only an informed decision in which both objectives are balanced against each other.  Ultimately, the correct mix depends on the particular needs and attitudes of the client.

Having a good night’s sleep

If having a good night’s sleep means being exposed to very little risk of loss, then such an investor’s primary objective is to “preserve capital”.  This implies an investment approach that focuses on short term Government Bonds, or even shorter term Government fixed interest and bank deposits.  They’re about the safest securities available these days and there is little to no chance of losing money on them.

However, these securities often don’t keep pace with inflation, after taxes.

Consider for a moment that 1-year New Zealand Government Bonds are currently yielding about 2.6% gross.  After you pay the necessary tax on that amount, let’s say at a marginal rate of 30%, this leaves you with about 1.8% to take home.  According the Reserve Bank’s Inflation Calculator, inflation last year (as measured by the CPI) was 1.8%.

So, while investors heavy in 1-year Government Bonds are more than likely to sleep very well, it is equally clear that they are only standing still in terms of providing for their future.

Having a nice place to sleep

There are other issues to be concerned with apart from a short term chance of loss.  What about a long term chance of a diminished standard of living?  Investors concerned about protecting their standard of living (purchasing power) in the future tend to prefer investments with higher expected returns and higher volatility.  Unfortunately, these kinds of investments can, and do, experience periods of loss.

Imagine a family doctor, 15 years from retirement, who contributes to his KiwiSaver fund.  The doctor doesn’t need to use his retirement savings right now and he doesn’t even notice it coming out of his pay each month.  Now let’s say that this year, 15 years before he plans to retire, his KiwiSaver account suffers from a bad market and loses 10%.

Does that really have any bearing on the doctor’s life now?  Has his standard of living diminished today?  Not at all.

His KiwiSaver account has 15 more years to grow and it is very likely to make back that loss, and grow besides.  Short term volatility is clearly not the most important issue to this investor.

Investors like the doctor in our example understand that inflation is a slow and silent killer of financial security.  Such investors seek out more volatile investments in order to preserve the purchasing power of their capital into the future.

How low volatility investments really do lose money

Most investors will find that an appropriate portfolio comprises some assets designed to preserve capital and others designed to preserve purchasing power.  The most suitable mix of the two will depend upon their specific needs and attitude towards short term losses.

Lately, those looking to invest, and a few existing clients, have questioned us about the merits of holding risky assets such as shares and property.  Some have queried why they should have risky assets in their portfolios at all.  Our response is consistent: we are trying to protect our clients’ purchasing power.  If we were to react with fear to recent poor returns and turn to a portfolio heavy in low yield investments, we would almost certainly harm our clients’ ability to reach their financial goals.

History shows that low yield investments can lose money for long periods of time when we correctly account for the corrosive work of inflation.  Let’s review the data.

Table 1 contains 111 years of financial data.  We couldn’t get more data if we tried.  It shows that short term New Zealand Government fixed interest (abbreviated to ‘short term fixed interest’ from here on) beat inflation before tax.  Note, though, that after tax this advantage was virtually nil 1.  Over 100 years equities have delivered returns exceeding both short term fixed interest and inflation by a wide margin, even when accounting for taxes 2.

However, investors in equities (another word for shares) must accept the risk of substantial declines – table 2 shows that in the worst period of the entire 111 year sample.  Now hold your hat – New Zealand equity investors lost 64% of their investment between 1987 and 1990, whereas the worst return for short term fixed interest was 1.51% in 1942 (not too bad).

But this is all before inflation.  What happens when we accurately account for inflation?

You see, it’s not good enough to applaud investments that merely make a positive return.  Investment returns need to outpace inflation in order to provide long-term security.

So let’s consider two more important pieces of information:

  1. The after inflation total return for equities and short term fixed interest during their respective worst periods
  2. The after inflation time required to break even from a 100% investment in either short term fixed interest or equities

What about short term fixed interest?  After inflation, an investor in short term fixed interest lost 45% from 1937 – 1982 and, in total, it took an investor 55 years to break even!  This is by no means a phenomenon that is unique to New Zealand.  Investors in Australia, Canada and the US would have found nearly identical results when investing 100% in bills.

