Blame it on the ETFs

ETFs - punching bag
 
They’ve been described as worse than communism, and more dangerous than the misuse of antibiotics. Some would have you believe that they cause trading glitches, are making the market dumb and dysfunctional and are leading the world toward imminent catastrophe.

It’s no coincidence that the groups most threatened by the groundswell of money into ETFs and index investing are also their staunchest and most vocal opponents. Any time there is hostile press on ETFs, you can be sure the author behind it is an active fund manager.

The irony is that the job of active fund managers is to identify and profit from market anomalies and trends. Yet they are ostriches in the sand when it comes to the colossal shift in their own industry.

The trend out of active management into indexing started gaining pace in the early 2000s. The pace has been accelerating since 2009. Regulatory change around best interests duty and growing awareness of the benefits of low-cost investing have both contributed to the success of indexing and ETFs.

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Our wealth management principles

Stockspot wealth management principles
 
Stockspot has a set of principles that guide how we advise clients and invest their savings. This is our DNA and what sets us apart from other products and investment managers.

The importance of compounding returns

Market timing or picking the right stocks is almost impossible to do consistently, even for experts. It is far more important to be invested for a sensible amount of time across a broad range of different investments.

The assets you’re invested in determines 89% of your returns. Therefore the investment strategies we recommend are designed to weather different market conditions by combining assets in the best possible combination based on your personal financial goals and situation.

We focus on helping clients achieve long term compounding returns without needing to time the market or pick individual stocks.
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The importance of Australian shares in your portfolio

Australian shares - ASX
 
Over the past 5 years US shares delivered a whopping 21% per year compared to a more modest 11% per year from Australian shares. This has led to a swarm of investors flocking into overseas shares and global ETFs.

With all of the talk about Google, Apple, Amazon and Facebook you could be excused for thinking that investing in Australia was no longer the thing to do.

In spite of the excitement around overseas markets, Australian shares still form a key part of our portfolios. We believe they should remain the dominant growth asset for Australian based investors.

There are many reasons to continue owning Australian shares but here we’ll focus on two.
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Unpopular ETFs surge ahead

2017 Australian ETF Report
 
It’s that time of year when Stockspot releases its annual Australian Exchange Traded Funds (ETF) Report which analyses and compares over 150 ASX-listed ETFs.

The report is now in its third year and each time it grows as more ETFs are launched on the ASX. We think that’s a great thing as it means more people are embracing index investing for their portfolios and superannuation.

The ETFs we’ve carefully chosen for the Stockspot portfolios and themes continue to do well. We recently celebrated our third anniversary and you can read how our portfolios have performed here.

If you’re interested in reading about the different ETFs available we recommend you download the full report. Here are some of the main findings from this year’s report.
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Finding freedom from the Bank of Mum and Dad

Parent and child - Future Affordability Report
 
Financial freedom is the most important factor in our ability to achieve our lifestyle goals and lead our life the way we should reasonably expect to. Yet, this is no longer guaranteed for future generations.

According to the 2016 HILDA Report, future generations of young people in Australia are, for the first time, set to be worse off than their parents.

To help understand parents’ views on their children’s financial future, Stockspot has partnered with Galaxy Research to produce the Future Affordability Report. We looked into parents’ concerns about young people’s finances, the cost of housing and living, and what do they think the fallout will be in later life for their children and themselves.
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How reliable is past performance?

Rear view mirror
 
If you’ve ever read the fine print of a product disclosure statement (PDS) for a financial product, you’ve almost certainly seen ‘The past is not a reliable indicator of the future’. Admittedly, we even put it in the Stockspot documents because we’re obliged to do so.

But in fact past returns can give you a much better idea about future performance than almost anything else. Markets tend to move in cycles so when one asset does well for a while that’s almost always followed by a period of doing worse. It’s known as mean-reversion and it’s why we rebalance our client portfolios out of investments that are up, into ones that have lagged.
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Stockspot celebrates 3 years…

Stockspot celebrates 3 years
 
This month marks the third anniversary since we started investing for clients. We’re humbled to have the opportunity to help thousands of Australians grow their savings every day.

