Thursday 11th February 2010
Clear Directions
In This Issue
Quote for Consideration
Financial Topic - Reasonable Expectations
Fascinating Financial Fact - S&P Persistence Scorecard
Market News
Savings - where it all starts
Other Website of Interest - InfoChoice
Eureka Report articles
From the Archives - Financial planning's big six
Three Factor Model in Action

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Top 
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:
  • look at S & P's Persistence Scorecard,
  • update major investment market performance,
  • outline recent additions to the online blog,
  • provide a link to Scott Francis' latest Eureka Report articles,
  • 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,
  • 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.
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:

  • 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.
  • 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.

Return to Top

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%.

 

As of February 2nd the P/E ratio for the S&P/ASX 200 was 15.41.  The dividend yield was 3.69%.


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 close for the VIX at the end of January was a level of 24.62.  This is slightly higher than the 12 month closing low of 17.55 but well off the 12 month closing high of  52.65.  (The latest close on the 9th of February was 26) 

 

Market Indices

 

 

January

3 Month

1 Year

3 Year

5 Year

10 Year

Australian Shares

 

 

 

 

 

 

S&P - ASX 200 (accum)

-6.18%

-0.93%

35.16%

-3.37%

6.69%

NA *

International Shares

 

 

 

 

 

 

MSCI World - Ex Australia

-3.50%

3.30%

31.07%

-8.24%

1.37%

-0.87%

MSCI Emerging Markets

-4.38%

2.90%

60.31%

4.18%

14.32%

9.62%

Property

 

 

 

 

 

 

S&P - REIT (accum)

-2.90%

1.40%

16.10%

-24.40%

-7.90%

4.10%

S&P/Citigroup Global REIT - Ex Australia - World

-4.05%

-5.21%

42.30%

-16.23%

1.16%

10.36%

Currency

 

 

 

 

 

 

AUS - US Exchange Rate

-0.67%

-2.75%

38.38%

4.89%

2.84%

3.39%

Trade Weighted Index

-0.72%

-2.12%

30.08%

2.75%

1.73%

2.14%

 * - 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:
  • RBA have left official interest rates at 3.75% at the February board meeting.
  • CPI (Inflation) rose by 0.5% in the December quarter and 2.1% for the year.
  • Official Unemployment fell to 5.5% in December.
  • Business confidence fell in December but still above long run average levels.
  • Westpac-Melbourne Institue Consumer confidence index fell 2.6% in February but is still 15.9% above long term averages.
  • Retail sales have fallen in December, well below expectations.
  • Investor sentiment has continued to rise according to the IFSA / Core Data index as at December 2009.

Return to Top

Savings - where it all starts
Scott's Financial Happenings Blog - Posted Monday 18 January
 
Most of us will not have the good fortune of winning the lotto nor coming into a significant amount of money through an inheritance.  The key to building wealth therefore will be about your ability to generate income, save a good part of that income and then invest those savings well.

Many of us put the cart before the horse by focusing on the investment stage of the process without realising that it is really the first two stages - generating income and saving - that will be the real determinants of our wealth in future years.

At the beginning of another year it is a great time to focus on the savings element of this equation to see whether you can wring out even more available funds from your take home pay / income.

"The Millionaire Next Door" written by Stanley & Danko in 1996 provide an interesting insight into the average millionaire in the US and how they have built their fortune.  They found that frugality was the foundation for building wealth and provided the following evidence of this frugality:

- self-made millionaires spend significantly less for suits
- the majority did not buy expensive shoes
- the majority did not buy expensive watches
- do not drive new cars and spend the same as the average person on car acquisitions

The book also provides some practical advice they found in their study of successful millionaires:

- Operate on an annual household budget
- Know how much your family spends each year for food, clothing and shelter
- Have daily, weekly, monthly, annual and lifetime goals
- Spend time planning your financial future

This discussion leads me to an interesting article I read in Sunday's Courier Mail - Losing billions in loose change .  the article quoted research that found "about $46 billion, or $2000 a person, was sitting in loose change jars, car consoles, piggy banks, shop tills, office floats and a corner of the purse and Ratecity said it was costing Australians as much as $2.5 billion in lost interest ... The average Australian could earn an extra $115 per year from interest if they deposited loose cash into a high-interest savings account"

It also found - "that Australians were losing $3.36 billion each year on comprehensive car insurance by not shopping around for a better deal."

So here are some practical examples of how we can all start to wring out some more savings this year - don't leave that spare change laying around and go back and check that you are getting a good deal with your car insurance.

There are many other strategies depending on your personal circumstances.  Three good sources of ideas to get you started are:

- Simple Savings - www.simplesavings.com.au
- Cheapskates - www.cheapskates.com.au
- Choice - www.choice.com.au

I hope this provides some useful tips for getting your savings plan off to an even better start in 2010.  Good luck and happing saving!

Regards,
Scott Keefer

Other blogs since the last edition have included:
 
7th February
8th February

9th February
Other Website of Interest - InfoChoice
 
With interest rates tending to be on the rise in Australia many of us are looking at where to source the best deal for savings accounts, term deposits and loans.  InfoChoice is an independent researcher into bank loan and deposit products has a website packed with free information including rate comparisons and loan calculators for different types of borrowers. Its information extends well beyond home loans to reverse mortgages and margin loans.
 
Click on the following link to be taken to the site - http://www.infochoice.com.au/
Eureka Report Articles

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

18 November -  Who's behind your financial adviser? - Too often, consumers think they are getting 'independent' financial advice when in fact it is a brand belonging to the big six.
 
02 December
 -  
AMP + AXA = Bad for investors - The investment monster that would be created by merging AMP and AXA would mean bad news for investors. 
 
07 December Value the sector not the stock -
Companies undervalued by the market can reward investors, but they can also trap the unwary.

  
23 December Something you must know about 2010 - As we head for a new year, investors should take a contrarian approach (and consider some international shares).

18 January - The January Effect - Investors who use returns in January to forecast yearly stock market movements should be extremely cautious.

20 January - Peaking Ahead - As the ASX 200 closes in on 5000 points, historical averages point to where it might go in 2010, and when it will reach new milestones.
 
From the Archives
Financial planning's big six - Eureka Report article October 2008
 
PORTFOLIO POINT: From regular investing to paying off debt, there are six basic elements of a financial planning strategy all investors should consider.
 
Three Factor Model in Action 
Dimensional Fund Performance Graphs updated to the end of January 2010
 
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 January 2010.
 
Commentary:
 
The graphs show a pull back in returns over the month for the Australian share asset classes with international share investments relatively flat for the month with Emerging Markets experiencing a fall.
 
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 Jan 2010

Premium over ASX 200

Accumulation Index

ASX 200 Accumulation Index

13.79%

-

Dimensional Australian Value Trust

16.53%

2.74%

Dimensional Australian Small Company Trust

20.15%

6.36%

 
International Share Trusts - 7 Year returns:
 

 

7 Yr Return

to Jan 2010

Premium over MSCI World (ex Australia) Index

MSCI World (ex Australia) Index

2.52%

-

Dimensional Global Value Trust

4.91%

2.39%

Dimensional Global Small Company Trust

6.40%

3.88%

Dimensional Emerging Markets Trust

16.76%

14.18%


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.
 
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. 
 
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 month!
 
Cheers,
Scott Keefer
 

Clear Directions 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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