So how could an investment like short term fixed interest, that has never had a negative return (remember the worst period return was 1.51%), lose 45% of its purchasing power?

The answer is simple.

The same year that New Zealand short term fixed interest earned 1.51%, domestic inflation was at 4.0% according to the Reserve Bank of New Zealand’s Inflation Calculator.  So even though the nominal return on short term fixed interest was positive, an investor was really going backwards in terms of purchasing power.  This is not even to mention that the 1.51% yield is taxable.

Warren Buffett, in a recent article titled, “Why stocks beat gold and bonds” summed up this issue beautifully:

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits and other instruments.  Most of these currency-based investments are thought of as “safe.”  In truth they are among the most dangerous of assets… their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal.  This ugly result, moreover, will forever recur.  Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation…

Current (interest) rates… do not come close to offsetting the purchasing-power risk that investors assume.  Right now bonds should come with a warning label 3.

In short, preservation of capital and the preservation of purchasing power are strategies which both have a place in a diversified investment portfolio.

History is clear that an over-allocation to cash, for fear of short-term drops in asset prices, can be an extremely risky strategy and can lead to the destruction of an investor’s purchasing power.  It is the goal of any good adviser to find an appropriate trade-off that will enable you to reach your long-term goals, while not being exposed to unnecessary market ups and downs.  Perhaps it’s with that combination, that some peace of mind can be achieved.

By Ben Brinkerhoff

Why are We So Passionate About Putting Clients First? Just Look at Goldman Sachs…

Over the past year, Bradley Nuttall has blogged, posted or presented on conflicts of interest probably half a dozen times. Suffice to say we are passionate about the subject. But why?

Why is this issue so darn important?

Enter Greg Smith…

Greg Smith, from all appearances, had it all. He was a Rhodes Scholar national finalist, a graduate of Stanford University and an accomplished athlete.  From thousands of applicants he was one of the lucky few to be given a job at prestigious New York investment bank, Goldman Sachs. In his 12 years there he rose to a position of Executive Director in the London office, advising clients with a combined asset base of over $1 Trillion.

March 14th was Greg Smith’s last day at Goldman Sachs (Goldman) and what a day it was. He chose it as the day to write an opinion-editorial piece in the New York Times giving the rest of us an inside view at the real Goldman (click here to read).

It’s an ugly view.

First of all it’s important to understand what Goldman is. They are a bank, an investment bank and asset manager and a broker, all rolled up into one. They are probably the most successful conglomeration of these businesses in the world. As a result of this structure, Goldman often sells products they have built and designed, or sell their clients investments from their own account. That’s important for this simple reason: they are almost always conflicted when dealing with their clients.

How does selling your own product create a conflict? Simple – the adviser is biased towards recommending in-house products even if they’re expensive, poorly performing or just not in their clients’ best interest.

How does selling from your own account create a conflict? If Goldman decides it no longer wants to hold an investment because it’s not profitable enough, why is it okay to dump it on their clients?

If it’s not already clear enough what a problem conflicts of interest can create, read some excerpts from Greg Smith’s article below:

…What are three quick ways to become a leader (at Goldman)? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

…I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them.

…It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.

…I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

…These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?”

The simple fact is Goldman Sachs is NOT a fiduciary for their clients. A fiduciary by law must act in the best interest of their clients. They must put their clients’ interest ahead of their own or their company’s interest. That doesn’t mean fiduciaries work for free, but it does mean the fees are clearly communicated and simple to understand. Accountants are often fiduciaries. Lawyers are often fiduciaries. Doctors can be thought of as fiduciaries.

How comfortable would you be with your doctor getting paid by the drug companies or your accountant getting paid by the IRD or your lawyer getting paid by your legal opponent?

