Spring 2015

Lessons from great

Investment quotes Investing can be profitable as well as fun, but it can also be unnerving and unprofitable if you don’t understand markets and don’t have the right mindset. The basics of successful investing are timeless and some experts have a knack of encapsulating these in a way that’s insightful. Here are some investment quotes I find useful. “The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions.” Seth Klarman Cycles are an investing reality. Not just shares – but also bonds, property, infrastructure, term deposits, whatever. They all go through cyclical phases of good times and bad which are driven by the combination of fundamental economic & financial developments invariably magnified by investor behaviour that has a habit of extrapolating current conditions into the future. Some cycles are short term, such as those that relate to the 3 to 5 year business cycle. Some are longer, such as the secular swings seen over 10 to 20 year periods in shares.

“It’s so good it’s bad, it’s so bad it’s good”. Anon In every cycle there comes a point where fundamental conditions are so good that they are bad: economic growth is so strong that its causing inflation to rise and central banks to run ever tighter monetary policies; shares have become overvalued;

Futuro Financial Services P/L

ABN: 30 085 870 015

Level 3, 200 Creek Street

BRISBANE, QLD 4000

GPO BOX 942

BRISBANE QLD 4001

T: 07 3018 0400

F: 07 3018 0399

www.futuro.com.au

Spring 2015

Lessons from great investment quotes continued and investors have piled in at such a rate that there is no one left to invest. This then sets up a market top and a new bear market. And the reverse applies during economic and market downturns. Which brings us to contrarian investing.

Contrarian investing

“The way to make money is to buy when blood is running in the streets.” John D Rockefeller

This is a bit extreme, but it illustrates a key point. The best time to buy shares and other growth assets is after a sharp fall and a good guide is the economic and financial pain around you. When it is at an extreme and it all looks hopeless then that’s usually a good sign that there is long term value to be found!

“The share market’s role is to make the majority of investors wrong” Ned Davis

This sounds rather bleak and is a bit simplistic, but it reflects the fact that most don’t invest. On a contrarian basis – by definition markets top out when most investors are long and they bottom when most are short or underweight. Hence the comment about the market proving the majority of investors wrong. There are two ways around it: either adopt a contrarian approach which takes positions counter to the crowd at extremes or take a long term approach that looks through cyclical fluctuations. But whatever you do don’t get sucked in (or out) when everyone else is.

Process

“A great company is not a great investment if you pay too much for the stock.” Benjamin Graham

The key to successful investing is not to buy great companies or investments, but to invest well. Shares can give you horrible returns if when you buy they are overvalued and overloved. So you need an investment process that avoids this.

“Don’t look for the needle in the haystack, just buy the haystack!” John C Bogle

The key insight here is that trying to beat the market by stock picking can be hard and so if you want to grow wealth over time the key is to get a broad exposure to the market and letting compound interest do its job.

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” J.K. Galbraith

While that may be a bit harsh – you might say I would say that being an economist – the reality is that forecasts as to where the share market, currencies, etc, will be at a particular time have a dismal track record. Hence the jokes about economists! Good experts will help illuminate and point you in the right direction, but don’t over rely on expert forecasts.

Cash flow and time

“Do you know, the only thing that gives me pleasure? It’s to see my dividends coming.” John D Rockefeller

There have been lots of investments over the decades that have been sold on promises of high returns or low risk but were underpinned by hope based on hot air (the tech boom) or financial alchemy (AAA rated sub-prime trash). By contrast, assets that generate sustainable cash flows (dividends, rents, interest payments) and don’t rely on excessive gearing or financial engineering are more likely to deliver.

“Our favourite holding period is forever.” Warren Buffett

In investing time is on your side and the more you have of it the better. So while short term market fluctuations can take you away from your objectives, the longer the perspective you take the great the chance you have of achieving them .

Right mindset

“In the business world, the rear view mirror is always clearer than the windshield.” Warren Buffett

We are all subject to behavioural biases, the most serious perhaps being a tendency to extrapolate recent developments off into the future regarding investment returns. So if the recent past has been poor you assume this will continue and want to get out and vice versa. But this just causes us to get wrong footed by the cycle. Just as spending too much time focussed on the rear view mirror will get you wrong footed by the road.

“Individuals who cannot master their emotions are ill suited to profit from the investment process.” Benjamin Graham

This is all about knowing yourself. The reality is that we all suffer from the behavioural biases that give too much weight to recent developments in forming expectations regarding future returns, seek safety in the crowd and give too much weight to loss relative to gain. But smart investors have an awareness of their weaknesses and seek to manage them. One way to do this is to take a long term approach to investing. But this is also about knowing what you want to do. If you want to take a day to day role in managing your investments then regular trading may work, but you need to recognise that this requires a lot of effort to get right and will need a rigorous process.

Reality

“There is no free lunch.” Anon

If an investment looks too good to be true in terms of return or risk, then it probably is. Rather, focus on investments offering sustainable cash flows (dividends, rents, interest) that don’t rely on excessive gearing or financial engineering.

“Money can’t buy me love.”The Beatles

And finally, just remember that money isn’t everything. Numerous studies show that people with good wealth and incomes are happier than those without, but beyond a certain level more money won’t necessarily make you any happier.

Dr Shane Oliver

Head of Investment Strategy and Chief Economist AMP Capital

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no

representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of

providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek

professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Spring 2015

Important information © AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s

right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making

any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the

reader or any other person.

The power of budgeting A budget can help you work out what you’re spending money on and whenAre you aware you need to change

your spending habits, but not sure

where to start? A budget can help you

get back to basics and work out

what’s going where and when.

