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Most Australians Struggle in Retirement – What to do? – Part 2

The previous post identified residential property or shares as likely growth investments that all investors should become friendly with.

The economist Shane Oliver has collected some data on the performance of each of these investment vehicles that goes back to 1926. The graph below uses a logarithmic scale which is quite appropriate for such long term reviews where there is a big range of values. The good thing about this scale is that in percentage terms, a vertical movement of, say 10%, moves the same distance whatever the year However, the downside is that it does visually compress the dollar gains for the higher achievers shares and property – the dollar values on the left axis should be considered in detail.

Looking at the above, it is clear that Australian residential property (blue) and shares (orange) both represent good investments. These values indicate Australian averages and in some markets (Inner city Sydney and Melbourne), property has done even better!

What stands out to Slack Investor is the raw dollar values for each investment class that 90 years of investment would reap. $100 in shares or property would be worth at least a million dollars now. The raw figure returns for bonds (light green) and cash (black) of around $50000 and $20000 in 2016 are much less impressive – If you want growth … shares or property are the big games in town!

The graph above shows that over 90 years, Australian shares are a slightly better investment than Australian property – However, over different time frames, property has done better than shares. Russell Investments have put out a report analysing returns for the last 10 years to December 2015. Australian residential property gained on average 8% p.a. compared with 5.5% for Australian shares.

As well as the past returns from each asset class, there are other considerations such as tax, liquidity,, transaction costs and ability to gear – Banks have traditionally allowed higher gearing ratios for property (80-100%) compared with shares (typically 50-70%).

Despite these complexities, if you want to prepare for retirement with more than basic superannuation, you must get involved with investing in either shares or property – they are growth assets that, with careful selection, will always do well in the long term – and do especially well in times of economic growth. Investing in these assets inside or outside of superannuation will help provide for your financial independence.

Most Australians to Struggle in Retirement – What to do? – Part 1

At some stage in your life, if all goes well, you might be on your way to buying a house to live in and starting to think about the next step of your financial future. If you are lucky enough to be an Australian employee, you will already be exposed to the share market through your work-funded compulsory superannuation (thanks Paul Keating!). The compulsory super now stands at 9.5% of your wages. So, you might think that your financial future is all taken care of … But wait, some crackpot naysayer from the ridiculously named Committee for Sustainable Retirement Income says

“Even after contributing to superannuation at 12% for most of their working life, most retirees will still not meet the comfortable retirement benchmarks.”

Cripes! We had better do something about this … and the more time that you have to work on this, the better!

A good place to start is adding tax-advantaged “salary sacrifice” contributions to your super. This is a great idea if you are in the last 10-15 years of your working life, but the downside is that you will be locking up your savings until you reach your, quaintly termed, “Preservation Age” – the age when you you will be able to access your super.

If you were born after 30 June 1964, the preservation age is 60 … and, If I was 20-30, I would think that this is too long away off to worry about – It is a long time to lock up your money! Also, one of the few things that you can guarantee is that future governments will gradually increase the preservation (and pension) age.

So, what can we do to fortify our financial future – The only easily accessible games in town are

Money in the Bank (Online of course!)
Bonds (or Fixed Interest)
Residential Property
Shares

The latter two are generally what I would consider to be growth (above inflation) assets and, although there are risks involved with each, to be serious about growing your money, you must get involved with one or the other, or both!

Through your home or compulsory superannuation you might already be a little invested in each of these asset classes and might be looking for new opportunities.

A flick through the paper will show you some great opportunities – Investment seminars conducted by self-made millionaires who, for a small fee, would be willing to impart the secrets of their financial success. In this case, Slack Investor would take the advice of ASIC on their MoneySmart site and show great caution.

ASIC suggests seeking independent advice before investing in any such scheme. Slack Investor suggests that you first educate yourself in these matters – and then avoid these seminars like the plague. My Dad would suggest you ask the question – “What are they selling?”

After all these suggestions, Slack Investor is pooped, stay tuned for the next instalment on this exciting episode as we explore further the shares vs property dilemma.

2016 December Monthly Update

Slack Investor remains IN for US, UK, and Australian index shares.

December has been a jolly month for the markets that Slack Investor follows. The US, Australian, and UK markets climbed 1.4%, 2.7%, and 3.8%, respectively.

