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Greetings!
Welcome to the latest edition of A Clear Direction's email newsletter.
The end of financial year is almost upon us so we start this email with a few strategies to consider. If you missed our 2011 Budget - Personal Finance Summary please click on this link.Also in this edition we:
- look at two great charts depicting world market capitalisations and developed market equity returns year by year over the past 25 years,
- update major investment market performance,
- take a look at the schemes that fail investors more than others,
- outline recent blog entries,
- look at an article from the archive - 10 costly tax mistakes,
- outline recently published Eureka Report articles,
- provide a link to ASIC's new financial guidance website - Money Smart, and
- provide updated evidence of the three factor model in action.
Enjoy the read!
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A Quote for Consideration
"Those who are ignorant of investment history are bound to repeat it. Historical investment returns and risks of various asset classes should be studied. Investment results for an asset over a long enough period (greater than 20 years) are a good guide to the future returns and risks of that asset. Further, it should be possible to approximate the future long-term return and risk of a portfolio consisting of such assets."
William Bernstein, "The Intelligent Asset Allocator"
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Financial Topic - End of Financial Year Strategies to Consider
The end of the financial year is an ideal time to consider your financial structuring for the year ahead. However if you have not yet put plans in place for this financial year it is not too late to put them into action. Here are some strategies to consider and as always, please seek individual financial advice before taking any action.
- Making a personal contribution of up to $1,000 into super to receive the government co-contributions.
- Making non-concessional contributions into super to get these assets into a tax friendly environment
- This can include an in specie transfer of assets if you use a fund that allows this
- Making a concessional contribution into super to reduce tax payable on income and get assets into a tax-friendly environment
- Making a contribution into your spouse's super fund if they are a low income earner and by doing so receiving a tax offset whilst also getting assets into a tax friendly environment
- Bringing forward any relevant tax deductions
To find out more details please take a look at our page - End of Financial Year Strategies to Consider
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Fascinating Financial Fact
World Market Capitalisations
The following is a great chart looking at market capitalisations of major world markets in US dollar terms as at the end of December 2010.
The chart shows that Australia was only 3% of the entire world market. Some might ask why then do we suggest that Australian shares make up 50% or more of recommended growth asset allocations? Our investment philosophy takes into account research suggesting that the franking credit benefits offered by Australian shares are not fully reflected into the value of Australian shares as they are not available to non-residents. This suggests that over the long term there is an extra benefit from holding Australia shares for residents of Australia. However we also acknowledge that including international shares provides diversification benefits for a portfolio. Click on the following link to view a full sized pdf copy - World Market Capitalisations 25 Years of Equity Returns for Major Developed Nations The following table provides a really interesting way to look at year by year returns for 18 of the major developed equity markets in the world over the past 25 years. 
The take away is the great fluctuation in performance from year to year. Australia has had very strong years such as 2001, 2002 and 2009 but years like 2008 remind that only investing here is by no means a sure bet to get better investments than if investing in other nations. Another reminder of the importance of diversification
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 30th April the trailing P/E ratio for the S&P/ASX 200 was 15.23. The dividend yield was 3.86%.
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 April was a level of 14.75. (Its most recent close was 17.38.) The 12 month closing low was 14.62 with the 12 month closing high of 45.79. In 2010, S&P introduced the ASX200 VIX. The level of the index on the 25th of May was 15.92 with a 52 week high of 34.23 and low of 12.16 suggesting that expectations of future volatility are relatively low. For more information on how the VIX is calculated please take a look at - http://www.asx.com.au/documents/products/vix_fact_sheet.pdf
Market Indices (to the end of April 2011)
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April
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3 Month
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1 Year
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3 Year
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5 Year
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10 Year
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Australian Shares
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S&P - ASX 200 (accum)
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-0.29%
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2.73%
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4.58%
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-0.49%
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2.60%
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8.20%
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International Shares
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MSCI World - Ex Australia (hedged)
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2.43%
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4.12%
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11.96%
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-0.78%
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0.80%
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2.09%
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MSCI World - Ex Australia (unhedged)
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-1.62%
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-2.94%
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0.23%
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-5.07%
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-4.65%
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-3.52%
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MSCI Emerging Markets (hedged)
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0.83%
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3.71%
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14.38%
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2.40%
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8.86%
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14.89%
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MSCI Emerging Markets (unhedged)
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-2.57%
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-1.47%
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2.64%
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-2.31%
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2.09%
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8.03%
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Property
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S&P - AREIT (accum)
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0.30%
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1.65%
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1.11%
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-15.63%
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-9.37%
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2.75%
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S&P/Citigroup Global REIT - Ex Australia - World (unhedged)
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0.10%
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-0.21%
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7.61%
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-3.52%
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-4.19%
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3.89%
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S&P/Citigroup Global REIT - Ex Australia - World (hedged)
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4.77%
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7.90%
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22.16%
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1.33%
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2.23%
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11.33%
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Currency
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AUS - US Exchange Rate
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5.48%
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9.83%
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17.20%
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5.29%
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7.64%
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7.92%
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Trade Weighted Index
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3.41%
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6.62%
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8.83%
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3.71%
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4.67%
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4.84%
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The data shows a strong month for the Australian dollar and hedged international exposures. Australian shares and unhedged international exposures struggled.
