The Financial Fortnight That Was - Tuesday 26th May 2009

Welcome to the latest edition of The Financial Fortnight That Was. I imagine that some of you are starting to question the suitability of the name of this publication given the time between this and the previous edition. I hope that this has not put any reader out but it has been an extremely busy period in the business with existing client work, strong new client enquiry with a Federal government budget thrown in for good measure.

I hope that you found the personal finance budget summary of some use. This budget along with the current economic and investment climate make for perplexing times. As our name suggests, this firm strives to continue to provide a clear direction for those wanting to plan well, invest well and live well. I hope that this publication goes a small way in achieving this. If there are ways we can improve this newsletter please do not hesitate to be in contact.

In this edition we:

take stock of the current investment climate and discuss what should investors do now,
look at the RP data - Rismark proerty indices,
summarise the movements in markets since the last edition including 3, 5 and 10 year return history,
take a look at the question of out of market risk,
provide a link to Scott Francis' latest Eureka Report articles,
provide a case study on what to do if your employer has not made your superannuation guarantee contributions,
link to the Financial Planning Association's Good Advice website, and
provide evidence of the three factor model in action.

Enjoy the read!!

A Quote for Consideration

"He who lives by the crystal ball soon learns to eat ground glass."

Edgar R. Fielder

The Three Rs of Economic Forecasting-Irrational, Irrelevant and Irreverent
June 1977

Financial Topic Demystified
What Should Investors Do Now?

This is the age old question asked by everyone, especially those inspired to take an active approach to investing. We do indeed live in interesting times. Share markets had fallen by more than 50% from their peaks in late 2007. Since early March we have experienced significant rebounds in prices. A range of questions are now being asked - have we passed the bottom of markets?, have I missed the best of the upturn?, will there be another major downturn in prices?, are prices going to stagnate for many years to come?, would I be better selling out and investing in bonds, cash or even gold? and the list goes on.

Rather than provide my own answers, which frankly would be "I don't know for certain", I think it is much better hearing the perspective from a group that we think has a good perspective on the issues - Dimensional Fund Advisors. The following is the transcript from the latest podcast on our website which provides a link to a really usefual series of presentation put together by Dimensional on the topic of What Should Investors Do Now?

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In this edition of our podcasts I wanted to provide a simple update on the movement of markets so far in 2009 and then turn listeners attention to considering what their response should be to the current climate.

To the end of last week - 22nd May - we have seen the following performance in share asset classes:

Australian shares are now up 1% for the year, up 20% since the bottom reached in early March.
Australian listed property still down 26% for the year but up 17% since the bottom.
International listed property is also still down 19% for the year but up 16% since the bottom.
International shares up 2.5% for the year and up over 30% since the bottom.
Emerging Markets are now up 27% for the year so far, up 38% since early March.

As I always profess. as my family and closest friends can confirm, I have no idea whether markets will continue this projection in the short term. There is still potential for "icebergs" to create more havoc such as the downgrading of the UK's or even the US credit rating. Let's hope the global economy can avoid these icebergs but we should be prepared for this.

So What Should Investors Do Now?

For clients and regular visitors to A Clear Direction's website you will be well aware that I currently favour the use of Dimensional Fund Advisor investments within portfolios.

Last Friday, Dimensional have uploaded to their public website a really useful series of online presentations done by Weston Wellington, Vice President of Dimensional in the United States. The series is titled - What Should Investors Do Now?

The presentations are 68 minutes in total length but well worth sitting through. Weston covers Dimensional's approach to managing money under adverse business conditions, looks at how recessions affect share prices, explains why many did not see the problems in share markets coming, compares the recent downturn with previous downturns, considers whether government intervention is a threat to capitalism and concludes by suggesting what investors should do now.

Summarising the concluding comments:

Diversification remains important.
If you have less borrowed money, are less affected by the recession, and have a longer time horizon than the average it makes sense to buy.
If you have more borrowed money, are more affected by the recession or have a shorter time horizon, it might be the time to sell.
If you are about the same as everyone else, do nothing and relax

These are very general rules of thumb that hold some merit. However each individual's approach will be more complex given individual circumstances, risk tolerance and goals. If you wanted to spend time discussing your individual response to the current economic and investment climate please do not hesitate to be in contact.