This is also time to rub the belly and review the calendar year 2016. The Slack Self Managed Super Fund, which is my main retirement vehicle, had a mixed year due to some not so wise investments in telcos and medical stocks. However, it still returned 7.5% overall for the 12 months. This was below the benchmark ASX return of around 11% but well above the online cash rate of around 2%.

As Slack Investor has a general policy not to directly invest in mining companies, it can be expected that the Slack Fund would underperform the benchmark in a year that mining companies did exceptionally well (2016, +52%).

Although the festive spirit prevails, it is good to remind myself of the words of Rudyard Kipling from “IF”

… If you can meet with Triumph and Disaster
And treat those two impostors just the same

Slack Investor tries to follow these wise words of British stoicism and treat the transient good and bad news of the stock markets with some detachment … and remain ever vigilant in a mostly slack way!

See the ASX, US and UK-Index pages for updated details.

Financial Winners

There are many ways to measure a happy and successful life – and financial security is just a part of this. Benjamin Franklin best sums it up

“Content makes Poor Men Rich; Discontent makes Rich Men Poor.”

To be grateful and happy with our many blessings is a good place to start – But, to be financially secure is one of the three tenements of a happy life. My Dad did give me the great advice …

“The only time that you use borrowed money is for the purchase of appreciating assets.”

This meant I would avoid the crippling credit card interest by paying off my credit card balance every month (Admittedly, there were a few slip-ups!) and, most importantly, if I wanted a car or holiday, I would have to save up for it first – and pay cash before the glorious enjoyment of my purchase.

However, (hopefully) appreciating assets like property or shares were given the big tick by my Dad – and it was OK to borrow money for them. I suppose my Dad would have made an exception to the rule if you were investing in yourself. Spending borrowed money on things like education or, if you are just starting out, tools, a work ute, or office equipment – can be justified.

This makes Slack Investor a bit of an outlier in the community considering the amount that the average Australian owes on credit cards. ASIC has a Debt Clock and they point out that there is around $32 billion owing on Australian credit cards, that’s an average of around $4,300 per card holder!

There are some basic rules for getting ahead financially and Noel Whittaker points out the differences between winners and losers in the financial game.

“The winners borrow at low rates of interest, subsidised by the Tax Office, to buy growth assets such as property and shares that increase in value over time. The losers borrow at high rates of interest, non tax-deductible, for consumer items such as cars that depreciate in value.”

You can argue about the fairness of negative gearing and capital gains concessions (I think rightly!) and superannuation concessions (Which have been recently reigned in) – but these are the existing rules.

If you start at a young age with just my Dad’s advice … and only borrow to invest in, hopefully, appreciating assets – it will be a good start. My Dad was an understanding bloke and would appreciate that there were some cases where the rules need to be broken – i.e. suppose that you needed a car for your job – but he would insist that If I did borrow for a car that I would shop around an get the best loan deal … and hopefully, I would be able to pay it off early.

Slack Investor can’t guarantee financial security – but If you follow my Dad’s simple advice you will be on the right path to be a financial winner.

Volatility … Its Scarey! … Take a deep Breath!

The range of one year share investment returns over a 10-year period – From Fidelity

In the above data collected by Fidelity, it is sobering to look at the range of returns that a share investor can expect over a one year period. By setting stop losses, you can help protect yourself from the very worst of declines – but even with this protection, there will be some bad investment years. Lets look at the worst investment year for Australian Shares shown above (-40%). Even with stop losses, your portfolio might lose 10-25% due to prices rapidly falling before you can act. This is a major hit on your savings and during the 2008 GFC many experienced losses in their investment and superannuation savings that have turned them off share investment forever. This, in hindsight, has not been the best decision as cash returns have been relatively low and, up till June 2016, median balanced funds have improved 86% since this global financial crisis.

But volatility is not for everyone – You must be able to sleep at night!

This week, Slack Investor just had the shock of one of his stocks dropping in price by 37% on an earnings update. Price swings like this on your hard-earned investment dollars are hard to take and the volatility of the stock market – particularly with individual companies – make share investment a difficult environment for many.

To Slack Investor this is was not great news and though I prefer to make my investment decisions at the end of each month, the price revision has triggered the “not very slack” procedure of a review of this stock. Are the companies earnings still forecast to grow? There is now a daily review of this stock – with a view to sell. The correction may be an over reaction … or just the start of more bad news.

The things that protect me in these moments are diversification and the fact that Slack Investor is a long term investor. There are always at least 20 stocks or managed funds in the Slack Portfolio.

