This article originally published in The Northern Daily Leader on 12 April 2014.

We recently returned from a short holiday at the coast, enjoying the waves, sand and relaxed atmosphere of a beachside town. The holiday itself was not as relaxing as it once used to be; both our youngest (18 months) and eldest child (3 years) have no concept of holidays, happy to wake up at 5:30 in the morning, holiday or no holiday. Rather than lazy long sleep-ins, hours on the beach reading and day-dreaming, it was a holiday of nappies, day-time naps, evening tantrums and early morning roll-calls. Still, I wouldn’t have changed it for the world, enjoying sand-castle building, fishing and braving two-foot high waves with Jack clutching tightly to my hand. Those days at the coast gave me some time to reflect on the concept of owning a holiday home. A permanent holiday house at the beach seems appealing – spur of the moment trips to the coast; a sense of ownership; no booking, availability hassles or rental costs. The reality however can be a little bit different: seemingly endless maintenance bills; holidays spent cleaning and repairing your property; that nagging feeling that you should be making more of your investment and being overrun with friends and family just when you feel like some quiet time at the beach.

As attractive (or not) as owning a holiday home may seem, one way to look at it is through a comparison of the alternatives. For example, if you owned a holiday home worth $400,000, you always have the option of selling the property and investing the proceeds. A reasonable income return assumption suggests that you could earn $20,000 a year from your investments (potentially tax-free, depending on your circumstances). Each year you could then spend $20,000 on holidays wherever you fancy. Skiing in Europe perhaps, maybe a cruise to Fiji and back, or you could even book a cabin at Cradle Mountain Lodge for nearly three months every year. No cleaning, maintenance or other issues to deal with. On hard numbers alone, owning a holiday home seems to make little sense. Much like renting usually allows you to live in a house you could never afford to buy, selling your holiday home and investing the proceeds may allow you to have the holiday you could never afford to have. But, and it’s a big but, this argument ignores the value placed on ownership. The ‘utility’ we derive from home ownership, whether at the coast or otherwise, can often far outweigh the rational financial argument of selling up and spending the investment earnings. In finance, just as in life, emotion can be more important than the hard numbers. Making the right decision in balancing the numbers versus the emotion is as important as judging when to jump or when to duck when that big wave comes.

This article originally published in The Northern Daily Leader on 29 March 2014.

The sporting world makes a significant contribution to the English language. Sporting terms and phrases form an evocative part of our everyday vocabulary. You can almost have an entire conversation using just sporting analogies: “How was your day today?” – “A little bit below par really (golf). I had a boring meeting with Dave from Accounts; you know him, the guy with the attractive girlfriend – he’s really punching above his weight (boxing). But the day ended well, I gave a sales presentation and knocked it out of the park (baseball).” And speaking of baseball, it was Warren Buffett, acknowledged as one of the most astute investors of all time, who had some insightful investing advice when he said “You don’t have to swing at every pitch”. What Warren was saying was that you don’t have to buy every company you come across. The market will ‘pitch’ an infinite number of companies at you, but you needn’t feel that every one of them is a buying opportunity. Choose what to buy carefully and you are more likely to be buying the right companies and not the wrong ones.

In fact, it’s arguable that what you don’t buy is more important than what you do buy. Just one HIH, OneTel, ABC Learning or Poseidon Nickel can wipe out all the hard-earned gains from success stories like Ramsay Healthcare, Commonwealth Bank or Flight Centre. More than half the battle is won if you can avoid adding the inevitable disasters to your portfolio. Outright fraud or theft are difficult to predict, but the usual suspects of too much debt, empire-building and structural change are easier to spot. Empire-building and too much debt often go hand in hand, as the empire is usually largely debt-funded. It’s one big party when the money is cheap and easy, but nothing unravels faster than an over-leveraged business that loses the support of its bankers. Just ask Nathan Tinkler or Eddy Groves. Structural change is less exciting and usually a lot slower, but produces the same results. Yahoo!, Holden and just about every manufacturing business in Australia are examples of the impact of structural change. Businesses can and do change and innovate, but the new business is often just a shadow of the first. Like the proverbial frog in a pot of slow boiling water, structural change can have a slow and almost imperceptible impact on a business, but the results can be just as fatal. So next time you’re thinking about having a ‘swing’, ask yourself if it’s going to be a home-run, or just another strike on your investing record?

