The market has a tendency to surprise speculators, which is why most speculators lose out to investors over the long run.
We recently wrote about why we think blockchain has the potential to transform all sorts of industries including our own but also why bitcoin may not be a great investment right now.
Markets have a tendency to get ahead of themselves when it comes to valuing new technologies. Sometimes it’s not the early bird who gets the worm, but the second mouse that gets the cheese.
This leads us into a related topic – cryptocurrency!
We have been asked by quite a few clients what they are, how they differ and how an initial coin offering (ICO) works?
Following on from our discussion on whether you should invest in Bitcoin and the difference between investing and speculation, we share our tips on how to be a smarter speculator.
We know Bitcoin probably got mentioned at least once at your office Christmas party this year. It did at ours.
You might be feeling down that you missed out or envious others around you have hit the jackpot. That’s a normal feeling. Those types of emotions are the fuel that drives speculation.
Our advice on speculating in Bitcoin (if you can’t resist the temptation) is the same as the advice we would give on investing in any other undiversified risky asset like individual shares, equity crowdfunding or art. You should still follow a sensible investment process to give you the best chance of success.
Different asset classes have different jobs to do in your portfolio. Understanding what those jobs are will help you make sense of why all assets don’t rise at the same rate or the same time.
The 3 broad assets in Stockspot’s portfolios are shares, bond and gold. We explain the role of each in your portfolio and how they can balance each other at different times of the market cycle to smooth your returns and keep you invested to help reach your goals.
This year market volatility has been almost non existent. Share markets have risen with little sign of worry.
The US share market has only moved by 1% or more 8 times this year, the fewest since 1964. It has also gone more than a full year without a 3% move, which is the longest stretch on record.
Calm markets means 2017 may go down in history as the most boring year in market history.
This is of course fantastic news for investors who have enjoyed great returns and very few hiccups along the way. However, history suggests the current period of market calm won’t last forever. Chances are we are getting closer to the next period of volatility, even if we don’t know exactly when it will take place.
Whether you’re borrowing to invest in property, shares or a diversified portfolio of ETFs, the principles of borrowing to invest (also known as leverage or gearing) are similar.
Why would I borrow to invest?
Borrowing gives you the ability to invest more money than you currently have saved.
The basic idea is you can benefit if the value of what you’ve invested in rises more than the the interest you pay on the borrowed money.
People usually consider borrowing to invest for a couple of reasons:
To access the increase in the value of an investment over time without needing to pay for it entirely upfront, ie a house.
To access tax benefits – sometimes you can get a tax deduction for interest payments on the loaned amount when the interest is larger than any income earned. This is known as negative gearing.
We launched Stockspot Themes in April 2016 and became the first digital investment adviser in the world to offer a range of curated investment options that clients could use to personalise their portfolio. We’ve developed sophisticated portfolio tracking and risk management software to enable us to manage this.
Stockspot Themes have given our clients access to 1,000 different portfolio combinations and allowed them to include a range of different markets and assets.
We’ve carefully selected 14 theme options from over 150 different ETFs available on the ASX. These ETFs complement our model portfolios and offer additional diversification benefits across markets, assets, sectors and personal preferences (like socially responsible investing). You can see our methodology for selecting the best ETFs in our annual ETF report.
We’ve seen great take-up of Stockspot Themes, particularly from our individual and SMSF clients that want to have more control over where they are invested.
Investing isn’t scary, but a lot of people think it is
Risky, time consuming and emotionally exhausting. Sounds like a bad relationship or like attempting Everest. Not what most people would like to associate with growing their savings.
Unfortunately, these are the feelings many Australians associate with investing. When asked why they are not interested in investing, most Australians cite lack of knowledge, disinterest and fear.
Many people still have memories of the global financial crisis and the effect that had on their own investments or those of family and friends.