Although at the time of buying, by doing a bit of research on past and future earnings, I am convinced that each individual company will be an enormous contributor to the retirement fund. However, I have been investing long enough to know that things don’t always pan out as forecast … and I have realized that it’s not necessary to get all your investment decisions right … just so long as you get a good portion of them right!

Investing can be tricky at times and during times of market volatility it is useful to take the long view. The 15-year extract above (Shown on a compressed Logarithmic scale)- from Fidelity – indicates what would happen to a $10 000 investment over 30 years in index funds in various markets. For Australian shares the average yearly return is 8.5% over 30 years – but there were some boom times over this time frame. Over a shorter period, Canstar reports a 10-year average return for the Australian Index of 5.5% compared to the, admittedly risk free, cash option of 3.1% over 10 years.

Particularly in these times of low bond and cash yields, if you can accept the volatility of the share market, be willing to live with the occasional investment mistake and have a diverse list of well-managed growing companies in your portfolio – take a deep breath and you will be OK!

2016 November Monthly Update

Slack Investor remains IN for US, UK, and Australian index shares.

There has been US elections, past and upcoming European elections and referendums, uncertainty with OPEC and the oil price … Cripes! Lucky we have the old stock proverb

“The market climbs a wall of worry … and slides down on the slope of hope”

What this means to Slack Investor is that sometimes you have to tune out the noise and rely on the fact that stock markets are a great place for the long term investor. According to Fidelity, over 30 years, average annual returns for Australian shares are 9.5% and for Global shares 7.1%.

In the US, for the world of commerce, there seems to be a feeling of optimism about the upcoming Trump presidency (For me it is a little weird … and alarming, putting those last two words together). I am naturally on alert when markets like the US are at an all time high. However, I have my monthly stop loss to protect me and we soldier on for ASX, US and UK-Index stocks. The UK and US are both well above the 10-month moving average (black line on the monthly charts) and of no immediate concern. The ASX index breached the stop loss early in November but as Slack Investor makes decision on the end of month prices – and they finished well above the stop loss (red line) – no action required. See the ASX, US and UK-Index pages for details.

Lucky!

Luck … there is a lot of luck in the investment process … and a lot of luck involved in life.

To be born in the western world … and to be born in Australia … and to be born a bloke … Slack Investor acknowledges his debt to the luck Gods … and he is grateful! (… further research has revealed that not all feel the same … Ms Slack Investor, for instance, is quite glad she is not a bloke OR an Australian!)

The great Warren Buffet talks about the “Ovarian Lottery”

“It’s 24 hours before your birth, and a genie appears to you. He tells you that you can set the rules for the world you’re about to enter — economic, social, political — the whole enchilada. Sounds great, right? What’s the catch?

Before you enter the world, you will pick one ball from a barrel of 6.8 billion. That ball will determine your gender, race, nationality, natural abilities, and health — whether you are born rich or poor, sick or able-bodied, brilliant or below average, American or Zimbabwean.”

“You’re going to get one ball out of there, and that is the most important thing that’s ever going to happen to you in your life.”

Slack Investor is well aware that defining life in terms of income is a narrow view. However, as a point of comparison, the Global Rich List offers some sobering perspectives.

For example, an Australian on an annual income of $50 000 is in the top 1% of world citizens by income.

And the western world in general offers opportunities for education and reward for effort … but most of all there is an environment where luck can at least enhance outcomes.

There are things that you can do to increase your luck. The golfer Gary Player adopted the aphorism

“The harder I practice, the luckier I get”

This is not against the Slack Investor ethos … there is some practice or research that you must do to become a good investor … however, we like to keep it too a minimum … and, as a rule, always remember to be grateful!

People are happier when they are active

Slack Investor is not averse to parting with the odd dollar for things he values … but increasingly these are becoming experiences rather than things. However, looking at his adventure packed schedule for the week, amongst the usual pastimes like (work, cinema, social gatherings, personal development and grooming (joke!)) I notice that two of the things I am doing are, remarkably, free events.

The first was a concert a Yarrabah indigenous community featuring the incomparable Archie Roach and the second is local university sponsored lecture on ecology by the Stanford Professor Paul Ehrlich.

The first event, at Yarrabah, I have already been to … and it was fantastic! This was my first visit to this local indigenous community. It is a settlement of over 3000 people in an idyllic tropical location – and a place with a few social problems – unemployment, lack of local businesses and a high crime rate, to name a few. However, the concert headlined by Archie Roach and Montaigne plus various local acts was a ripper – and there was a real sense of hope from some of the community leaders (and Archie). It will take some time, but a few of the locals were quite inspiring.