This article originally published in The Northern Daily Leader on 15 March 2014.

One of the big stories in the press last week was the apparent rush of overseas buyers into the Australian property market. Specifically, cashed-up buyers from China and other Asian countries were accused of driving up prices in the mid-range property price bracket – this is largely in Sydney of course, where a mid-range property costs a substantial $550,000 to $750,000. Newspaper articles complained that the influx of money from Asia was leading to excessive price growth, squeezing first-home owners out of the market and generally impacting any Australian looking to buy a home. There is some truth to the story, as there is little doubt that there is substantial overseas interest in owning property in Australia, again more likely in Sydney than elsewhere in the country. And in many ways it makes sense: if you are a wealthy Chinese citizen (for example), it’s probably prudent for you to consider shifting a portion of your assets offshore. China is still largely a totalitarian state where the rules of law are entirely at the whim of a select few. The robust democratic debate which we take for granted in Australia is completely absent in China and getting on the wrong side of the authorities can mean the loss of your life, never mind your wealth.

This trend of foreign property ownership is not unique to Australia – for some years now a similar relationship has existed between wealthy Russian citizens and property in London. Worried about the general lack of rule of law, wealthy Russians (and others from some of the more shaky Eastern European nations) have been heavy buyers of property in London. In the 12 months to June 2013 nearly 10% of all London property sales worth more than 2 million pounds involved Russian buyers. Canada too has been a destination of choice for wealthy Asians seeking to convert a portion of their wealth into bricks and mortar in a politically and economically stable country. The reality is that as a small country, Australia is reliant on inflows of foreign capital to maintain our living standards. Every $500,000 property purchase by a Chinese buyer involves the transfer of a certain amount of foreign capital from China (usually) and into Australia. A simplistic way of looking at it is that for each $500,000 brought into the country in this manner, the nation as a whole is $500,000 better off. Multiply this amount by 5,000 transactions and it soon starts to add up. The real blame for overly expensive housing lies with state and local governments who have an incentive to keep prices high through limiting supply (higher stamp duty and local rates), but that’s a story for another day.

This article originally published in The Northern Daily Leader on 1 March 2014.

Everybody eventually figures out that there really can be too much of a good thing. This wisdom usually comes with age, with children generally refusing to believe that too much ice-cream, lollies or soft drink can ever be a bad thing. When I was a teenager I held the same view about prawns – there could never be enough grilled prawns dipped in tartare sauce. Until a dinner-time special at a local restaurant – 50 prawns for 50c each – taught me that there was indeed a point at which too many prawns became a bad thing.

The investment world has its own version of ‘too much of a good thing’. An important rule in investing is to apply the principle of diversification. It’s both a combination of common-sense – why would you invest all of your life savings into just one or two companies – and of sound scientific basis – research has shown that appropriately diversified portfolios out-perform under-diversified portfolios under any set of circumstances and across just about any time period you wish to consider. There is, however, diversification which results in the most appropriately diversified portfolio and then there is diversification for the sake of diversification. A recent new client arrived with an investment portfolio which consisted exclusively of Australian shares; around 50 of them in all. It sounds like it was a diversified portfolio, but just like the prawns, simply increasing the quantity does nothing for the quality. Many of the companies were inappropriately speculative and the exposure to individual sectors and industries appeared haphazard and indiscriminate. It was almost as though they had been previously advised to buy 50 random shares out of the available list of around 2,000 listed companies and throw them together in the hope that it resulted in a diversified portfolio. Not only that, but besides a small bank account, there was no other exposure to any other asset classes. International investments? None. Fixed-interest investments? None. Anything else at all besides Australian shares? Nothing.

Even ignoring the lack of alternative asset classes (which in itself is a failure to diversify), the sheer number of companies in the portfolio achieved little. Once you have more than around 25 to 30 shares in your portfolio, adding additional companies to your portfolio has only a marginal impact on your portfolio’s level of diversification, with the trade-off being higher transaction and administration costs. You can keep adding to your portfolio beyond this point but it achieves little, beyond helping your stockbroker fund his next Ferrari. Diversification across asset classes however, is even more important. Research has found that in general, it’s not what investment you hold that matters, it’s what asset class you have exposure to that matters. But that’s a story for another day.