General News
The following major economic data has been announced since the previous edition:
- The RBA kept official interest rates on hold at 4.75% in April.
- Business conditions and confidence both softened April. Both remain in positive territory,
- Consumer sentiment fell 1.3% in May's reading and has fallen 3.7% over the past 12 months. It remains in positive territory.
- Unemployment remained steady at 4.9% nationally in April.
- The Consumer Price Index rose 1.6% in the March quarter providing an inflation level of 3.3% for the past 12 months.
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The schemes that fail investors
Scott's Financial Happenings Blog - Posted 19 May
Reports are being published today relating to a study conducted by an independent market research company commissioned by the Australian Securities & Investments Commission. ASIC commissioned the study to better understand the personal consequences of investors not being fully compensated and to help inform submissions to the government review into whether a statutory compensation scheme should be introduced in Australia.
The following is taken from Andrew Main's report in The Australian -
Move to compensate investors for bad financial advice
Among key findings were that investors who suffered the most had invested all their money, had not diversified or went into debt as part of their investment strategy....
Most investors' losses were associated with an underlying product that was either frozen or collapsed, and the impact of the monetary loss was immediate on investors who did not have a financial buffer. For others, the first six months from when they discovered their loss were critical.... Every single investor in the worst affected category, which usually involved losing their house, reported serious illness following the financial loss.
The key point I took away from the reporting of this study was that the worst-affected investors covered by the new study were in the following types of scheme: - inner city unit developments,
- mortgage investment schemes,
- rural managed investment schemes such as forestry or horticulture,
- structured investment such as hedge funds and infrastructure funds, and
- investors who geared up against their home equity and took out margin loans to invest in assets which lost value.
My heart goes out to those who have been hurt by dreadful financial advice and I hope that the government can implement a structure to support those who were mislead or deceived. It is also important that we all learn from the terrible misfortune of others and make sure that we are careful to properly investigate investment options and seek a second or third opinion if there is any doubt. At A Clear Direction you can be assured that none of these investment options are in our preferred investment portfolio structure.
Regards,
Scott Keefer
Other blogs since the last edition have included:
23rd May Inflation rate for retirees running hotter than the ABS figures suggest 19th May Tax Effective Schemes 17th May Is time your most precious resource? 15th May Successful economies don't mean great share returns 11th May Costs do matter 11th May Understanding the psychology of investing 11th May 2011 Budget - Personal Finance Summary |
From the Archives
10 costly tax mistakes
Following on from our feature item for this newsletter we look at tax mistakes to be avoided. This Eureka Report article written in 2010 looks at 10 issues to consider.
PORTFOLIO POINT: The clock is ticking to the end of the financial year. Here are 10 of the most common mistakes and how to avoid them. |
Eureka Report articles
Since our last edition Scott Francis has contributed a further two articles to Alan Kohler's Eureka Report. Click on the links below to be taken to these items:
20/05/2011 - The tax rise no one noticed - Back-of-the-envelope calculations reveal that the failure to index the tax-free threshold delivers the government an additional $3 billion every year.
11/05/2011 -Retirees' handy bonus - The work bonus detailed in the budget adds to the government's theme of flexibility for retirees.
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Website of Interest
ASIC's MoneySmart website
Earlier this year ASIC replaced their FIDO website with the MoneySmart site. The site looks at the following topics:
- Managing my money
- Borrowing & credit
- Superannuation & retirement
- Investing
- Scams
It also contains a very useful tools and resources sections with a range of calculators available.
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Three Factor Model in Action
Dimensional Fund Performance Graphs updated to the end of April 2011 Since our last ed  ition we have updated the Dimensional Fund Performance Graphs page on our website. The page has been updated to also include periodic performance data for the previous 1 month, 3 months, 6 months, 1 year, 3 years, 5 years and 10 years. We hope that this data provides more detail to allow a comparison with other investments. Now that we have more than 10 years of actual performance data available we have chosen to show 10 year growth of wealth graphs and average performance bar charts. Commentary:
The graphs show a negative month of returns for all asset classes with all of the risk premiums under-performing the large company benchmarks.
Over the long run, however, the data continues to clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist:
Australian Share Trusts - 10 Year returns:
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10 Yr Return
to April 2011
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Premium over ASX 200
Accumulation Index
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ASX 200 Accumulation Index
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8.20%
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-
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Dimensional Australian Value Trust
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11.82%
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3.62%
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Dimensional Australian Small Company Trust
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12.15%
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3.95%
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International Share Trusts - 10 Year returns:
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10 Yr Return
to April 2011
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Premium over MSCI World (ex Australia) Index
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MSCI World (ex Australia) Index
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-3.52%
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-
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Dimensional Global Value Trust
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-0.97%
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2.55%
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Dimensional Global Small Company Trust
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1.95%
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5.47%
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Dimensional Emerging Markets Trust
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7.95%
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11.47%
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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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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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