One of the great things about living in Australia is that various levels of government and educational institutions subsidise occasional events – and as an abiding tax-paying citizen I make it my business to attend them if I find them interesting.

Ms Slack Investor reminds me often about the human need for occupation – and filling in your calendar with events is a great thing. As well as (hopefully) being kind and charitable, being busy is a fundamental part of a full life.

Although this blog is mostly about financial stuff, “The golden triangle of happiness” points out that this is just one corner of the triangle of well-being. I will revisit this important triangle in another post.

The Deakin University study points out that Relationships, Financial Control and Sense of Purpose are the three corners to a happy life. As my full time working life is coming to an end, it is this sense of purpose that I will be working on … people are happier when they are active – and filling my calendar with enjoyable events, volunteering, travel – will be all part of it – I hope.

2016 October Monthly Update

Interesting times … Despite the rough month on some of my individual holdings, at the end of October 2016 my index funds strategy remains on hold for each of the ASX, US and UK index positions. Slack Investor remains IN for all index holdings as the end of month prices have not breached their set stop losses … but these are volatile times … stay tuned for next month!

This pre-US election time is bringing on plenty of action in my individual positions though – after a bit of a cruisy period, and being almost 100% invested in stocks, my portfolio is now 12.5% cash … due to selling some holdings that have had some dramatic falls in this jittery ASX market.

I have the feeling that this wild time will not be over till at least the US elections are over.

What is Slack Investors strategy for the coming month? … although the start of November has brought further falls, and the “fear index” is creeping higher on the US Charts. Slack Investor does not want to become a daily trader and respond to the whims of sentiment – However, if the whims become big enough on a monthly basis, action will be taken. He has reviewed all of his individual stock positions and concluded that his remaining holdings are sound companies with good management – and will stay with them … up to a point!

Some of my individual stocks are near their selling prices and I suspect that further selling could occur and my cash position is likely to increase by next month’s monthly report. However, in the meantime, Slack Investor is taking a deep breath and enjoying the lack of decision making until another month. At the end of November, I will be making buy/sell decisions on the monthly data in a rational, but slack, way.

More detail and chart and table updates can be found on the ASX, UK,US index and Portfolio pages.

Not Index Funds Again … This is Boring!

This site spends a bit of time talking about index funds, here and here. As well as the blog, the Slack Investor site hosts pages following the ASX Index, US Index and UK Index. This is because Slack Investor likes, and is invested in, these type of funds. Each page is dedicated to a rules-based method of following these type of funds in a (mostly!) profitable manner … and, in the Slack Investor tradition, a minimal amount of energy needs to be spent on these investments.

The astute reader will peruse my portfolio page and ask the question

Why does Slack Investor keep going on about these funds when only ~4% of his portfolio is invested in them?

The explanation is that Slack Investor started out 100% in Index funds … and, with some experience started trading in individual shares. I currently have a mixture of both. Index funds are a great place to start your journey into share investment.

There are some eloquent arguments against using the broad index funds as an investment tool. Montgomery maintains the theme “why fill the saddlebags with bad companies!” in this article.

However, despite these funds labelled as “dumb investing” by some, Index funds become more popular each year and have some solid support in the investing community. Slack Investor has developed a simple rules-based method for (usually!) profitable trading in index funds that only requires monthly monitoring. At the end of each month, I will look at the monthly chart of each followed index on Incredible Charts and make one of three decisions – buy, sell, or move my stop loss.

The simplicity of this approach is appealing for its slackness!

Details of this method will be eventually posted on the index pages – Not because I’m secretive, … just because I’m a little slack … and I think it will make an interesting future post … but for now, monthly decision points will be posted as soon as they are made.

This “index trading” method is different to how individual companies are traded by Slack Investor. There are greater risks involved in trading just a few individual companies … but the potential rewards are also much greater! One of the few advantages of being in the investment game a long time is having enough capital to have positions in at least 20 companies … this limits “individual company” risk as each company is just a small fraction of my total portfolio.

Slack Investor is currently enjoying the decisions associated with trading individual companies … even though a bit of effort goes into researching the companies – and they require more monitoring (work!). I am rational enough to know that there will be a time where this extra work will lose its appeal … and then I will revert back to index investing … “dumb” perhaps … but hopefully still profitable.