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So what is "A Clear Direction's" approach?

Of course, it should be stated up front that Dimensional run a business with the objective of encouraging investors to invest money with them for the long term. We should not blindly follow everything they suggest as truth. Our firm does not, and we are constantly looking for better alternatives. However, at present I have not found a better approach and therefore continue to recommend Dimensional investments and their approach to investing as the core of what we suggest for clients.

We have some clients who have stopped regular investing into the market, some have increased their regular investments, none yet have sold any of their growth asset exposures but this has been put as an option for some clients depending on their individual situation. As always, the decisions to be made should be done so according to your own individual circumstances.

To take a look at this approach and some of the research that sits behind our firm's core investment philosophy in more detail please take a look at our Building Portfolios page on our website.

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Fascinating Financial Fact

RP Data - Rismark Property Indices

There is a fair bit of interest in residential and commercial property investment at the moment. Our firm considers that direct property investment is a valid investment class depending on an investor's situation. There are concerns with liquidity and diversification but after weighing up these issues it might be that an investor sees the other benefits of property still attractive.

Over the past month I have come across the RP Data - Rismark Property Indices which provide an overview of property price movements throughout Australia. Their latest report released 30th April - Property Value Index Release - suggests that residential proprty values have bounced back over the March quarter.

The report also provides some interesting data on indicative rental yields. They suggest the following average rental yields across Australia of 4.64% for homes and 5.39% for units.

Without going into too much more detail, for those who are interested in property this might be a good place to find some overall property performance data.

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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 May 25th the P/E ratio for the S&P/ASX 200 was 9.82. The dividend yield was 5.98%.

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 31.36. This is slightly higher than the recent low of 27.47 but well off the high of 80.74 from last year.

Market Indices

	Since last ed.	Since Start of 2009	1 Year	3 Year	5 Year	10 Year
Australian Shares
S&P - ASX 200	0.69%	1.06%	-35.44%	-9.24%	2.07%	NA *
International Shares
MSCI World - Ex Australia	8.04%	2.55%	-33.70%	-8.81%	-0.21%	-1.61%
MSCI Emerging Markets	15.59%	27.72%	-29.87%	3.96%	14.15%	10.76%
Property
S&P - ASX 200 REIT	-6.03%	-26.08%	-59.57%	-29.69%	-15.93%	NA *
S&P/Citigroup Global REIT - Ex Australia - World - AUD	-0.73%	-19.23%	-36.68%	-16.90%	-2.59%	4.08%
Currency
US Exchange Rate	8.91%	12.25%	-19.36%	1.18%	2.13%	1.61%
Trade Weighted Index	5.25%	11.87%	-14.90%	-0.19%	0.53%	0.50%

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

General News

The following major economic parameters have been announced since the previous edition:

Unemployment now at 5.4% (predicted to rise to 8.5% in Federal budget)
Annual CPI measured at 2.5% for the year ending 30th March (predicted to fall to 1.5% in Federal budget)
RBA left official interest rates at 3.0% in the May board meeting.

We have also had the Federal Government budget delivered on May 12th. If you missed our email summarising the major personal finance impacts please take a look at the summary on our website - 2009 Personal Finance Budget Summary.

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Considering Swapping Investments? Take Care With out of Market Risk

Scott's Financial Happenings Blog - Posted Monday 27 April

The more positive conditions being experienced in equity markets since the beginning of March is starting to shake investors into action. For those who hold investments, including superannuation, that they would prefer to get out of and switch to an alternative investment care needs to be taken that you understand the risks and costs involved with this decision.

Costs

Of the two concerns, monetary costs are the easiest to quantify and are made up of the brokerage costs to sell your current investments and then buy new investments. If you are using managed funds these costs are known as the buy'sell spreads. Depending on how you hold the investments, e.g. through superannuation or an administration service, there may be other administrative costs involved. For instance, the asministration service we use for client super and pension portfolios charges a $20.50 fee for every once off sale and purchase of an investment. These costs should be fairly clear and transparent.

