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Greetings!
Welcome to the latest edition of A Clear Direction's email newsletter.
Due to the uncertainty on markets of late it is very easy to put the issue of rebalancing on the back burner. In this issue we remind readers about the importance of recviewing your asset allocation.
Also in this edition we:
- look at the new Australian fear index - the S&P ASX200 VIX,
- update major investment market performance,
- outline recent additions to the online blog,
- look at an article from the archive - Winning in the retirement risk zone,
- outline recently published Eureka Report articles,
- provide details from the latest Westpac ASFA Retirement Standard report, and
- provide updated evidence of the three factor model in action.
This is the last edition of this newsletter that will be sent from the [email protected] address. In future emails will be sent through our [email protected] account. If you could set up your junk mail filters to take account of this change that would be appreciated.
Enjoy the read!
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A Quote for Consideration
"Most people think they can find managers who can outperform, but most people are wrong. I will say that 85% to 90% of managers fail to match their benchmarks, if you properly specify their benchmarks."
Jack Meyer, former Harvard Management CEO (Harvard University Endowment), credited with tripling the endowment from $8 billion to $27 billion during the 10 years he was at the helm. Excerpted from BusinessWeek interview
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Financial Topic - Portfolio Rebalancing: Is it worth it?
One of the few decisions you need to make as a buy and hold strategy is when to rebalance your portfolio. This is an important decision as it gets you into the habit of an important aspect of investing - buying at lower levels and selling at higher levels. Scott Francis in a recent Eureka Report article looks at the important aspect of rebalancing. ----- Several weeks ago I looked the overall impact of asset allocation on a portfolio before concluding that holding extra cash did not significantly reduce portfolio returns (see Would it kill you to own fewer shares?). Another strategy that deserves some serious consideration is the idea of portfolio rebalancing. This essentially involves investors committing to a target investment asset allocation and then buying and selling assets over time to maintain that allocation. Studies show that not only does this enhance portfolio returns slightly, but also reduces their volatility. On a practical level, that can be illustrated by considering the case of the investor who has a preferred portfolio design of 50% in growth assets (let's say Australian shares) and 50% in defensive assets (say cash, deposits and bonds). During periods of strong investment returns, the investor is faced with a portfolio that now has a 60% allocation to equities and a 40% allocation to cash. Rebalancing involves selling down some of the strong-performing equities to restore the target allocation of 50%. The next step is to let us consider a period of time where growth assets fall sharply in value. The portfolio might now be 40% growth assets and 60% in defensive assets. Bringing the portfolio back to a 50:50 split means using some defensive assets to buy more growth assets. Importantly, the key strength of this system ensure that the investor "buys low and sells high", which should be the aim of every investor. It is worth thinking about the great opportunities to purchase growth assets in the past - in the downturn of the early 1970s, the 1982 recession and after the 1987 stockmarket crash. Having a system that would have allowed you to buy growth assets at these times would have been useful in creating long-term wealth. A disciplined approach to portfolio balancing would have seen an investor purchasing growth assets at these low points, just as they would have when markets traded at less than 3300 points back in March 2009. The next question is: Does this strategy work?To read the rest of the article please click through to our website - Portfolio Rebalancing: Is it worth it? ----- So What's A Clear Direction's Approach to Rebalancing?
As with all investment decisions we see it as a client by client proposition however our general rule of thumb is to consider rebalancing when the broad defensive and growth allocations are 5% away from target allocations. Within each of these broad asset allocations, for instance when looking at Australian shares and international shares, within growth assets, we use a threshold of 2 to 3% away from targets to provide a trigger to consider rebalancing options at a client review meeting.
If you would like further information please do not hesitate to be in contact.
