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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Diversifying your investments – how to put eggs in different baskets

Eggs in one basket
 
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.

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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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Best investment lessons from 2016

Best investment lessons from 2016
 
​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.
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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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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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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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Active vs Index investing – what’s the difference?

Active vs Index investing
 
Active investing and index (or passive) investing are 2 different ways to grow your wealth.

Actively managed funds aim to beat the returns of a given investment market. Passively managed funds, on the other hand, are designed to mimic the returns of a specific market as measured by a particular index like, for instance, the S&P/ASX 300. This is why they are also known as ‘index’ funds.

Most of the money in Australia is managed by active funds but passive investing has been growing fast, particularly since 2008. We look at some of the key differences and why index investing has been growing in popularity.
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How are ETFs taxed?

How are ETFs taxed?
 
ETFs: Everything you need to know about tax on ETF investments in Australia.

One of the reasons exchange-traded funds (ETFs) have gained popularity with Australian investors is because they are tax efficient. If you’ve invested in ETFs on your own, through a broker, or with the help of an automated investment service like Stockspot, here are some tax issues to consider.

Keep in mind that this article is general information only and doesn’t consider any individual’s personal circumstances.
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How to build an awesome investment portfolio

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Clients sometimes ask us how we built the Stockspot portfolios, and why we selected 5 assets to invest in rather than 2, 3 or 10!

It comes down to the purpose of the Stockspot portfolios which is to maximise returns for each level of risk. Five assets allows us to give clients the best possible combination of returns, risk and costs.

To do this we leverage the benefits of diversification. Diversification simply means that by combining investments with different characteristics you can improve the quality of returns in your portfolio.

Quality of returns is measured by how much risk you need to take to earn a certain return. Since all investing involves taking some risk, the aim is to minimise the risk you need to take to earn the return you want. Diversification across assets enables you to take less risk to earn better returns.
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When is a good time to invest?

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Markets can go up and down over the short-term and it’s almost impossible to pick the market top or bottom (even for professionals).

So when is a good time to invest in shares?

Instead of trying to time your entry point, dollar-cost averaging is a strategy to invest gradually over a few days, weeks or months. This helps reduce the impact of short term moves in the market because you invest at an ‘average’ price over a period of time.

Dollar cost averaging can help smooth your initial investment returns by reducing the risk that you’ve invested everything just before a dip in the market. By buying over a period of time you get to take advantage of any market dips and buy at the lower prices if markets fall.
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How does anchoring bias affect your investing?

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In many walks of life we have a tendency to use anchors or reference points to make decisions, and sometimes these lead us astray. Nowhere is this more dangerous than when investing.

What is anchoring?

Anchoring is our tendency to grab hold of irrelevant and often subliminal information in the face of uncertainty to make decisions.

Since anchoring occurs in so many situations, no single theory has conclusively explained why we do it. However the modern favourite theory for explaining the effect of anchoring comes from several groundbreaking studies that were conducted in the fields of decision science and performed by Kahneman and Tversky in the 1970s.

Kahneman and Tversky were interested in how people formed judgements when they were unsure of the facts. They found that when people are uncertain about the correct answer, we take a guess using the most recent number we’ve heard as a starting point.
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What is your risk profile & how does it help your investment strategy?

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Having an up-to-date investment profile is important when making any investment decision because it helps match you to the best investment strategy to meet your goals.

Your investment profile defines what type of investor you are and is made up of 2 parts:

  1. Your investment timeframe

  2. Your risk profile

Asking questions about these 2 areas helps to ensure that your investment strategy is suitable and that you don’t take on too much risk.
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The ETF boom continues in 2016

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The ETF boom has continued in Australia with the market growing 20% over the year to $21.3 billion in funds under management (FUM).

ETF trends for 2015/16

Global share ETFs maintained their position as the largest ETF sector, with $7.9 billion, up 18% for the year and there were 13 global ETFs launched.

Fixed income and cash ETFs continued to grow in popularity as investors looked to diversify and access higher yields than the low interest rates available in savings accounts. The sectors’ FUM grew 40% to $2.2 billion.
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Stockspot portfolios: 2 years on…

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Thanks to the thousands of clients who have been on the journey with us since Stockspot launched to the public in May 2014, exactly 2 years ago. Back in 2014, automated investing, robo advice and fintech weren’t as well understood as they are today so we appreciate the support of our clients who have trusted us to help manage their savings.

Despite the recent share market volatility, the Stockspot model portfolios generated 4% to 4.5% p.a. in total returns over the 2 years to 30th April 2016.

The performance was more than double the 1.5% p.a. return from indexed Australian shares over the same period. Distributions and dividends made up most of the performance since it was a subdued period for capital returns.

