Tuesday, December 23, 2008

Snow. Christmas 2008. Beaver Creek, Colorado, USA.

...I am not actually at Beaver Creek for Christmas (very jealous of those who are, epecially after another 17" of snow on Christmas Eve!)

I am staying in Sydney for most of the holidays and will be in the office between Christmas and New Year and through January.

Happy Christmas and all the best for 2009.


Monday, December 08, 2008

IFA Quote of the Week 40 (William Bernstein)

The presentation below is from IFA.com and is targeted at US investors. A similar prudent approach to investment portfolio construction is available in Australia from Commercial Associates Financial Planning (contact details above.)

Note that there are no absolute guarantees in investing and past performance should not be used as a predictor of future returns.

Friday, December 05, 2008

Basic Instinct A Sound Move

by Kevin Bailey CFP, founder and Managing Director of The Money Managers Ltd.

Published in the Herald Sun - 12/1/2008

Investors everywhere are in a state of shock. The devastation wrecked by falls in shares around the world has not only affected our investment plans and confidence but it has also led many of us to question our ability to protect against these sorts of calamities in the future.

The over riding message from the crisis is that we have to ‘get back to the basics’ of planning our long term future. There is a desperate need for good comprehensive financial planning advice. Advisers who positioned themselves as investment specialists who could pick the right stocks to buy and offered promises of monitoring portfolios to get you into and out of the market at the most appropriate time have been shown to be charlatans. Advisers whose skill set was supposed to be picking the best performing fund managers based on their past results have likewise been shown to have empty promises.

The basics or fundamentals of good advice are constructing a financial plan that meets your income and growth requirements over your lifetime. Investment planning is one aspect of that process but the education that diversification is essential to consistent long term success is paramount. The information that we can’t time markets in advance so we need to diversify and constantly rebalance our portfolio to enable us to ride through the cycles that will include negative years about 20% of the time is central to good advice.

It is the people that forgot the basics and thought it was easier to buy a solution that included ‘absolute return funds that never fall in value’ that are now questioning the wisdom of that course of action. The financial engineering of the last decade has come crashing down and we have a right to question the promises that were made.

The answer lies now, as it always has, in returning to the basics of investing. The basics include good taxation planning, risk and insurance planning and understanding that there will be some very lean years. Retirement planning is all about preparing ourselves for the fluctuations of markets. We require growth assets as part of our investment mix if we are going to protect against inflation over time.

Estate planning and philanthropic planning are areas that can easily be neglected in times of crisis. These are areas that can give meaning to why we are investing and being so diligent about our finances. We can’t control markets or predict their direction in advance but there are many things that we can control and those are the things we should be focusing on at the moment. There is a far greater chance of getting through the current crisis if we have a plan and we stick to it rather than reacting emotionally and switching to try and save what we have left. A well constructed portfolio should still have 70% of the portfolio still intact to benefit from a recovery when it eventuates.

The difference between serious long term investing and speculating could not have been starker over the course of the last year. Anyone focusing on generating income for retirement has still got many choices of yield from shares, property and bonds. If you are primarily focused on dividend return then you should be prepared to buy the shares and then not be concerned about the share price. As long as the company is able to maintain its dividend, as a longer term income investor the share price shouldn’t matter.

It is obvious that it does matter to so many people. Psychologically, many of us were ill prepared for the frightening decline in valuations this year. Many advisers have earnt their keep recently by getting their clients to ‘stay the course’ and hold their nerve.

Many financial planners are working overtime to ensure investors don’t transfer to cash at the worst possible time in the market cycle. The efforts in this regard are going to be the major contributor to investors trading through the crisis. These are the worst of times but there is no doubt that they will lead to the best of times for those of us that focus on the fundamentals.