The debate over active versus passive investing has raged since the 1960’s and 1970’s when Jack Treynor and Bill Sharpe developed the Capital Asset Pricing Model. That work was the foundation for Eugene Fama and Kenneth French who developed the basis of the Efficient Markets Hypothesis.

The Efficient Markets Hypothesis

The Efficient Markets Hypothesis basically says that all information (about a stock) is continuously and instantaneously embedded into the price of securities at any given time. This theory implies that all humans are perfectly logical and rational decision makers. By extension then, no-one can outperform the whole sharemarket because all that can be known about a stock is already in the price.

As a result, one could surmise that the academic approach is to simply own all securities in the market at the ratio of their current market value over the total market. This method is called indexing. To be more specific, ‘Cap Weighted Indexing’ with the ‘Cap’ being shorthand for ‘Market Capitalisation’. For example, this week the market value of all the shares in CBA was $126.3 billion. At that price the company makes up 7.27% of the value of all the companies in the ASX200 index.

So, a cap weighted index investor would be putting 7.27% of his or her investment into CBA. The tenth largest stock in the ASX200 is Woolworths, with a market capitalisation of $37 billion, so it would only get 2.1% of your money.

Cap weighted indexing provides very broad diversification, and according to academia, that is a good thing!

But stepping outside of academia, what do the world’s greatest investors have to say on diversification?

Peter Lynch, in his book, One up on Wall St, he coined the phrase diworsification to make the point that making more investments into substandard opportunities, only for the sake of ‘diversification’ would likely make you worse off. This was the advice from a man who made 29% per annum from 1977 to 1990 for the Fidelity Magellan fund.

Another name that needs no introduction is Warren Buffett. His view is “diversification is protection against ignorance. It makes little sense if you know what you are doing.” He was effectively saying the same thing as Peter Lynch.

However, even Warren Buffett gave indexing a thumbs up in 2014 when he said he would instruct his widow to put the money she inherits at a 90/10 ratio into S&P500 index funds and bonds. In my way of thinking the advice is coloured by two important factors. 1. with the amount she will have, even a 40% decline in values won’t leave her starving, and 2. he is very conscious that consistent out performance of an index becomes very difficult when you are managing $290,000,000,000 as he and Charlie Munger are at Berkshire Hathaway.

From 1965 till 2017, Berkshire Hathaway shares have grown at 20.8% per annum, over which time the S&P 500 grew at 9.7% per annum. Clearly smart investors can outperform the market.

But let’s revert to the active vs passive question, and ask, ‘what are the characteristics of a portfolio manager that can outperform?’

For that answer we rely on two studies. Affiliated Managers Group is a company that buys into active funds management businesses. They are very incentivised to know what makes a market beating manager. In their 2014 white paper, “The Boutique Premium” they categorised ‘boutique fund managers’ as managers where the people making the portfolio decisions own at least 10% of the company, they manage less than $100 billion, and investment management is the sole business line.

They found that in the well researched asset universes, such as large cap US stocks, only around 50% of the boutiques outperformed the index. So it is basically a coin toss as to whether your ‘boutique’ manager will outperform the large well researched and hence ‘efficient’ markets like the S&P 500. But even in that market, the top 10% (decile) of fund managers outperformed by more than 6% per annum after fees.

What was of more interest was that in the global shares, smaller companies, and emerging markets, boutique managers had an excellent track record of outperformance. In both emerging market and small companies, these boutique managers outperformed by more than 2.5% per annum on average. The top decile managers in those markets outperformed by more than 11% per annum.

Macquarie Investment Management drilled into this argument from a different angle, comparing those managers who run a ‘Core’ portfolio and those who run a ‘Concentrated’ portfolio.

The mandate of the ‘Core’ manager is to provide an index plus return with a medium risk profile. Typically this group would hold 50-120 stocks with a target tracking error of between 0.50 – 3.0%.

Tracking error means the percentage return above or below a benchmark. For example, if Fund X made 10.50% return for a year, and the index they were using as a benchmark returned 9.5%, then their ‘tracking error’ was 1.00%. As a perverse outcome, if that fund made 14.00% return, and the targeted ‘tracking error’ was 3.00%, then the manager might have some explaining to do, since the outperformance was above the targeted tracking error.

The second group that MIM tracked were those with a ‘Concentrated’ portfolio. These had an aim to deliver significant excess returns with a higher risk profile. They would typically hold 20-30 stocks with tracking error which could exceed 4.0%.

Here are their results.