Risks involved with switching

The risk involved with switching investments is not so simple to quantify. The key risk here is out of market risk. This is the risk that between the time you sell down one investment and purchase into an alternative investment, the market price increases in value and you therefore miss out on this increase.

Of course if markets fall in value then by being out of the market will work in your favour.

To put some numbers to this risk I have tracked the daily movements in the ASX200 since the index reached its low in early March. A minimum amount of time between selling one investment and having the funds from that sale available for a new investments is approximately 3 days so this is why I have chosen a 3 day rolling periodalong with 5 and 10 day periods. The table below sets out this data:

Please click here to be taken to the full blog entry including results table

What the table tells us is that if you were out of the market for the best 3 day period you would have missed out on a 6.58% upswing, the best 5 day period a 8.19% upswing, 10 day period a 12.17% upswing.

How to minimise Out of Market Risk?

The best way to minimise out of market risk is to have enough cash set aside so that on the same day as selling out of one investment you can be immediately buying into another investment and therefore not be out of the market.

If you don't have enough cash to achieve this but you have some cash, the next step would be sell down your investment in tranches bit at a time. This increases your costs of making the switch but these costs might be minimal compared to the potential out or market risk.

Finally, if you don't have any cash available it might be that you spread out the switch to spread out the out orf market risk over a period of time and thius hopefully reducing the risk that you will pick the worst possible time to be out of the market.

Your strategy will really depend on the purpose for making the switch including the benefits you expect to achieve from making the switch.

The bottom line is thet any investor should take special care in transitioning from one investment to another at any time. The recent data suggests that this is especially the case at present.

Regards,
Scott Keefer

Other blogs since the last edition have included:

13th April

30 Days on US Markets

26th April

Margin Lending - Food for Thought

29th April

Can we see the bottom yet? - presentation from Vanguard

7th May

Value in International Investments - Scott Keefer quoted in the Australian

21st May

Vanguard Investment Insights videos - worth a look

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Eureka Report Articles

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

24 April - Quoted in Investors warm to index funds article - The cheaper fees charged by index funds mean they are still attractive in a falling market

24 April - Timbercorp's fall reverberates - Timbercorp going into administration is a sobering reminder to investors of the relationship between risk and reward.

6 May - Inflation-linked bonds need just one ingredient - Inflation-linked bonds, likely in the budget, might not be as exciting an opportunity as the concept suggests.

13 May - Time to look beyond super - New restrictions on super will prompt investors to pursue strategies outside superannuation.

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

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Case Study - Chasing up unpaid employer superannuation contributions

A friend of mine has been in contact recently explaining that her superannuation contributions for the past year had not yet been paid by her past employer. After ringing her employer she was informed that the company she had previously worked for had been put into receivership. However we later found out that the business she worked for was still operational just under a new company structure.

After we rang the ATO they explained that there was nothing that they could do to follow up this breach and that my friend need to contact the receivers to make a claim on any remaining assets of the previous company.

Without wanting to comment on the ethics of this situation I thought it would be useful for readers to know what they should do as early as possible if their employer has not been paying superannuation entitlements.

The ATO sets out the following points on their website:

If you're concerned about unpaid super guarantee contributions you should:

Step 1

Talk to your employer. You should ask them how often they are currently paying your super, into which fund they are paying it, and how much they are paying. It's a good idea to ask these sorts of questions when you start work with an employer.

You should also make sure you are eligible to receive super. Usually an employer has to pay super contributions for you if you are over 18 and you are paid at least $450 in salary and wages (before tax) in a month. It doesn't matter if you work casual, part time or full time hours. You can also be eligible if you are a contractor working primarily for labour (eg. graphic designer).

Step 2

Check your last Member Statement from your super fund, or contact them to confirm if your employer has paid your super.

Step 3

If you have completed steps 1 & 2 and still believe your employer is not paying enough or any super, and/or is not paying the super to your chosen fund, you can lodge an enquiry about unpaid super by phoning the Tax Office on 13 10 20.