This article originally published in The Northern Daily Leader on 15 February 2014.

One of the simplest concepts in investing is that of the trade-off between risk and return. Most people understand the notion that you may have to take on a bit more risk if you want your potential return to be that bit higher too. And it’s not just in the investment world where this concept applies. In golf or cricket for example, you might try and go for a slightly riskier shot, perhaps over some water or in the air, in order to get a slightly higher reward – closer to the pin or over the boundary rope perhaps. As the concept of risk and return is so commonplace, it’s not necessary to explain the concept in any great detail to clients. Everybody gets it almost immediately.

A more important aspect of risk and return relates to the timing. That is, when do you choose to increase your risk, or when do you choose to reduce your risk, whether it’s the risk of landing in the rough or getting caught on the boundary or just aiming for the middle of the fairway or hoping for just a single run off the over (to continue my golf and cricketing analogy). The dilemma facing investors is much the same – when should you be taking on more risk, or when should you be selling your riskier investments and seeking safety in term deposits and bank accounts? Unfortunately for investors, it’s probably harder to judge the appropriate level of risk than the task facing your average weekend golfer or cricketer.

As part of my nearly completed Master’s thesis, I have been researching the investment decision-making of trustees of Self-Managed Superannuation Funds (SMSFs). Apart from a lot of complicated detail that’s too lengthy (and probably too boring) to discuss here, I have uncovered some strange patterns in the investment decisions of SMSF trustees. One of the most interesting is that SMSF trustees in general acted to reduce their level of investment risk AFTER the recent global financial crisis, not before. Much like closing the barn door well and truly after the horse has bolted, there’s little to be gained by selling all your shares and putting the money into a bank account after the stock market has fallen by 30% – at that stage you should really be doing the reverse; cleaning out your bank accounts and buying every good quality company you can get your hands on. Of course, this is exactly when the newspapers, magazines and nightly news broadcasts are full of doom and gloom, so adopting the contrarian approach is harder than it seems. With investment risk, much as with cricketers and golfers, timing is everything.

This article originally published in The Northern Daily Leader on 1 February 2014.

For a very numbers-oriented world, the language of the stock market is a colourful and evocative one. When the market is doing well, with shares rising strongly in value, we talk of the bulls taking control. Bullish investors, viewing the future through rose-tinted glasses, stampeding through the market, pushing up prices for any old rubbish higher and higher. The market surges, stocks bounce, indices catapult and investors wallow in their wealth. Seemingly overnight however, the bears chase out the bulls and take control of the market – prices crash, indices tumble, wealth is destroyed and markets collapse. All very dramatic for what is supposed to be simply an orderly and effective means of allocating capital.

The language of the market has also found its way to everyday life. We all know the expression to ‘hedge one’s bets’, which involves adopting an offsetting position to minimise your losses if your first ‘bet’ doesn’t pan out quite like you had hoped. The expression originally arose from the planting of an actual hedge around your land, thereby delimiting the extent of your ownership. Hedging plays an important role in investing, where it is used most frequently to hedge foreign currency exposure as part of international investing. This ensures that an increase in the value of your home currency relative to the currency of the country in which you are investing does not offset any capital growth achieved by your investment. Unfortunately, hedging offshore currency exposure is expensive, particularly when large sums of money are involved. As a consequence, many large institutional investors will adopt only a limited hedge of their currency exposure, hoping to repatriate their invested funds prior to any large-scale falls in the foreign currency. At the first sign of trouble, investment managers act swiftly to pull their money back home, avoiding potentially significant losses as the foreign currency depreciates in value.

This set of circumstances quite closely matches the current situation in global investment markets. US-based investors have made healthy returns investing overseas, helped by prolonged weakness in the US dollar. The general consensus is that the US dollar is on the way up, bad news for unhedged US investors. And as expected, these investors are not going to hang around and wait for the inevitable, so they are selling the assets they have carefully accumulated over the past five or six years. Emerging market debt, shares, currencies, commodities…just about every asset class is going to be impacted by this process, most particularly in countries such as Brazil, India, Indonesia and South Africa. The bears look set to take control, but how long before the bulls come back to chase them out?