Today our clients range from 18 to 80. They come from Alice Springs in the centre to Kalgoorlie in the west, Swansea down south in Tasmania and Townsville in North Queensland.

As we promised on day one, our investment philosophy and strategy haven’t strayed. Rather than trying to time the market or pick stocks (an expensive and dangerous endeavour), we’ve generated our consistent returns with a strategy based on decades of evidence and by not changing course.
We strongly believe that the most sensible investment advice for most people is to avoid trying pick winners, invest in a broad mix of assets, keep your costs low, rebalance occasionally to reduce risk and don’t worry about what happens in the short term because it’s meaningless noise.

This is a philosophy I’ve learned from my own years of investing and it’s one echoed by industry veterans like Warren Buffett, Charles Ellis, Burt Malkiel, Daniel Kahneman and many others…
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What are the best dividend ETFs?

Dividend ETFs and Dividend Harvesting
 
A client recently asked us if Stockspot would consider adding a pure income producing ETF to our portfolios to take advantage of ‘dividend harvesting’. We thought it was a great question so decided to share the answer with everyone!

Dividend harvesting is a strategy that involves buying shares just before they pay dividends and selling them just after dividends have been paid. At face value this sounds like a very sensible way to collect dividends without having to hang onto shares for too long.

However, like any investment strategy that involves timing your entry and exit points, dividend harvesting has risks. The biggest risk with dividend harvesting is shares tend to fall in price on the day they pay their dividend. Therefore any amount you gain in the dividend is likely to be lost on capital returns.
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How portfolio rebalancing works

Rebalancing scales
 
Portfolio rebalancing is one of the most important jobs of an investment adviser. It involves selling investments that have grown faster than others in your portfolio and buying more of the investments that have fallen behind.

Portfolio rebalancing helps reduce the risk you need to take to earn a certain level of return. Portfolio rebalancing can be expensive, time consuming and emotionally exhausting to manage yourself. This is why rebalancing is hard to get right as a DIY investor.
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3 fintech ingredients to make 2017 great

Ingredients for Australian fintech
 
At the start of 2017 I was appointed to the ASIC Digital Advisory Committee which consists of members from the fintech ecosystem and government. I hold strong opinions on the topic on good financial advice so naturally I attended my first meeting eager to contribute!

The ‘Fintech in Australia’ report by Frost & Sullivan predicts revenue from the Australian fintech sector will grow at a compound annual growth rate of 76% and reach A$4.2 billion by 2020. The potential of fintech to create competition, innovation and jobs for a 21st century Australian economy is huge and worth campaigning for.

So after hearing the views of many fintechs, government and consumer advocacy groups, here’s my top 3 ingredients to drive Australian fintech forward in 2017.
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Why you shouldn’t feel bad about renting

Renting a property
 
The property market is rarely out of the news in Australia, with regular predictions of house prices collapsing being followed by weekends of record auctions and prices.

Property has certainly had a good run over the past few years. According to CoreLogic RP Data, the average house in Sydney has increased in value from $650,000 in 2012 to over $1,066,000 in 2017. That’s a 64% rise in 5 years!

Average house prices in major Australian cities
Sources: CoreLogic RP Data; RBA

As property has become less affordable, more people are looking at a popular alternative which is to rent and invest their savings in a portfolio of shares instead.

Over the last 30 years, both property and shares in Australia have returned between 11.0% and 11.5% per year so both are proven ways to grow your long term wealth.

But which is better today?
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What I’ve learned from 21 years of investing

21 years of investing
 
It’s been 21 years since I made my first investment on January 1st 1996. At the time I was 10 years old. Not your standard primary school hobby.

I was sport obsessed and starting to realise girls weren’t as annoying as I thought, but for some reason I quickly became fascinated by what made share prices go up and down.

Neither of my parents worked in finance but I was lucky that my dad had some shares in his self managed super fund and decided to teach me and my brother some of the basics. He let us choose a stock from the newspaper and gave us $1,000 (which later, to my dismay, I found out was only theoretical).

I had a few stock market wins, a few losses and I was hooked!

