Q: Does a short term investment strategy give you a degree of control over your money?

Not really.
Trying to forecast market returns, or making short-term changes to asset allocation, can destroy you wealth.

Q: What about all those stock market crashes you’ve read about?

In the long term, generally recognised as being seven years and above, the real return on equities has been three times that of cash and fixed interest.

• If you look at the chart below you can see the impact on investment performance by missing some of the best days in the markets over 30 years. For example: An investment of $1,000 gained a return of 12.35%, simply by being in the investment market for the full term.

That same $1,000 invested lost its investment performance as the investor changed their strategy or tried to buy and sell to escape negative returns or losses. If the investor missed the 50 best days in the market, their same $1,000 invested would only return 6.04%.

It’s the amount of time you are in the market that is important, not trying to pick and choose the best days in the market.

There are two lessons here

• Historically, the gains have always been greater than the falls.
• If you tried to time the market or stayed out of it, you would’ve missed the best days.

Q: Should you invest in property or shares?

There is no correct answer.
Perhaps both. While we all like to compare returns between types of investment, people invest in property and shares for very different reasons.

Each investment has its own distinct advantages and disadvantages and ‘time in the market and individual property research’ is key to finding a suitable investor to investment match. It really depends upon your individual needs, expectations and comfort levels. For example, property is considered an ‘ill-liquid investment’ in that it is hard to sell it immediately at a fair price, whereas shares can usually be sold and traded instantly.

• As far as the historical figures are concerned, the 2010 Russell Investments /ASX Long-term Investing Report found that direct investments into residential property has produced slightly better overall returns than shares over the long term.
• For the technically minded: Even when comparing the after-tax performance, the report looked at both the low and high margin tax rates which are 16.5% and 46.5% respectively inclusive of the 1.5% Medicare levy. Over the 10-year comparison, residential property beat shares at both the lowest and the highest marginal tax rates, generating a return of 9.5% pa and 7.9% pa respectively, compared with shares on 8.6%pa and 6.3% pa.
  Research conducted by AMP Capital Investors also found that shares provide very similar returns to property.

Q. So should I invest in shares or managed funds?

Through managed funds, you can further diversify your investments and benefit from the expertise of full time fund managers with access to levels of data and research that is unavailable to the average person. By pooling funds with other investors through managed funds, you diversify your market volatility and can also access wholesale investments with lowers fees.

“If you’re confident and good at share trading, by all means be your own investment manager, but for the average person, I think those [managed funds] fees definitely pay for themselves”.

Q: Should you react at all to market corrections?

History is littered with examples of share market tumbles, followed by nervous investors bailing out, only then to then miss the eventual, and inevitable, recovery.

Each year, the DALBAR study in the US calculates how much money the average investor, who changes their investment strategy, either to chase the latest trend or to try and escape negative returns, loses.

Over a 20-year period, they discovered such an investor in equity funds achieved an average return of 1.9% in a year. This compares with the average return of the market of 8.4%, as measured by the S&P500 index. Those are pretty startling figures.

This is Warren Buffets, the American billionaire’s answer to this particular question:

Much stress can be attributed to inactivity. Most investors cannot resisst the temptation to constantly buy and sell Warran Buffet

Q: Do I have to watch the market daily?

The oversupply of information today for investors can often become intoxicating, but is not always helpful to them? Focusing on the daily (or hourly) changes in investment portfolios often cause investors to unsurely focus on the short term. This can often have the negative effect of encouraging investors to lose focus on a long term strategy and can lead them to make multiple rash decisions. You don’t check the market value of your investment property daily.

Q: In volatile times, should you go with blue chip equities or spread your net wider?

It’s important to have a range of investments in your portfolio so that a strong performance from one asset class, investment manager or security counters any weak performance from another. In other words, don’t have all your eggs in the one basket.

Why?

Its so your investments won’t all move in the same direction at the same time, potentially reducing the total value of your portfolio in the event of a sudden market downturn. It’s a good idea to talk to us about getting the right balance for your risk profile and investment goals.