Sadly, as a society, we still seem to be totally okay with an investment adviser recommending a money manager that paid orhired him/her to recommend their product.

The greater the money manager’s fee, the lower the client’s return. When will clients learn that hiring an adviser that takes a kickback from a money manager is like hiring an accountant that takes a kickback from the Inland Revenue Department?

It’s time for New Zealand investors to see that this is not only a New York issue. There are brokerage firms and conflicts of interest in New Zealand too. There is no reason to put blind trust in big company names, especially when the structure of the relationship is fraught with difficulty.

This isn’t just an important issue; it may be the key issue in any adviser-client relationship. Bradley Nuttall was among the first advisory practices in New Zealand to adopt the fiduciary framework. We rebate all commissions and we don’t accept payment from any investment funds, companies or managers we hire. This way we, like your lawyer and your accountant, avoid conflicts of interest and focus on representing your best interests.

This is a simple but important duty of care and one that may go unnoticed as we advance the work of client financial planning and advice. However, we believe it is the foundation for long-term client success and a culture of treating clients with the respect and honesty they deserve.

By Ben Brinkerhoff

The End of Wall Street as We Know It – and We Feel Fine

When I (Ben) had the privileged of working for Index Funds Advisers (IFA.com) in California, one individual I worked most closely with was Jay Franklin, a very bright and passionate advocate of investors.

As IFA and BNL are now associated (BNL is a Network Member of IFA) we are able to publish some of Jay’s articles on our website. Although this one seems a bit focused on the USA I think it’s message is clear and fully endorse it. Link

by Jay D. Franklin Tuesday, February 14, 2012

Lately there has been a great deal of news coverage of the ever-shrinking pool of bonuses awarded to the traders and investment bankers of the too-big-to-fail Wall Street firms. At UBS, for example, certain highly compensated employees will have to face the indignity of having part of their previous bonuses clawed back in the wake of a $2.3 billion loss resulting from the actions of a rogue trader. New York magazine recently ran a detailed piece on this subject appropriately captioned, “The Emasculation of Wall Street.” One of the article’s most poignant statements was voiced by an unnamed hedge fund manager.

“If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now–you’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg.”

To this, we at Index Funds Advisors, Inc. say “Bravo!” and we wish it would have happened many years sooner. Society derives far greater benefit from the application of brainpower to real world innovations as opposed to financial innovations. The simple fact of the matter is that the primary financial instruments that are used to connect providers of capital with users of capital have existed since the nineteenth century. Much of the innovation that has come from the geniuses of Wall Street has been useless at best and incredibly destructive at worst. Nevertheless, we have seen a few advances that have truly helped investors such as index funds, but none of these required the talents of PhD. Physicists from MIT.

As noted by Matt Taibbi of Rolling Stone in his blog post of 2/8/2012, “The financial services industry went from having a 19% share of America’s corporate profits decades ago to having a 41% share in recent years. That doesn’t mean bankers ever represented anywhere near 41% of America’s labor value. It just means they’ve managed to make themselves horrifically overpaid relative to their counterparts in the rest of the economy.” All we really need from Wall Street are prudent people who will be reliable stewards of their client’s money for which they can expect to be well compensated as opposed to outrageously overpaid. What we don’t need are Fabulous Fabs aided by rocket scientists who help them conjure up new ways to “blow up the client” or “rip the client’s face off.” The world is a better place when the rocket scientists are actually designing rockets (i.e., actual products or potentially beneficial scientific research) and Wall Street bankers are playing their proper role as handmaidens to capitalism.

Regarding the big-time traders, as more and more individual investors as well as trustees of foundations, endowments, and pension plans become wiser and go passive, the traders will have only each other to play against in their zero sum game. We wish them the best.

Finally, the increasing adoption of passive over active will automatically reduce the bloated 41% share to a more reasonable level. This is far preferable to wielding the heavy hand of government regulations which all too often have unintended consequences.

By Ben Brinkerhoff