View - investment newsletter spring 2012

Welcome to our spring 2012 edition of Views.

In this edition, you will find our latest update and opinion on the current commodities and economic cycle.

Liquidity is the principal focus in markets today. Markets feel that liquidity will give support to the stock market, the European banking system and the Euro, as well as help commodity prices from sinking. As widely expected, the Europeans, Chinese and Americans provided investors with more of the same “drugs” they wanted in order to prolong the solvency issues.

Policy expectations during September have dominated market movements, which has helped to trigger a rally following these announcements. Ultimately, the underlying data trends will be the key to a more sustained rally.

Read more...

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Diversifying fixed interest

PORTFOLIO UPDATE: Fixed interest investments are secure with low volatility but still achieve solid returns. Read more about diversifying fixed interest...
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Quantitative easing – round 3



Image thanks to KJGarbutt

The latest big announcement by the Federal Reserve is to continue with more quantitative easing (QE) until the labour market improves. This open ended statement caused markets to react positively.

So what is QE and why does it seem to be the only game in town?

To be fair, QE is not actually money printing, even though it has a similar effect. While money printing puts the money in the hands of the public, QE allows central banks to finance fiscal deficits with the aim of giving banks more money to lend at the same time as reducing long-term interest rates to bump up business and consumer activity.

With interest rates in these troubled economies are virtually at zero, policy makers have almost no other politically acceptable tools available other than to increase the balance sheet of central banks by buying more assets with central bank money.

The first two rounds of QE have produced little effect to push down unemployment and secure consumer activity and sustainable business lending. Therefore whether another round will ultimately work remains to be seen. We have no option but to give them the benefit of the doubt.

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Loss aversion bias

Investors are often far more interested and consumed with the daily movements of stocks and the possibility of placing a winning trade than sitting down and understanding how our brains work and how this undermines our performance in the market.

 

One of the most common errors identified by psychologists and behavioural finance studies is that investors always tend to have a bias against losing money. Unfortunately humans fear losses more than we appreciate gains. This was confirmed in a simple university survey using a coin toss whereby the participants would need an average payoff of $40 on a winning toss to offset the pain of taking a potential loss of $20 on a losing toss. In other words, the pain of a loss is twice as potent as the pleasure generated by a gain.

 

As advisers, the above result demonstrates the reason we have more trouble getting clients to sell a losing position, even when clients also believe the position is likely to continue its loss for quite some time, in the hope that they recover. Many times, this recovery rarely takes place, particularly with small speculative companies with no profits.

 

This fear of loss and negativity bias may in fact blind an investor to take advantage of good opportunities. It is often important to weigh up the prospect of loss with that of the opportunity costs. It may also mean that the portfolio struggles to outperform over time, as this loss aversion bias leads to having too many losers being kept and too many winners being sold (often too early).

 

This blog is brought to you by Financial Decisions, a leading financial planning firm offering a diverse range of services that include investments and superannuation, personal insurance, estate planning, mortgages, tax planning and family office. Please call us today and take control of your financial future.

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Paradigm on investments

Image thanks to RambergMediaImages

Following our recent paper titled "Portfolio paradigm", please refer to this recent AFR article which provides further evidence that there is a paradigm on investments.

This blog is brought to you by Financial Decisions, a leading financial planning firm offering a diverse range of services that include investments and superannuation, personal insurance, estate planning, mortgages, tax planning and family office. Please call us today and take control of your financial future.

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Investing is a game of expectations

Have you ever wondered why a good earnings result is sometimes met by a drop in the share price? Or maybe why stocks rise even after poor economic data has been announced to the public?

There are many instances where it is hard to explain the daily movements of shares due to the contradiction between news and price. In our opinion, these unexpected movements are directly related to human behaviour and the expectations investors have in relation to a certain company or event.

Traders and investors buy and sell based on what they believe future news will be, whether that is tomorrow or next month. So when investors are nervous and cautious about the earnings of a company, they lower their expectations and have a tendency to sell prior to the earnings announcement.

If the earnings are not as bad as they originally feared, shares are inclined to increase as investors buy the stock back.

When the Global Financial Crisis hit top gear in the early part of 2009, the markets started to rise much earlier than the economy, as expectations of an improving economy in the latter part of 2009 caused investors to buy stocks again. By the time the economy had shown signs of improvement, many markets around the world had risen approximately 50%.

This blog is brought to you by Financial Decisions, a leading financial planning firm offering a diverse range of services that include investments and superannuation, personal insurance, estate planning, mortgages, tax planning and family office.  Please call us today and take control of your financial future.

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A problem with the budget surplus forecast



Wayne Swan, Treasurer
Image thanks to publik16

There was an interesting comment recently in the “Money Minute” segment on Channel 9’s Today Show that mentioned the small but significant rise in unemployment from 5.1% to 5.2%. It doesn't seem like there is anything for us to worry about, which may be true for now.

The concern is that Wayne Swan has forecast a slim budget surplus by the end of this coming financial year. A big component of this forecast stipulates our unemployment level to be no higher than 5.25% for the next 12 months. Therefore, if unemployment increases further by just another 0.1% to 0.2% over the coming months, the slim surplus that the treasurer has been confidently predicting over the past few months will be wiped out.

The affect on the surplus

When unemployment runs up, less people are at work and thus there will be less tax paid to the Government. Conversely, there will be more Government handouts to those not working. That’s a "double whammy" for the Government.

We don't have a problem with people having an opinion and forecasting what they think may happen. But when the Government, represented surely by “one of the smartest mathematicians” in the Labor Government, provides himself with almost no margin for error, the forecast often tells us more about the forecaster than the forecast itself.

This blog is brought to you by Financial Decisions, a leading financial planning firm offering a diverse range of services that include investments and superannuation, personal insurance, estate planning, mortgages, tax planning and family office.  Please call us today and take control of your financial future.

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