I kept a diary of every investment I made between 1996 and 1999 which I still have today. It looks more like a colouring-in book than a trading diary because I gave each stock a different set of colours – but in it I kept track of my running profit or loss, dividends and company news cutouts.
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The rise of socially responsible investing

Ethical investing
 
You may have heard some murmurs about socially responsible investing recently.

Given 2016 was the hottest year on record, Australia claiming the highest the gambling rate in the world and the recent scandals about labour standards, it’s fair to ask yourself:

“Are the companies I invest in helping the world?”

Enter socially responsible investing (SRI)

Known as ethical investing, sustainable investing or green investing, socially responsible investing is an investment strategy that considers both financial return and social good to bring about social change.

Its history is believed to date back to the Quaker Society in the late 18th Century when members were banned from participating in the slave trade. Seems fair enough today. Back then, it was a bold statement.

Fast forward a few hundred years we saw people question the ethics of companies during the Vietnam War. Dow Chemical, a napalm producer, was boycotted and the subject of protests across America for its war profiteering when a photo was released of a nine-year-old girl running naked and screaming with her back on fire from the napalm dropped on her village.

Recently fast fashion brands like H&M and Zara are under scrutiny for labour rights violations, some ethical funds have stopped investing in these brands.
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ETFs trump managed funds in 2016

ETF Update - Quarter 4, 2016
 
Our quarterly update on the Australian ETF market as at December 2016 and performance of the Stockspot portfolios.

ETF market highlights

  • Quarterly FUM growth was +7%, from $23,971 million at the end of September to $25,291 million at the end of December 2016.
  • Total ETF FUM has now reached the $25 billion milstone, including adding almost $4.3 billion in 2016.
  • The top 5 ETFs for the past 12 months have all been resources focused, reversing a 5 year period of underperformance since 2010.
  • After some US election volatility, Australian and global share ETFs showed steady inflows during November and December.
  • Overall we have seen another positive quarter for ETF FUM growth and returns, continuing the steady drive forward of the Australian ETF market.
  • Globally investors have put more money into ETFs than actively managed funds in 2016 for the 10th straight year.

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What is a MDA Service and how does it work?

Question - What is a MDA service?
 
When you invest with Stockspot, you sign-up online and answer some questions about your financial goals and personal circumstances, then you’re asked to review and sign an MDA Agreement before you can invest.

At this point, you ask yourself what is an MDA Agreement and what exactly am I tying myself into?

A good question you should ask before using any financial product is how exactly does the product work, is it the best product for me and is my money safe?

Here’s what a MDA service is, how your money is secured and why we think our MDA is the best way for many people invest.
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2016 : Stockspot end-of-year update

2016 update
 
Back in 2013 I left my job as a portfolio manager to start a better wealth management service for Australians. It’s hard to believe Stockspot has now been up and running almost 3 years.

It is something I am immensely proud of and I want to thank the thousands of clients who have been on the journey with us. In 2014 when we launched, automated investing and robo-advice were new in Australia so we appreciate the support of our early clients who trusted us to help manage their savings.

We’ve generated annualised net returns for those early clients of 6.2% to 9.2% per year with much lower fees than traditional managed fund options. At the same time our portfolios have been much less risky than just owning Australian shares.

We’re also thankful to the 22,000 people who have subscribed to our newsletter for our monthly investment insights. And none of it could happen without the tireless effort of the Stockspot team.
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Why you won’t beat the share market (but many still try)

Won't beat the share market

Four things you will learn:

  • Why picking stocks or trying to time the market is pointless
  • Why fund managers have become ‘the market’ (and what that means)
  • How behavioural biases lead us to make bad investment decisions
  • Why index investing is the smart investor’s choice

The US election is the perfect demonstration of the futility of trying to beat the share market.

Those who tried to time their market entry were whipsawed in all directions, share markets initially fell 6% before staging an 8% recovery to close up for the week. Not only did most ‘experts’ call the election result wrong, they completely misjudged the impact that Trump would have on markets.

Meanwhile those with portfolios focused in popular yield-sensitive sectors of the market like property saw their investments crushed due to events in bond markets that were completely outside of their control.