Stockspot model portfolios: 2 year performance after fees

  Total return p.a. Distributions p.a.
Topaz 4.13% 3.36%
Emerald 3.99% 3.33%
Turquoise 4.20% 3.07%
Sapphire 4.34% 2.78%
Amethyst 4.56% 2.52%

Total return after ETF and management fees (1st May 2014 – 30th April 2016)

2-year-portfolio-performance
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Property or shares? What is the best investment?

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What is the best investment? Property and shares are the 2 most common ways of building wealth in Australia outside of superannuation.

The topic of whether to invest in property, shares (or both) often leads to heated debate. The 67% of Australians who own the house they live in are usually passionate about they believe is their best investment decision.

Shares and real estate have both generated reliable income and capital returns for Australians over the long-term.

property-vs-shares-aus-wealth
Source: Corelogic, Housing Market and Economic Update March 2016
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The Paradox of Skill: Why active funds underperform

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The latest data for active funds returns does not bode well for traditional active fund managers. Standard & Poor’s (S&P) SPIVA report for 2015 is the clearest indictment yet for traditional active management, revealing that close to 90% of fund managers have underperformed over 10 years after fees.

More recently, 2015 proved to be one of the worst years on record for active managers, who failed to cushion the effects of the stock market’s dip over the second half of the year.

Those who mention top-performing managers as evidence that indexing isn’t sensible are doing retail investors a terrible disservice. Although each year some active fund managers beat the indices, very few have consistently done so over the long term. Those who do well over 1 and 3 years usually do poorly over longer periods as their styles and the market factors that have served them well (value, growth etc) mean-revert.
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Lessons I learned from The Big Short

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There have been a few books and documentaries that have tried to capture the Global Financial Crisis but probably none more entertaining than The Big Short. For those who haven’t read (or seen) it, The Big Short is the story of a few eccentric traders who anticipated the US housing bubble and worked out a way to profit from it.

The book was written by Michael Lewis who you may recognise from some other top-sellers like Moneyball and The Blind Side. Before those two, he also wrote ‘Liar’s Poker’ in 1989 which was a semi-autobiographical memoir about his time on the bond trading floors of the late 1980s. Fittingly, The Big Short continues where Liar’s poker left off – at the peak of the US housing bubble which owes much of its existence to the junk-bond days of the 80s.
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Why bonds belong in your portfolio

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As part of our detailed series on each of the assets in the Stockspot portfolios, we’ve already taken a look at two of our portfolio investments – Australian shares and gold. Now we looked at why fixed interest, also known as bonds, forms an integral part of our portfolios.

What are bonds?

A bond is a piece of debt sold to investors usually by a company or the government. Bondholders “lend” money to the bond issuer for an agreed period (until “maturity”) and in return for that, they are paid a regular income in the form of interest.

Investors in bonds can earn a return in 2 ways:

  • From the income received through the bond interest payments.

  • By selling the bond. If you hold a bond to maturity, you will get face value of the bond back, which is usually $100. However it is possible get more (or less) back by selling a bond before it matures. This is because bonds, like shares, trade on a secondary market and their prices are always changing.

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Should you buy into smart beta ETFs?

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Smart beta is latest investment trend, marketed as a new way to diversify and reduce risk. But is smart beta really the best way to achieve your investment goals? Here we look at smart beta ETFs in Australia – what they are, how they are built and how they’ve performed.

It’s nearly impossible to read the financial news or an investment newsletter these days without coming across the term “smart beta”.

Smart beta – also known as strategic beta, alternative beta, fundamental beta, advanced beta, enhanced beta, and probably a few other names – aims to combine elements of passive index investing and active fund management to deliver the best of both worlds: transparency, broad diversification, and market-beating returns – all at low cost. What more could you ask for?

But before you throw all of your savings into the latest smart beta product, it’s worth digging a bit deeper into what smart beta really is.

Smart beta is all about index construction which refers to which stocks (or other assets) make up an index and their relative size within that index…

So what exactly is an index?
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Investment traps you can avoid

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As the saying goes “experience is the name we give our mistakes”. Too often though, investment lessons come with a large price tag and cause financial distress for individuals and families when they are made with vital savings.

Many common mistakes can be avoided by having a basic appreciation of risk, return, the importance of time in the market and understanding some of the behavioural biases likely to get in the way of smart investment decisions.
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Is your Super in a Fat Cat Fund?

Stockspot has been actively campaigning to raise awareness of poor fund performance since 2013 when we published our first report into 496 of Australia’s largest managed funds, finding that 45% of returns were paid away in fees between 2008-2013.

Our Fat Cat Funds Report aims to shine a spotlight on those funds that are amongst the worst performers and recognise funds that have performed well. This year’s report compared over 3,000 funds including retail and industry super funds.

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