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Fascinating Financial Fact
Standard & Poor's / ASX 200 VIX
S&P have released a new index which seeks to measure the implied volatility of the Australian stock market using the settlement prices of the S&P ASX200 put and call options. This provides a reflection of investor sentiment regarding the expected volatility in the Australian share market. Put and Call options are in essence insurance contracts used to protect investors from changes in prices in future periods. By providing a measure of these options, S&P hope to provide insight into investor's perceptions of future risk / volatility in the market.
This is a similar offering to the CBOE Volatility Index that has been created in the US and is well known as the Fear Index.
It will be interesting to see how the S&P / ASX 200 VIX Index tracks over coming periods. The data has been back dated to the 2nd of January 2008. Over that period the data has shown that the index peaked at a level of 66.72 on the 20th of November 2008. (A higher level shows gretear levels of expected volatility in the market.) The minimum level of 15.46 was reached on the 24th of December 2009. Yesterday's closing level of 19.01 indicates that the expected volatility is relatively benign.
To find out more information about this index please refer to the following websites:
S&P / ASX 200 VIX - Information Page
ASX - Information Page
Return to Top
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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%.
As of October 5th the trailing P/E ratio for the S&P/ASX 200 was 16.44 . The dividend yield was 3.80%.
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 September was a level of 23.57 (Its most recent close was 18.96.) The 12 month closing low was 15.58 with the 12 month closing high of 45.79. Levels have remained around thge low 20s so far this financial year indicating that volatility is at reaonably low levels at present.
Market Indices (to the end of September 2010)
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| 3 Month | 1 Year | 3 Year | 5 Year | 10 Year | | Australian Shares | | | | | | | | S&P - ASX 200 (accum) | 4.62%
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8.04%
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0.61%
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-7.23%
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4.15%
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7.72%
| | International Shares | | | | | | | | MSCI World - Ex Australia (hedged) |
7.09%
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9.46%
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6.98%
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-8.30%
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0.20%
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-0.47%
| | MSCI World - Ex Australia (unhedged) |
0.51%
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-1.14%
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-2.14%
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-10.53%
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-3.12%
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-4.69%
| | MSCI Emerging Markets (hedged) |
7.74%
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12.88%
| 15.96%
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-0.58%
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11.96%
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13.05%
| | MSCI Emerging Markets (unhedged) |
2.14%
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2.96%
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9.58%
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-4.39%
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7.52%
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7.03%
| | Property | | | | | | | | S&P - REIT (accum) |
-0.90%
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3.85%
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-4.15%
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-24.21%
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-8.07%
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3.13%
| | S&P/Citigroup Global REIT - Ex Australia - World (hedged) |
5.12%
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13.93%
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23.69%
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-7.02%
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1.27%
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10.29%
| | S&P/Citigroup Global REIT - Ex Australia - World (unhedged) |
-2.13%
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1.73%
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12.63%
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-9.73%
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-2.90%
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4.58%
| | Currency | | | | | | | | AUS - US Exchange Rate |
8.40%
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13.42%
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9.84%
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3.08%
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4.89%
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5.93%
| | Trade Weighted Index |
5.65%
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8.32%
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6.89%
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1.36%
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2.42%
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3.86%
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The data shows a generally strong 1 & 3 month period across markets with renewed strength for the Aussie dollar eating into the performance of unhedged international investments.
General News
The following major economic data has been announced since the previous edition:
- The RBA kept official interest rates on hold at 4.50% in September & October.
- Business conditions have improved in September but confidence has dipped but both are in positive territory.
- Consumer sentiment dropped by 5% in September's reading but remains in positive territory.
- Unemployment remained at 5.1% nationally in September.
- Gross Domestic Product rose 1.2% in the June quarter to an annual rate of 3.3%.
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Not all planners' fees slug investors
Scott's Financial Happenings Blog - Posted 6 October
The main headline for Tuesday's Australian Financial Review read "Planners' fees slug consumers". If this did not get your attention it sure got mine. Leong Yeow provided the following analysis:
- Consumers are paying up to 3 times more in annual fees for financial advice since the changes banning commissions were introduced
- Percentage based fees are as high as 1.5% of assets under management
- Additional one-off upfront financial plan fees of $1,000 to $5,000 are being charged
You might think that as a financial planner I would be cringing at headlines such as these. Granted it is not good for the industry as a whole but personally my reaction is quite the opposite. It reminds me and hopefully my clients and future clients that A Clear Direction has been positioned to fight against the fee gouging that goes on through the industry.
