The Financial Fortnight That Was - Tuesday 17th March 2009

Welcome to the latest edition of The Financial Fortnight That Was. This edition is a week out of schedule. Attendance at an important conference combined with a busy schedule of client and prospective client appointments have lead to this delay in publication. We hope this delay has not caused you any inconvenience.

In this edition we:

remind readers of the importance of diversification within and across asset classes,
take a look at 30 years of asset class performance,
provide a summary of the movements in markets over the past fortnight including 3, 5 and 10 year return history,
look at an example of how an active investment approach has not protected invetors during a bear market,
provide a link to Scott's latest Eureka Report article, and
discuss early access to superannuation.

Enjoy the read!!

A Quote for Consideration

"We found that about 90 percent of the variability in returns of a typical fund across time is explained by policy (asset allocation), and on average about 100 percent of the return level is explained by the policy (asset allocation) return level."

Roger G. Ibbotson & Paul D. Kaplan - Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?Financial Analysts Journal January 2000

Financial Topic Demystified

Diversification & Asset Allocation

Some might be surprised to know that Australians investing in international unhedged investments over the past 12 months have performed much better compared to investing in the ASX200. The return for the MSCI World ex Australia index over the 12 months has been -22.12% compared to -36.89%. During what has been an extremely difficult market across all world markets over 2008, this again highlights the benefits of a diversified approach to investing. So what is diversification and how should you apply it to determining your asset allocation?

Click here to be taken to the full version of the chapter taken from our latest book - Your Guide to Being a Successful CEO of Your Life.

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How Do We Apply This?

We apply the diversification story both within individual asset classes by utilising index style funds. We also apply the theory across asset classes by setting portfolio allocations with cash, fixed interest, listed property, Australian shares and international shares. Within the growth asset classes we further diversify by investing in different areas of the market:

Listed property - Australian and international
Australian shares - large, value and small companies
International shares - large, value, small and emerging markets

To see how we apply this to our portfolios please take a look at the Building Portfolios page on our website.

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Fascinating Financial Fact

30 Year Asset Class Performance

As part of our financial planning process, we have a tool that reports on the returns from asset classes over the past 30 years on a rolling 12 month period basis, quarter by quarter.

The most recent data is up to the end of December 2008. This provides us with 117 years worth of rolling data in this data set. The first year commences January 1979, the next year starts April 1979 with the last period commencing January 2008. Our firm also combines these asset classes to provide data on the performance of asset mixes over that 30 year period. The following table sets out the data for the past 30 years:

Asset Class or Portfolio Type	Positive Years	Negative Years	Best Year	Average Year	Worst Year
Cash	117	0	19.06%	9.27%	4.63%
Fixed Interest (Local & Foreign)	112	5	24.43%	9.97%	-5.62%
Property (Listed or Direct)	104	13	53.32%	10.58%	-53.99%
Australian Equities or Shares	89	28	85.44%	12.58%	-40.38%
International Equities or Shares	90	27	73.25%	12.21%	-33.08%
70 / 30 #	109	8	38.72%	10.38%	-13.43%
50 / 50	107	10	47.22%	10.76%	-21.59%
30 / 70	99	18	56.33%	11.23%	-29.70%
15 / 85	96	21	65.31%	11.74%	-36.49%
5 / 95	91	26	71.08%	12.27%	-39.28%

# - i.e.

70% cash & fixed interest assets, 30% growth assets

This data provides some interesting information which is useful in guiding the development of a client's optimal asset allocation. No surprises that the more growth assets you include in a portfolio, the greater the average return but also the greater the volatility. The key for helping to guide the determination of an appropriate asset allocation is to sit back and think how these returns would impact your situation and how comfortable you would feel to experience worst year scenarios.

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Market News

ASX P/E Ratio and Dividend Yields

The P/E ratio is a common broad indicator of the price of shares. It is a calculation of the price of shares compared to expected earnings. A higher ratio indicates that share prices are more expensive. The historical P/E ratio for the ASX has been between 14 & 15. The dividend yield is the calculation of dividend payments divided by the market capitalisation of the company or index. The historical average in Australia is around 4%.

As of March 10th the P/E ratio for the S&P/ASX 200 was 8.77. The dividend yield was 6.75%.

Volatility Index (VIX)

Another index we are keeping an eye on in the USA is the CBOE Volatility Index. This index purports to be a key measure of market expectations of near term volatility conveyed by the S&P 500 share index. The higher the level of index, the higher are expectations for volatility in the S&P 500 index. For more information on how the VIX is calculated please take a look at - www.cboe.com/micro/vix/introduction.aspx

The latest close for the index was at a level of 43.74. This is slightly lower than the 49.7 level reported last edition.

Market Indices

	Since last ed.	Since Start of 2009	1 Year	3 Year	5 Year	10 Year
Australian Shares
S&P - ASX 200	-1.68%	-10.13%	-34.87%	-12.25%	-0.34%	NA *
International Shares
MSCI World - Ex Australia	-1.63%	-14.85%	-40.17%	-15.19%	-4.13%	2.58%
MSCI Emerging Markets	3.94%	-1.53%	-39.39%	-4.69%	6.56%	10.22%
Property
S&P - ASX 200 REIT	-0.33%	-27.19%	-58.09%	-30.49%	-15.91%	NA *
S&P/Citigroup Global REIT - Ex Australia - World - AUD	-4.60%	-23.00%	-37.16%	-20.09%	-4.79%	4.35%
Currency
US Exchange Rate	2.16%	-5.72%	-30.19%	-3.78%	-2.16%	0.28%
Trade Weighted Index	2.59%	-0.36%	-21.30%	-3.96%	-2.33%	-0.18%

* - Data unavailable as ASX 200 only commenced on 31st March 2000

General News

Since publishing our previous edition the Reserve Bank of Australia board has decided to keep the official cash rate at 3.25%. Minutes of the meeting can be found here - RBA Minutes of the March Monetary Policy meeting

The Australian Bureau of Statistics has released the latest National Accounts figures up to the end of December 2008. The figures show a small fall in economic growth of 0.5% over the last 3 months of 2008 and annual growth for 2008 of 0.3%. They have also released the latest labour force data which places the level of unemployment to the end of February at 5.2%, up 0.4% from the end of January.