Before phoning the Tax Office on 13 10 20 you will need to prepare information to help us record your enquiry. Please refer to:
What information do I provide when I lodge an enquiry about unpaid super?
What process does the Tax Office follow to investigate unpaid super enquiries?

Other ways to obtain unpaid super

If you lodge an enquiry with the Tax Office, we will take action on the information you provide.

Below are some other ways you can try to obtain unpaid superannuation from your employer. You can try to recover the superannuation that should have been paid to you directly from your employer.

If you areemployed under the federal workplace relations system (that is, if you are/were employed in the ACT, Northern Territory or Victoria, or you are employed by a company in another state or under a federal award or agreement), you can seek an order from an eligible court under the Workplace Relations Act 1996.

Alternatively, the Workplace Ombudsman may be able to help you if you have not received all of your workplace conditions and entitlements. The Workplace Ombudsman may get you to complete a Wages and Conditions claim form and pursue your entitlements on your behalf, including going to court, if necessary.

If you are employed under one of the state industrial relations systems (in NSW, Queensland, South Australia, Western Australia or Tasmania), each state has its own laws that enable the courts to order your employer to pay the amount of the shortfall to you or your superannuation fund.

I hope that you do not need to follow this process but in the current climate it might be worth looking into any unpaid super entitlement before it becomes too late.

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Other resource of interest

This week is The Financial Planning Association's - Financial Planning Week.

Their Good Advice website provides some useful information including how to choose and retain a financial planner, ability to ask an expert for free advice and real life case studies.

Well worth a look.

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Three Factor Model in Action
Dimensional Fund Performance Graphs updated to the end of April 2009

Since our last edition we have updated the Dimensional Fund Performance Graphs page on our website. The graphs show the performance of the Dimensional funds that we use to build investment portfolios for our clients. They have been updated to contain data up until the end of April 2009.

Commentary:

The graphs show growth in monthly returns over April for all asset classes.

Over the long run, the graphs continue to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist:

Australian Share Trusts - 7 Year returns:

	7 Yr Return to April 2009	Premium over ASX 200 Accumulation Index
ASX 200 Accumulation Index	8.48%	-
Dimensional Australian Value Trust	10.55%	2.07%
Dimensional Australian Small Company Trust	11.85%	3.37%

International Share Trusts - 7 Year returns:

	7 Yr Return to April 2009	Premium over MSCI World (ex Australia) Index
MSCI World (ex Australia) Index	-1.72%	-
Dimensional Global Value Trust	0.32%	2.04%
Dimensional Global Small Company Trust	2.42%	4.14%
Dimensional Emerging Markets Trust	10.16%	11.88%

NB - These premiums are higher than what we would expect going forward.

Please click on the following link to be taken to the graphs - Dimensional Fund Performance Graphs.

For anyone new to our website, it is important to point out that we build investment portfolios for clients based on the best available academic research. Take a look at our Building Portfolios and Our Research Based Approach pages for more details. In our view, this research compels us to use the three factor model developed by Fama and French. In Australia, the most effective method of investing using this model is through trusts implemented by Dimensional Fund Advisors (www.dfaau.com). We do not receive any form of commission or payment from Dimensional for using their trusts. We use them because they provide the returns clients are entitled to from share markets.

However, academic theory is nothing if it can not be implemented and provide the returns that are promised by the research. Therefore, we like to provide the historical returns of the funds that we use to build investment portfolios.

Please let us know if you have any feedback regarding these graphs by using the Request for More Information form to the right or via our User Voice feedback forum.

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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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Monday's Money Minute Podcasts

In the latest podcast Scott Keefer looks at recent share market performance and discusses the recent Dimensional presentation series.

25th May - Taking Stock - What Should Investors Do Now?

Click here to be directed to the Monday's Money Minute Podcast page of our website

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I 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,

Scott Keefer

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 Keefer

1 Park Road - PO Box 1688

Milton QLD 4064

(07) 3876 6223

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of FYG Planners Pty Ltd ABN 55 094 972 540

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