Whatever your plans, a budget can help you

to:

get more organised with your finances

cut down spending in areas you have a

tendency to overspend, like clothes

shopping or eating out. This can

significantly help you cut your debt.

save for a specific goal, like going

overseas or buying your first property.

Once you’ve set up your budget, it makes it

easy to keep track of your spending, change

your habits and reallocate your funds to

achieve different goals.

How to build a basic budget First, work out your income. Include your

salary, plus any bonuses and investment

income. Then, divide your money into seven

main ‘buckets’:

1. Living expenses—include rates,

utilities, telephone, groceries, medicines,

clothes, education, pets, child care and

home maintenance.

2. Transport—include petrol, vehicle

registration, repairs, parking, public transport

fares and taxi fares.

3. Loans, credit card and store

accounts—include home loans and

personal loans.

4. Taxes, fees and charges—include

taxes on any investments and fees/duties.

5. Insurance/superannuation—include

life, health, super, home and contents, car,

business and any other insurance.

6. Leisure/entertainment—include

holidays, eating out, takeaways, sporting

memberships, newspapers, books, music,

gifts.

7. Savings—if you want to save money on a

regular basis, for holidays, investments or a

rainy day.

For each bucket, indicate how much and how often you need to pay—weekly, fortnightly, monthly or annually.

Managing and sticking to

your budget Then, once you’ve crunched the numbers,

you can start looking at areas you can make

savings.

You don’t have to do it all by hand. There are

plenty of tools out there to help you manage

your finances:

A simple online tool like AMP’s Budget

Planner Calculator

(https://www.amp.com.au/calculator/budg

etplanner) can help you tally up your

expenses and work out how much you

have left over.

There are even apps like MoneySmart’s

TrackMySPEND

(https://www.moneysmart.gov.au/tools-

and-resources/calculators-and-

apps/mobile-apps/trackmyspend) that

allow you to track your personal

expenses on the go.

Need a hand? Let us help you to use the power of

budgeting to achieve your financial goals.

Spring 2015

Working to restore your balance In our fast-paced world, the

desire for a better work/life

balance is a common goal. It

affects everyone from young

professionals working long hours

to get ahead, dual income

households juggling inflexible

jobs and children, and older

workers wanting more time to

help care for grandchildren or

ease into retirement.

While some people want to increase their working hours, the more common reason for pursuing work/life balance is to reduce working hours. Let’s face it, who hasn’t wished for more hours in the day to pursue interests or hobbies, spend more time with the kids, care for elderly parents or to volunteer?

Traditionally it has been professional women leading the push for part-time work as a way to balance the competing demands of a career and parenting. Now, greater numbers of men are considering flexible working arrangements that allow them to balance paid jobs with time taken out for parenting duties, sports careers, to improve their health or to do volunteer work.i

Need for time out

Recent statistics show that 29 per cent of men under the age of 35 have given serious thought to quitting an organisation that does not extend workplace flexibility. ii

Currently, 16 per cent of Australian men work part-time compared to 44 per cent of Australian women. Economists have calculated that a woman taking time out to care for children will, over a lifetime, suffer an average 17 per cent fall in her income. iii If you are considering cutting back your working hours, you need to consider the impact on your take-home pay and weekly expenses. While some expenses, such as childcare, may decrease, others still need to be covered. Thought should be given to maintaining contributions to superannuation, income protection insurance and investments for future spending needs.

In addition to a drop in income, there is evidence that part-time work is less secure and predictable than full-time work. This underscores the need to plan carefully for the financial consequences of opting for greater job flexibility .iv

Plan your finances Among the factors that need to be

calculated when making a switch to part-

time work are the impact on your taxation

status, credit and other debt, especially

large borrowings such as a home

mortgage, plus your eligibility for

government benefits.

Your adviser can guide you through the

implications of transitioning to a part-time

job and help build a financial plan that will

avoid disadvantages that can flow from

reducing your hours at work.

For instance, if you are over the age of 55 and you decide to work fewer days, you may be eligible to withdraw income from your super to top up your pay.v This is called a superannuation transition to retirement strategy. Such a strategy could be useful if you want to care for grandchildren on some days, while not retiring entirely. This helps your adult children to remain in work and reduce childcare costs.

Consider your options If you have considered going part-time to help restore some work/life balance but do not really want to leave your full-time position, there are other options. For instance, instead of cutting back on work hours you could outsource some of your household’s unpaid but time-consuming duties, such as cleaning, gardening and even cooking. Not only will this buy you more time for leisure at the end of a hard day’s work, it can improve the wellbeing of the whole family. A structured plan to restore your work/life balance is possible without compromising your finances or your career. We can help you with financial strategies to achieve your personal and financial goals. i http://museumvictoria.com.au/about/work-opportunities/volunteering/ ii April 27, 2015, AFR, Fiona Smith: Why these men have decided to stop being workaholics. http://www.afr.com/leadership/careers/why-these-men-have-decided-to-stop-being-workaholics-20150427-1mu6uw iii Adda, J., Dustmann, C., and Stevens, K. (2010). The career cost of children. Paper presented at the 10th World Congress of the Econometric Society 2010. Retrieved from http://www.eswc2010.com/ iv Page 4, WGEA perspective paper, Parenting, Work and the Gender Pay Gap. https://www.wgea.gov.au/sites/default/files/2014-03-04_PP_Pay_Gap_and_Parenting.pdf v https://www.ato.gov.au/Individuals/Seniors-and-retirees/Transition-to-retirement/

This information is provided by Futuro Financial Services Pty Ltd ABN 30 085 870 015 AFSL 238 478. Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your advisers and applicable associates or businesses may receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Ask us for more details. If you no longer wish to receive direct marketing from us, please call your adviser.