	Concentrated excess over index	Core excess over index
1 year	0.52%	-1.58%
3 years (p.a.)	1.47%	0.09%
5 years (p.a.)	1.67%	0.13%

Source: MIM. As at 31 December 2016

MIM also analysed the range of potential outcomes for an investor that allocated $100k to both a portfolio of Core and Concentrated managers over 10 years. The outcomes for investors allocating to top performing, median and poorly performing portfolios can be seen in the table below:

	Concentrated 20 to 30 stocks	Core 50-120 stocks	S&P/ASX 300 Index
5^th percentile (worst)	$214,196	$212,955
50^th percentile (average)	$242,852	$221,235	$227,470
95^th percentile (best)	$285,472	$236,830

Source: MIM. As at 31 December 2016

What is evident from the above is that:

the median Concentrated portfolio outperformed the index over the period
the median Core portfolio did not outperform the index over the period
the best performing Concentrated portfolios delivered significantly better returns than both the Core portfolios and index

What is the final lesson for us for diversification?

We continue to strive for excellence. At times, and in some markets, cap weighted indexing may make sense. But if risk budgets can be structured to allow for a little bit more tracking error, then additional returns can be achieved.

Part of our role at Quill Group Financial Planners is to research and recommend managers who have proven that they can outperform. The second part of our work is to monitor such managers and look for any signs that their ability to outperform (their ‘alpha edge’) may be diminishing.

If you aspire to have better than average performance, let’s talk about who is best placed to manage your money. Of course investing in this manner doesn’t guarantee outperformance, but we know it can be achieved, and for that reason we never give up the search.

The Australian Bureau of Statistics (ABS) released data in 2017 showing the increase of 2.3% for the average full time adult weekly earnings. With the average level of income rising every year, does this correlate to the average household expenditure, and how to save money?

The ABS has commented that their captured data of Australians and household expenditure doesn’t necessarily capture a household or families response to prices increasing. ‘Shrinkflation’, where the physical weight and package size is reduced by the manufacturer but the price remains the same, causes the price to rise and the increase in inflation, but is masked. Other factors may be where households choose to buy alternative, cheaper products, therefore not increasing their spending.

Household Spending in Australia | How to save money

The below graph details the breakdown of weekly household expenditure.

However, how does this compare to household expenditure in previous years? The graph below details the expenditure for each of the categories for the years 1984, 2009-10, and 2015-16.

How to save money | Australians show how and why they’re saving

The detailed infographic below breaks down exactly how and why Australians are saving their money.

We’re here to help

To see how you can start utilising your savings goals, find out more at ASIC’s savings goals calculator. If you require assistance with managing your finances, please do not hesitate to get in touch with us. We would be more than happy to assist you.

Some time ago, my daughter was lamenting that she didn’t have enough money to pay her phone bill and the rest of her bills. I suggested she should create a budget in excel. Her reply was ‘How can I create a budget when I don’t have enough money?’.

Now at 23, and living interstate, she asked me how to create a budget in excel so she can save for all the things she wants to do, and still be able to pay her bills. I must say, living by themselves and paying their own way changes a child’s attitude. While staying with her on a recent trip, I was chastised for leaving the bathroom light on! Yet only a few years ago I remember continually turning off lights and fans well after the room was vacated. How the tables turn.

1. Look at and categorise your expenses

The first step to creating a budget is to look at your expenses. You can use your receipts, or use a budgeting app. If you’re with Macquarie or Commonwealth Bank, they have excellent avenues to track your spending via their apps. An excel spread sheet can also help – you can write down where and what the expense was, and the amount. This starts to build a picture of where your money goes.
To take it to the next level, you can separate these expenses into 2 basic categories – ‘needs’ and ‘wants’. Make sure you put the take-aways and dining out in the ‘wants’ category. These I classify as reward items.
Now you have a clearer picture of where your money goes, let’s start on the budget. You can download various budget tools, but I find they tend to work on monthly and annual amounts. I’ve created my own excel spread sheet which I update each week.
Nominate a regular time to go through your past week’s expenses and bills due to be paid in the coming week.

2. What are your regular/monthly bills?

Look at your monthly bills and list them out. Such as:

Add all those other little things (‘wants’) like Spotify, Netflix, etc.

3. Other bills

What are your other bills and when are they due? Look at what you pay during the year. Such as:

So, you need 12 times your monthly expenses plus your annual and quarterly bills. In this example we have a total of $15,590 minimum per annum to pay the bills each year. Divide this total by the number of pay days in the year. For example, fortnightly, $15,590/26 = 599.61. In this instance, you need to set aside at least $600 per fortnight to pay your bills.
Put this amount in a separate account. I call mine ‘bill’ and put in place an automatic direct debit for the day after payday. You can set up direct debits for bill payments from this account. Direct debits for bill payments ensures the bill is paid on time and you don’t end up paying late fees. Also, some companies give you a discount for direct debits.
Whenever you receive a bill, update this spread sheet and adjust the amount you need to put aside.
Now that the bills are paid, let’s look at your other expenses.