These are all natural and very human feelings. Loss aversion or fear of the unknown is something that has helped us survive through history – it’s evolutionary. However that same fear holds us back when it comes to investing. We refuse to take a well calculated risk that could immensely benefit and enrich our lives because we are fearful of losing money.
If this sounds familiar you are potentially missing the most effective way to grow your wealth.
It would be great if everyone started saving money early to take advantage of compound returns but it’s easy to see how people fall behind. The typical financial lifecycle involves saving up for a house deposit, having children, and all of the expenses that come along with raising a family.
Meanwhile for many people in their 50s and 60s, compulsory superannuation didn’t kick in until much later in life…
Plenty of parents reach the empty nest phase of their life once the kids are out of the house and slowly realise they are completely unready for retirement. The average superannuation balance for someone who is 50-54 in Australia is $142,644. That falls a long way short of the amount needed to generate a comfortable income in retirement.
Sometimes markets don’t go up or down, they go sideways. Sideways markets can last weeks or even years. They can be particularly frustrating for a long-term investor.
As time passes and markets don’t go anywhere, it can be tempting to change your investment strategy or switch into cash. However like driving in heavy traffic, switching lanes is unlikely to get you there faster. The best investors resist the urge to change strategy during these times because they understand the secret to sideways markets.
In most of life’s pursuits, the harder you work the better your results. Work-out more and the fitter you become. Study harder and you can get better grades.
People apply the same logic to investing. If you watch and listen to as much market news as possible you can get ahead of everyone else. There is no shortage of share market newsletters, tipsters and TV commentators to help give you an ‘edge’ over the millions of other investors out there.
Since 1995 all the people reading, researching, charting, analysing, scouring the market for opportunities and actively trading have lost out to those investors who have done absolutely nothing. In fact those so called ‘lazy investors’ made triple the returns of their active counterparts.
Self-managed super funds (SMSFs) are popular because they offer greater control over how your superannuation is invested.
Despite their popularity, managing an SMSF well is difficult – it requires time, effort and investment expertise. This is why more SMSFs are using robo-advice to reduce this burdon.
SMSFs + robo advice
The emergence of robo-advice in Australia over the last 4 years and the increasing popularity of ETFs has resulted in an increase in SMSF trustees allocating part of their fund to a robo-advice service to manage.
Robo-advice is now the fastest growing area of wealth management globally, expected to grow to US$2.2 trillion or 5% of all money managed by 2020.
Considering that SMSFs are the largest segment of the Australian superannuation industry, managing $653.8 billion as at December 2016, it’s inevitable that more SMSFs will turn their attention towards robo-advice over time. In Australia this trend is still in its infancy however 2017 is shaping up to be the year more SMSFs started using robo-advice.
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.
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.
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’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.
You’re watching the tele as you get ready for work. The 7.20AM finance news comes on and you dash to brush your teeth.
You know for the next 5 minutes the finance expert is going to stand in front of a ridiculous number of computer monitors and ‘blah blah blah’ their way through the ‘market update’ and use finance jargon you don’t understand. It’s enough to make you weep into your first coffee of the day.
It often seems like the finance industry is created on a house of jargon designed to keep people baffled to the point that they just give up and collectively say ‘take my money’.
Here’s a list of some financial jargon terms you’ll probably come across at some point and what they mean in plain English.
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.
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.
You know the expression ‘don’t put all your eggs in one basket’? This should be the first lesson taught at investment school (if there were such a thing).
Placing your eggs in a variety of baskets or spreading your money across many different investments is diversification 101. If there are 2 lessons everyone should be required to learn before they invest they are:
1. How compounding works
2. What is diversification and how does it work.
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.
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.
2016 was the year of the unpredictable events. The world and financial markets were sent spinning several times over while commentators went into meltdown.
Who would have believed a year ago that Britain would leave the European Union, that Donald Trump will be next president of the United States, and that both events would send global markets significantly higher!
There were many lessons to be learned from last year and we recently asked our clients to tell us the best investment lesson they’ve received in 2016. Here are some of their top learnings.