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Greetings!
Welcome to the first edition of A Clear Direction's email newsletter for 2010.
Investment markets have already provided their fair share of volatility making for a nervous start to the year.
In this edition we look at what history suggests are reasonable expectations for the years ahead.
Also in this edition we:
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look at S & P's Persistence Scorecard,
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update major investment market performance,
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outline recent additions to the online blog,
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provide a link to Scott Francis' latest Eureka Report articles,
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revisit the archives to look at financial planning's big six - investing regularly over time, repaying non tax deductible debt, borrowing to invest, salary sacrificing to super, transition to retirement strategy & income planning in retirement,
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provide evidence of the three factor model in action.
Enjoy the read!! |
A Quote for Consideration
"IN THE STOCK MARKET (as in much of life), the beginning of wisdom is admitting your ignorance. One of the many things you cannot know about stocks is exactly when they will up or go down. Over the long term, stocks generally rise at a nice pace. History shows they double in value every seven years or so. But in the short term, stocks are just plain wild. Over periods of days, weeks and months, no one has any idea what they will do. Still, nearly all investors think they are smart enough to divine such short-term movements. This hubris frequently gets them into trouble."
James K. Glassman, Co-Author of Dow 36,000 | |
Financial Topic - Reasonable Share Market Expectations
A lot of time and energy goes into forecasting the likely movements in share markets all around the world each day every day. This is all important work as it helps investors determine what is a fair and reasonable price for a particular investment. Unfortunately al through history events seemingly come out of the blue turning these forecasts on their head.
The approach at A Clear Direction is to focus on what are fair and reasonable expectations for various asset classes based on long term historical data and to work with clients to develop asset allocations that target the most appropriate outcome for them.
Recently Scott Francis has published an article in Alan Kohler's Eureka Report which looks at the topic of reasonable share market expectations. The following link will take you to Scott's article - Peaking Ahead - where he makes a number of major conclusions -
- past data suggests that a return of 10.3% would be reasonable on the Asutralian share market going forward
- this would suggest that the market would get to a level of 5,000 by the middle of 2009, 6,000 by 2013 and reclaim new highs (i.e. greater than 6,800) by 2016 That said, markets might move faster than this if earnings growth is greater than in the past and/ or the downturn of November 2007 to March 2009 was an overreaction. Of course markets could also move slower than the 10.3% used by Scott in the article.
What Does This All Mean for Investors?
If your approach is more actively inclined than this data will mean little to you. However if you are interested in building a plan around reasonable expectations then the analysis will be helpful in providing insight into how much you need to expose your portfolio to volatile growth style investments in order to achieve the goals you have set yourself both now and in the future.
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Fascinating Financial Fact
S & P Persistence Scorecard
Standard & Poors in the US produce a semi-annual report looking at whether mutual funds (managed funds in Australia) show ebidence of continued out-performance otherwise known as persistence.
Their latest report dated January 2010 looks at the 5 year window ending September 2009. What they found was:
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Very few funds manage to consistently repeat top-half or top-quartile performance. Over the five years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a topquartile ranking over the same period.
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Looking at longer term performance, 24.32% of large-cap funds with a topquartile ranking over the five years ending September 2004 maintained a top-quartile ranking over the next five years. Only 16.39% of mid-cap funds and 27.06% of small-cap funds maintained a top-quartile performance over the same period. Random expectations would suggest a repeat rate of 25%.
Basically the findings were that an investor had no better chance then luck of picking a fund managed fund based on good past performance that turned out to continue that out-performance into the future. Even though the study relates to American funds similar findings could easily be translated to Suatralian managed funds. Please clink on the following link to view the S & P Persistence Scorecard report for yourself.
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Market News
The purpose for including this section in the newsletter is not to provide a tool to decide in what to invest but rather as a guide to what has been happening recently on markets.
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%.
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