This article originally published in The Northern Daily Leader on 18 January 2014.

Yes, Dolly Parton. Not your usual topic for a finance column. Unless of course we are talking about insurance and the fact that Dolly’s well-known bosom is reportedly insured for $600,000. Dolly’s insurance broker definitely earned his or her fee, as placing an accurate value on Dolly’s ‘assets’ must have been a challenge. No, this column is about one of Dolly’s lesser-known, but far more worthwhile achievements, the Dolly Parton Imagination Library. Launched by Dolly in 1996, the Imagination Library’s aim is to send every newborn child a free book a month until they reach age 5. The objective is to foster childhood literacy, hopefully leading to better educational outcomes for those children who participate in the program. Each book is mailed to the child’s home and is tailored to the child’s age. It’s probably no surprise to hear that research has shown that early exposure to books results in improved childhood literacy and higher literacy levels later in life.

Active in the United States, Canada, the United Kingdom and only very recently in Australia, the library has sent over 40,000,000 books to children since 1996. The Australian arm of the library was only launched in May 2013. An early problem encountered by staff at the library was the fact that books in Australia are significantly more expensive than in the US, Canada or the UK. Despite this handicap, at the moment there are 1,315 children in Australia who are registered to receive a book per month from Dolly’s Imagination Library. Only a few towns and suburbs are currently signed up to the program, limiting the opportunities for children to be part of the Imagination Library. The program relies on the support of the local community, both in terms of organisation and administration, and for financial assistance. It’s not hard to imagine the benefit that participation in the Imagination Library program would have on young children in our local community (or any community for that matter). There are certainly many existing childhood literacy programs, ranging from intensive tutoring to hour-long reading sessions at the local library. One of the difficulties faced by these programs however, is that they require a level of effort and commitment by parents. They have to be willing to take their children to the local library or community centre each week or month. A free book arriving in the post each month requires far less involvement by parents – unwrap the parcel, open the book and start reading to your child. No hassle, no fuss. Take a look at the library by going to their website at http://au.imaginationlibrary.com. If you like what you see, perhaps we need to see if we can bring the Imagination Library here?

This article originally published in The Northern Daily Leader on 20 December 2013.

It’s only five days until Christmas and the shops are starting to gear up for the last minute rush. For many people, Christmas is a time of excess, both in terms of eating and drinking, but also financially. The gift wrapping, cards, decorations, beer, wine, turkey, prawns, lolly mix and Christmas crackers all add up, but it’s usually the gifts which do the most damage to the credit card at this time of year. Rather than stress about the cost of Christmas however, plan to enjoy yourself and buy what you have to, but consider a financial detox once the festive period is over. Much the same as checking into a luxury health spa to try and undo some of the damage caused by consecutive days of eating and drinking, start the New Year with a brand new financial health regime. Try the following:

1. Halve your credit card limit. If you’re prone to loading up your credit card and suffering the consequences later, halving your limit will keep your mind focused on your spending and may encourage you to keep a closer eye on any gradual increase in your credit card debt.

2. Swap banks. If you have a mortgage, make it a New Year’s resolution to find a home loan with a cheaper rate. Most of us could save money by shopping around, but it’s a hassle, which the banks rely on to keep you in an overly-expensive loan. So shop around, but just remember to take into account any loan establishment or exit fees.

3. Give your superannuation a health check. By the time you reach retirement age, superannuation is likely to be your most significant asset, so give it the attention it deserves. How is it performing? Is the investment selection appropriate? Are your fees reasonable given the level of service you receive? And if you get a pay-rise this year, ask your employer to pay the extra into superannuation rather; you won’t even miss it but it could make a substantial difference to your retirement.

4. Spend ten minutes jotting down some financial goals. As they say, failing to plan is planning to fail. Having some financial goals and a rough strategy to achieving those goals is going to put you in a far better position than just dealing with it on a day by day basis. An investment of ten minutes of your time now could pay off handsomely in the future.
Best wishes for a merry Christmas and a happy New Year.