None of this is unusual… time after time, finance commentators have their predictions proved wrong by the market. Those who try and beat the market by timing entry and exit points, or picking stocks or sectors, are outsmarted by each other.

So why is it so difficult for even the experts to get it right?
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Investment update: US election

US election
 
Does this feel like deja vu? After the market reaction to Brexit earlier this year, the US election result seems like we’ve been down this road before.

Unexpected political result causes wild market movements

Before you make any investment decisions based on politics, it’s worth considering what it actually means for your investments over the long-run. The answer, which may surprise you, it’s actually very little.

Market commentators and your emotions may lead you to believe the different policy positions (and personalities) of the candidates will lead to different market returns. However, history repeatedly shows us markets will overreact in the short term and pay no attention after that. In fact, investment markets often move in the opposite direction to what you would expect due to currency movements or because everyone is already positioned one way.

Take Brexit as a perfect recent example. After the surprise Brexit result, which was considered by many ‘investment experts’ to be a disaster for the UK economy, British shares rose 25% over the next 3 months.
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Are your savings going backwards?

going-backwards-banner
 
Have you ever thought you were doing something good for yourself only to find out it was having the reverse effect? Like having a caffeine-hit only to end up in an even bigger slump, or dry-cleaning that expensive jacket and having it returned ruined. Unfortunately the same can be said for many Australians who keep their savings in a high-interest bank account.

If the prices of the things you want are rising faster than the interest you’re receiving, you’re actually going backwards. This situation is now common for many Australians because interest rates have fallen to a historic low and are now below the rate of inflation.

This means that each year you’ll be able to buy less stuff with the same money than you could the year before.
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Australian ETFs add $10 billion in 2 years

ETF Update - Quarter 3, 2016
 
Our quarterly update on the Australian ETF market as at October 2016.

Highlights

  • ASX-listed ETFs have added $10 billion in new funds under management since October 2014, representing 31% p.a. growth.
  • Quarterly growth of ETF funds under management was 7%, from $22,404M in June 2016 to $23,971M by the end of September 2016.
  • After some volatility in the first half of September, the Australian share-market stabilised near a 12 month high.
  • Gold and small Australian shares have performed best over the last year with oil, ‘Bear’ and some currency ETFs performing worst.
  • Fixed income ETFs continued to attract new funds at the fastest rate of all sectors as more investors and Self Managed Super Funds (SMSFs) add fixed interest to their portfolios to balance equity risk.

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What is an ETF?

What is an ETF?
 
At Stockspot we believe Exchange Traded Funds (ETFs) are the building blocks for the best investment portfolios.

ETFs have been around for roughly 20 years and are fast becoming the most popular investment option. Each year more money leaves managed funds and goes into ETFs. This is because they can easily be traded on the stock exchange, they’re low cost and offer instant diversification.
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$59 billion trapped in Fat Cat Funds

2016 Fat Cat Funds Report
 
Our latest Fat Cat Funds Report, the largest analysis of superannuation and managed funds in Australia, has found that the money managed by Fat Cat Funds increased to $59 billion, up from $53.5 billion in 2015.

We believe Australians deserve greater visibility around where their money is invested and how it is performing so we have been producing this report to highlight the issues of high fees, poor transparency and conflicts of interest within the investment industry.

This is the 4th year we’ve run the report and this year we compared a record 3,800 funds to assess how they have performed after fees.

Unfortunately for consumers, almost nothing has changed since our first report in 2013 as the big 4 banks and AMP continue to dominate the distribution of Fat Cat Funds.
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Why you shouldn’t rush into tech stocks

Chasing tech stocks
 
It’s easy to get swept up in the hype of a hot sector, but there are big dangers when the music stops.

Investing in the hot stock or sector de jour is a always strong temptation, especially in markets where there are very clear winners and losers. These days global technology is that hot sector – particularly the big US tech giants. They’ve all doubled, tripled or quadrupled since 2012 so have easily beaten the broad market. Their returns have trounced Telstra, BHP and Woolworths.
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