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An active investment approach does not protect you in a bear market

Scott's Financial Happenings Blog - Posted Saturday 7 March

A common fallacy thrown out there by those supporting an active investment approach is that this approach can protect you better from bear markets.

Today I share some more practical evidence that this is just not the case. It has been published by The Intelligent Investor newsletter. This is one of many investment newsletters that provides stock selection suggestions for its readership. I have to applaude them because each year they have their stock picking record audited to show just how much they have helped their readers. Unfortunately for them this has provided a lot of transparency to how they have performed. The following is an extract from the latest report of their results:

This Performance Report, our fourth, covers the past 7 1/2 years, from when Greg Hoffman took over as Research Director at issue 80 until issue 262. The weighted annualised average return of 2.6% is a little behind the 5.5% average annual return from the benchmark All Ordinaries Accumulation Index over the same period.

Our conservative methodology punishes our returns in several ways, but there's no escaping the fact that 2008 was a very disappointing year for The Intelligent Investor's recommendations. Indeed, it reversed our previous string of market-beating results.

If you want to see this for your own eyes click here - Intelligent Investor Performance.
If you had followed their advice over the past 7.5 years you would have performed up to 2.9% worse than if you had simply invested in the All Ordinaries Accumulation Index. This is the bottom line. However it also does not take into account the extra worry and personal pressure that is added from taking on an active approach to investing. Struggling with knowing what is the next hot stock pick and when to sell out of current holdings.

I know what space I would much rather be in, sitting back investing in index based investments without the stress of having to be watching share prices each day every day and knowing that you will be beat more than 50% of other investors out there each year.

Regards,
Scott Keefer

Other blogs over the past fortnight have included:

7th March

Keep an eye on those dividends

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Eureka Report Articles

Since our last edition Scott Francis has contributed another article to Alan Kohler's Eureka Report. Click on the link below to be taken to this item:

11^th March - Franking credits in the firing line - A threatened cut to franking credits would affect the attractions of DIY super and Australians' retirement savings.

Click here to be forwarded to all of Scott's Eureka Report articles

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Case Study - Accessing your superannuation assets before reaching preservation age

Recently I was asked under what conditions could you access some or all of your superannuation funds before reaching your preservation age.

First a quick reminder, the preservation age is currently 55 but will be increased to 60 on a phased in basis:

For a person ...
Before 1 July 1960                     55
1 July 1960 - 30 June 1961         56
1 July 1961 - 30 June 1962         57
1 July 1962 - 30 June 1963         58
1 July 1963 - 30 June 1964         59
After 30 June 1964                    60

Before reaching your relevant preservation age you may be able to access your superannuation under one of the following conditions of release:

- Permanent incapacity

- Permanent departure from Australia in limited circumstances

- Severe financial hardship

- Compassionate grounds

- Temporary incapacity

The two conditions that need further explanation are financial hardship and on compassionate grounds.

To be eligible under the financial hardship conditions a person needs to have received, and still be receiving at the time of application Commonwealth income support payments for a continuous period of 26 weeks and the trustee of the fund must be satisfied that the person is unable to meet reasonable and immediate living expenses. The maximum payment is $10,000.

Payments may also be able to be made on compassionate grounds including:
- paying for medical treatment of medical transport for the person or dependant
- enabling the person to make a payment on a loan to prevent foreclosure of a mortgage on the person's principal residence
- paying expenses associated with a dependant's palliative care in the case of impending death.

If you wanted more information on this topic please do not hesitate to be in contact.

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Other website of interest

Since the last edition we have come across two interesting resources that may be of interest to readers:

The Credit of Crisis visualised - a simple summary of how the credit crisis eventuated.

Interview with Gus Sauter - Chief Investment Officer and Managing Director of the Vanguard group - Mr Sauter answers 15 questions about the current market conditions and the lessons for investors.

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Requesting feedback

We encourage subscribers to ask questions or make comments either directly by sending an email to our email address: financialfortnight@acleardirection.com.au or by engaging with our feedback site:

Financial Fortnight Feedback Forum

After clicking on the link you will be taken to our Financial Fortnight User Voice page. On that page you will be able to provide suggestions or vote on suggestions that have been made by other subscribers. By submitting an idea, you enable other users to view your idea and add their vote if they think it is worthwhile. By casting your vote you are telling us whether you think the ideas are worthy and which ideas should be implemented first.

We welcome your feedback.

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We hope you have enjoyed reading the latest edition. If you have any comments or suggestions for future topics please do not hesitate to get in contact.

Have a great fortnight!

Cheers,

The Two Scotts

The Financial Fortnight is a publication of A Clear Direction Financial Planning. It contains general financial advice. Readers should check this advice with a professional financial adviser before acting on any of the material contained in this email.

Scott Francis & Scott Keefer

1 Park Road - PO Box 1688

Milton QLD 4064

(07) 3876 6223

A Clear Direction Financial Planning is an Authorised Representative (No. 329574)

of FYG Planners Pty Ltd ABN 55 094 972 540

Australian Financial Services Licensee (No. 224543)

Registered Office: Level 1, 10 Wilson Street Burnie Tas 7320