So how do our fees stack up?
We would prefer to offer clients a flat annual fee that included all financial strategy and investment advice, capped at $4,400 p.a.. For some clients this flat fee is prohibitive so we also offer a fee based on a percentage of assets under management. The maximum fee that any client pays this firm is 0.55% of their assets under management. Research I have read suggests the average rate is more like 1.1% of assets under management.
We do charge one-off financial planning fees at a standard rate of $660 per annum, a little bit more for complex plans. We think this sits pretty well against the standard $1,000 to $5,000 being charged elsewhere.
One last point to cover is a definition for the term "Assets or Funds Under Management". For A Clear Direction this refers to the assets we manage on the behalf of clients. For investment clients and clients with their own Self Managed Superannuation Fund, we don't think we need to charge a fee to manage their cash assets so this does not fall under the assets we manage and therefore we do not charge a fee on this. We do however continue to provide these clients with guidance as to how to make these cash assets work as hard as possible for them.
Without wanting to beat our own drum (we acknowledge we are giving the drum a pretty good going over in this blog) we think our service offering and pricing is very competitive. In the end though, you need to find an adviser you feel comfortable with and who applies an approach to financial planning strategy and investment advice which you are at ease with.
Regards, Scott Keefer
Other blogs since the last edition have included:
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From the Archives
Winning in the retirement risk zone
This time last year Scott Francis provided insight for those close to retirement. With markets not moving far from the valuations reached last year and no major changes to the superannuation system to speak of, Scott's article is still relevant.
PORTFOLIO POINT: Minor changes to retirement plans can have a big impact on your situation.
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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: 29 September - Woolies buyback windfall - Even receiving a discounted price in the Woolworths' buyback, DIY funds in pension mode can book a profit of up to 18%.
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Website of Interest
Westpac ASFA Retirement Standard
Every quarter Weatpac in conjunction with the Association of Superannuation Funds of Australia (ASFA) publish a benchmark of the annual budget needed by Australians to fund a comfortable or modest standard of living in retirement.
The data suggests that couples seeking a comfortable retirement require an annual income of $53,565 whilst those seeking a modest retirement lifestyle will require $30,399. Singles should look for an income of $39,081 for a comfortable lifestyle whilst a modet retirement will requirean annual income of $20,973.
The data is based on home owners and breaks the annual income down into more specific components. The resource is very useful in defining what is one of the trickiest questions in planning for retirement - how much income will I need. After defining this amount it is not a huge leap to determine what level of financial assets will be required to sustain that level of annual income.
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Three Factor Model in Action
Dimensional Fund Performance Graphs updated to the end of September 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 September 2010. Commentary:
The graphs show a strong month of returns for all asset classes. However the premiums from investing in the value, small and emerging markets areas of markets have shrunk since our last report.
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:
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7 Yr Return
to July 2010
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Premium over ASX 200
Accumulation Index
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ASX 200 Accumulation Index
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11.91%
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-
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Dimensional Australian Value Trust
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13.04%
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1.13%
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Dimensional Australian Small Company Trust
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14.03%
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2.12%
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International Share Trusts - 7 Year returns:
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7 Yr Return
to July 2010
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Premium over MSCI World (ex Australia) Index
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MSCI World (ex Australia) Index
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1.52%
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-
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Dimensional Global Value Trust
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3.07%
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1.55%
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Dimensional Global Small Company Trust
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3.42%
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1.90%
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Dimensional Emerging Markets Trust
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14.43%
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12.91%
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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: [email protected] 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.
Until next time!
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. |
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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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