(It’s also a good idea to be careful about having too many properties of the same type in the same location. For example, holding 3 apartments all in the same building would expose you to an increased risk of a problem with one affecting the others, simply due to their shared proximity).
It’s important to always invest in quality. Firstly, history shows that quality investments fluctuate upward more often than downward. And, secondly, that they recover from falls in the market more quickly than second tier stocks.

Pay attention to the value of the investment, not merely the price you are paying for it.

Q: If you agree with what we’ve been saying, what do you do next?

At this point you should probably discuss with Sapience where you are and, even more importantly, where you want to be. The better an adviser understands what your needs are for the future, we will be better placed to deliver them.

Sapience’s multi-manager & core-satellite approach aims to grow your wealth at an acceptable level of volatility. Even when markets are weak and returns are negative, we always aim to do better than comparable funds. When markets are very strong, however, we keep focused on meeting your long term goals rather than chasing risky returns.

This may temporarily result in a lower return than those funds that do chase after risky returns, but we believe that by reducing the extent of the ups and downs, overall and longer term returns will be smoother. Remember, you should monitor and review your investment strategy. Just because your goals remain unchanged, your market volatility strategy should be regularly reviewed.

Q: What about tax?

There are several things well worth remembering here.

• Like, if you arrange with your employer to put some of your pre-tax salary into super, then most people will pay 15% on the contribution and investment earnings. This compares with your marginal tax rate which could be as high as 48.5%
• If you’re self-employed or unemployed, similar benefits are also available if you invest in super and then claim a tax deduction for it. To find out whether this strategy may be suitable for you, speak with Sapience today.

Q: What if you don’t feel comfortable putting large sums of money straight into the market?

Instead of investing all your assets in a lump sum, it can be wiser to work your way into the market by investing smaller amounts over a longer period of time.

This spreads the cost over several years and gives insulation against changes in market price. This is known as Dollar Cost Averaging.

Q: Are there ways to make your money work harder?

Yes, there are.
You can recycle any interest earned on your investment back into your original investment. That way you earn interest from both the principal and the interest.
This is called compounding. A bank account, for example, may have its interest compounded every year. In this example, an account with $1,000 initial principal and 20 % interest a year would have a balance of $1,200 at the end of the first year, $1,440 at the end of the second year, and so on.

Q: What if inflation eats away at your progress in the markets?

You obviously need a return that’s greater than the inflation rate. Otherwise, you’re going backwards.
Rises in the price of goods and services are known as inflation. Inflation erodes the value of your money. For example, $100 in ten years’ time will almost certainly not buy the same amount of goods as $100 today. To prevent the value of your money being eroded, your investments need to earn a return equal to or above the rate of inflation over the long term. Each year the government publishes the consumer price index (CPI) as a formal measure of inflation in the economy. If inflation is running at 3.3%pa, to keep pace with inflation, investments would need to return value of at least 3.3%.

For your investments to more than keep pace with inflation, you need to invest in types of assets (or asset classes) which are expected to deliver higher returns. Cash in the bank is low risk, but also means low returns. Depending upon your personal situation needs and objectives, you should probably be considering shares, managed funds or direct residential for better capital growth.

Q: What if you need some cash quickly?

Assets that can be easily bought or sold are known as liquid assets. Residential property is known as an ill-liquid asset.

• If you want to be able to get your investment money back in the shortest period of time consider investing in highly liquid assets (like Blue Chip shares in the stock market).
• If you don’t need such immediate ready access to cash, a less-liquid investment class (like managed funds) may be suitable. If you are investing for the longer term, the Australian investment regulator ASIC stated in their Risk Return Calculator ‘Property investments generally suit the long term, more than 5 years’.

Q: Do I need advice to secure the future I want?

If you've read this far, you've probably been thinking about your financial and investment options, perhaps where to start or perhaps how to tweak and fine turn your current investment engine.

We certainly think you’d be wise to get advice because we believe in the difference working with an expert can make to your financial future. We all live in a world of choices and a superabundance of information, data and constantly changing market forces. It can all seem a bit overwhelming and foreign to our day to day lives.