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Greetings!
Welcome to the latest edition of A Clear Direction's email newsletter.
After early 2010 jitters, investment markets have steadied through the back end of February and throughout March. However there remains significant threats to the global economy, not to mention potential tax law changes here in Australia in coming years, making the task of short term investing fraught with dangers. It is easy to get swept up in the fear or euphoria that is prominent at a point in time and as a consequence make rash investment decisions.
At A Clear Direction our approach is all about the building of portfolios for the longer term. In this edition we want to take readers back to the research document we have developed to support the way we see the investment world - Our Research Based Approach.
Also in this edition we:
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explain the Rule of 72,
-
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 the benefits of Family Trusts,
- provide a link to a new resource for self managed super fund trustees, and
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provide evidence of the three factor model in action.
We are also pleased to announce that A Clear Direction has moved locations and is now based in the Brisbane CBD:
Level 24, AMP Place
10 Eagle Street
Brisbane QLD 4000
Ph: (07) 3379 6068
This change also provides us with office locations throughout major cities in Australia. If these new arrangements are more convenient for you and you are interested in discussing your financial situation with us in more detail please do not hesitate to be in contact.
Finally, we would like to wish readers a safe and enjoyable Easter period and as always, enjoy the read! |
A Quote for Consideration
"These
results add up to perhaps the most important investment lesson of all that can
be drawn from this week's market anniversaries: Predicting turns in the market
is incredibly difficult to do consistently well. That means that, if your
investment strategy going forward is dependent on your anticipating major
market turning points, your chances of success are extremely low."
Mark Hulbert, "Fools R Us", MarketWatch, March 10, 2010
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Financial Topic - Our Research Based Approach
I think everyone would agree that the most important rule for all investors, no matter what your personal philosophy, is that you have a plan based on evidence and you stick to that plan unless you find conclusive data to suggest otherwise. It's those investors with no plan, running on fear and greed that tend to get caught out by the markets and achieve below average returns as reported by such studies as Dalbar's Quantitative Analysis of Investor Behavior. For those who have followed this firm's philosophy, you will realise that our investment approach is built on scientific, peer reviewed research coming out of Australian and international universities. This research reminds us of the following key aspects:
Putting all of this together brings us to the position of building robust investment portfolios as set out on the Building Portfolios page of our website.
What Does This All Mean for Investors?
To take the unnecessary stress out of investment decision making, consider applying an investment approach based on timeless scientific research into investing and most importantly beware relying on the latest trends and fads.
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Fascinating Financial Fact
The Rule of 72
This simple rule helps us to quickly estimate the time that it will take to double an investment. What you do is divide 72 by the return you expect to earn each year or other period of time. This will provide you with the number of years that it will take to double your investment.
For example, if our expected return was 9% per annum, it should take 8 years (72 / 9) to double our initial investment.
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 March 23rd the P/E ratio for the S&P/ASX 200 was 17.84. The dividend yield was 3.35%.
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 February was a level of 19.5. 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 30th of March was 17.13)
Market Indices
|
February |
3 Month |
1 Year |
3 Year |
5 Year |
10 Year |
Australian Shares |
|
|
|
|
|
|
S&P - ASX 200 (accum) |
2.16% |
-0.56% |
44.70% |
-3.20% |
6.68% |
8.35% |
International Shares |
|
|
|
|
|
|
MSCI World - Ex Australia (hedged) |
1.96% |
2.06% |
46.90% |
-7.26% |
1.26% |
-0.81% |
MSCI World - Ex Australia (unhedged) |
0.06% |
1.28% |
9.68% |
-10.43% |
-0.93% |
-3.48% |
MSCI Emerging Markets (hedged) |
-0.15% |
-0.52% |
64.74% |
4.36% |
12.73% |
9.46% |
MSCI Emerging Markets (unhedged) |
-0.39% |
0.68% |
36.71% |
-0.52% |
9.65% |
4.95% |
Property |
|
|
|
|
|
|
S&P - REIT (accum) |
1.46% |
1.87% |
40.57% |
-23.91% |
-7.18% |
NA |
S&P/Citigroup Global REIT - Ex Australia - World (hedged) |
3.45% |
5.69% |
76.19% |
-15.02% |
1.33% |
11.02% |
S&P/Citigroup Global REIT - Ex Australia - World (unhedged) |
2.14% |
5.66% |
30.04% |
-18.31% |
-0.99% |
7.26% |
Currency |
|
|
|
|
|
|
AUS - US Exchange Rate |
-0.11% |
-3.04% |
37.88% |
4.14% |
2.40% |
3.78% |
Trade Weighted Index |
0.37% |
-0.67% |
26.66% |
2.43% |
1.51% |
2.45% |
General News
The following major economic data has been announced since the previous edition:
- The RBA lifted official interest rates by 0.25% in March.
- Business confidence and conditions rose in February.
- Consumer sentiment fell in February.
- Unemployment rose slightly in February.
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Index managers win over the long term
Scott's Financial Happenings Blog - Posted Monday 01 March
I hate to sound like a broken record but some
more data has been recently published by Standard & Poor which
provides evidence that an index based approach to investing will serve
you well. S & P have started to publish a bi-annual report
looking at the investment performance of active managers as opposed to
the benchmark S&P ASX200 and MSCI World ex Australia indices - Standard & Poor's Index Versus Active Funds Scorecard - Australia Year End 2009. Their second report has been
published this week and provides the following conclusions:
-
Over a five-year period ending December 2009,
respective benchmark indices have outperformed the majority of active
funds across the different peer groups covered by the SPIVA Scorecard.
In contrast for the 2009 calendar year comparative analysis of the
annual returns shows that a majority of active funds have outperformed
their benchmark across most peer groups.
There is some cause to cheer for active
managers as the results suggest that 2009 was a much better year on
average compared to the index. However the 5 year results still show
that more than 63% of active funds under-performed over that period.
That suggests that the performance from 2005 to 2008 must have been
particularly poor.
There has also been some cause to cheer for
small company funds showing a strong record over 5 years.
Five
years is still not a very long window but you would expect that over
even longer periods active managers perform even worse. The latest
report is even further evidence that an active approach to investing
increases the probability that you will perform worse than the average
investor return - i.e. the index.
A Clear Direction's approach is
to use index funds as they base and add to that small and value
exposures. Over the 5 years these exposures have provided after fee
premiums of:
Australian small company exposure
1.44% Australian value exposure
0.87%
Over 7 years these premiums are even greater.
The
results suggest the approach we are employing is positioning client
portfolios well above the returns being provided by active managers.Regards, Scott Keefer
Other blogs since the last edition have included:
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Website of Interest - Self-Managed Superannuation Funds - Trustee Education
For those readers who are self managed super fund trustees or are considering this alternative the following online education program is well worth a look. The Self Managed Superannuation Fund Trustee Education Program has been released by the Joint Accounting Bodies. The Joint Accounting Bodies consist of CPA Australia, the Institute of Chartered Accountants in Australia, and the National Institute of Accountants. This service has been provided free to members and trustees of self-managed superannuation funds.
This program is designed to educate trustees of SMSFs throughout Australia. It is designed according to the Australian Taxation Office's Trustee Declaration form to assist trustees in understanding their role and responsibilities.
Throughout this program, each element of the Trustee Declaration will be addressed. It will provide the key messages, key terms, legal jargon and present possible scenarios that trustees may encounter during their decision making processes as a trustee of a SMSF.
At the completion of this program, trustees will be able to understand:
- their roles and responsibilities within a SMSF
- the investment restrictions imposed on trustees of a SMSF
- the rules and limitations surrounding contributions and benefit payments within a SMSF
- the administration involved with a SMSF
At the conclusion of the training program, on successful completion of a small quiz, a certificate of attainment will be provided. Click on the following link to be taken to the site - http://www.smsftrustee.com
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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:
10 February - Australia's biggest losers - As investors paid active fund managers at Australia's biggest financial institutions to beat the market, they couldn't keep up. 24 February - Who'd want to be a millionaire? - Investment and pension income for retirees with smaller savings means they are only marginally worse off than those with seven-figure sums. 24 March - New paths to home ownership - As houses become harder to afford, buyers should consider new strategies to secure them.
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From the Archives The Case for Family Trusts
PORTFOLIO POINT: Investing
through a family trust gives people the flexibility, unlike
superannuation, of accessing money before they reach a certain age.
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Three Factor Model in Action Dimensional Fund Performance Graphs updated to the end of February 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 February 2010. Commentary:
The graphs show a flat month 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 Feb2010 |
Premium over ASX 200
Accumulation Index |
ASX 200 Accumulation Index |
15.58% |
- |
Dimensional Australian Value Trust |
18.80% |
3.22% |
Dimensional Australian Small Company Trust |
22.41% |
6.83% |
International Share Trusts - 7 Year returns:
|
7 Yr Return
to Feb 2010 |
Premium over MSCI World (ex Australia) Index |
MSCI World (ex Australia) Index |
3.64% |
- |
Dimensional Global Value Trust |
6.80% |
3.16% |
Dimensional Global Small Company Trust |
7.91% |
4.27% |
Dimensional Emerging Markets Trust |
17.94% |
14.30% |
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:
Clear Directions 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 this latest edition of Clear Directions. 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
Level 24, AMP Place 10 Eagle Street
Brisbane QLD 4000
(07) 3379 6068
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 | |
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