4. Other expenses

You should now have an idea what you are spending each week. If you are wanting to save or increase mortgage repayments, this is the area you need to review.
Your expenses should be trimmed to essential items, plus an extra amount for those unforeseen expenses or treats (‘wants’), such as lunch with friends. You should then be able to formulate how much you can save.
Start a new tab in your spreadsheet. The table below is broken up into weeks in the month with paydays highlighted.

You can update your spreadsheet each week with the amount you actually spend, to compare to your budgeted amount. This will determine if you need to make further adjustments.

5. Set goals and stick to it

Once you have set your saving goals, the most important thing is to stick to your budget!
When you start out, it can take a little time to form new spending habits. You will need to review and monitor your expenses until you are comfortable with your budget. You will also need to monitor your bills account especially in the beginning when funds are building. You may have to fund some bills from your weekly expenditure instead of the bill account if there are insufficient funds.
Remember to reward yourself now and then. If you want, you can add another account and deposit a few dollars each week.

Speak to your adviser

If you have any questions, or would like to talk to anyone, we would be more than happy to talk to you about your financial goals. You can make an appointment with our Eight Mile Plains or our Southport office, or get in contact via our website.

A common concern amongst investors arises when the value of their portfolio suddenly falls due to market volatility. Understanding market volatility becomes especially relevant for those who are close to retirement, or recently retired.

Typically, listed shares drive much of this volatility, and portfolios with larger allocations to shares are most affected. In times like these, it’s important to understand the causes of market movements and how to minimise your risk.

Understanding Market Volatility | Why do markets move so much?

Whenever there is significant uncertainty about the future, or a sudden and unexpected economic, financial, or political event, financial markets may experience volatility until the repercussions are more fully understood.

For example, consumer and business confidence affect spending and therefore company profits. Global trade and production naturally affect economic growth. Political and fiscal decisions in larger economies such as the US can have far reaching consequences globally. And of course, natural disasters can cause major damage to any economy without warning.

Is market volatility normal?

It is important to remember that markets move in cycles, and volatility is a natural part of the economic cycle.

The Australian Securities & Investments Commission (ASIC) agrees that, ‘negative returns from time to time are not inconsistent with successful long-term investment’. History demonstrates that over the long term, the general trend of share markets has been upward.

The question therefore is not if it will happen, but how to best plan for when it does happen.

Look at the bigger picture and have a Plan

1. Develop a long-term investment strategy and stick to it. A sound investment strategy to address your spending priorities will consider how much to invest, how long to invest for, and what return is required. Your financial adviser can help you to formulate a well-considered strategy. This will need regular review to ensure it continues to meet your needs and objectives.

2. Understand how much risk you are willing to accept. If market volatility has caused you to reassess the way you feel about risk, it’s important that you see your financial adviser to discuss any necessary changes to your financial plan.

3. Your investment may benefit by being spread across a variety of asset classes, including shares (domestic and global), fixed income, cash, direct and listed property and alternatives. This diversification should help soften the effects of any share market falls as some asset classes often tend to do well whilst others are struggling.

4. Take the emotion out of decisions. When your portfolio value suddenly falls, it may be tempting to temporarily or permanently withdraw your remaining funds. This creates a number of difficulties:

– Looking to re-enter the market by buying back later is a risky strategy that rarely results in investors coming out ahead.
– Crystallising losses. If the value of your investment is falling, you are technically only making a loss on paper. A rise in prices could soon return your investment to profit without you doing anything. Selling your investment makes any losses real and irreversible.
– Incurring capital gains tax (CGT). Make sure you know what your CGT position will be before selling any asset.
– Losing the benefits of compounding. If you’re thinking about making a partial withdrawal from an investment, remember that it’s not just the withdrawal you lose, but all future earnings and interest on that amount.

Need advice?

Your financial adviser can provide the guidance you need to put in place a well-rounded investment strategy designed to meet your needs.

Is life insurance necessary?

Before considering ‘Should I have life insurance’, you need to determine what’s important to you. For most people, the most important thing in life is the welfare of their loved ones. Sometimes life doesn’t go as planned, so it’s important to consider the impact on your family’s future if you were to suffer a major injury or illness, or an untimely death.

Australia’s life underinsurance gap

However, a large proportion of Australians remain relatively unprepared for these possibilities, where their family income after the event may be substantially lower than it is now. Where this income shortfall cannot be funded from existing assets, it will need to come from another source such as a life insurance benefit. This difference represents a life insurance gap. In many cases, the gap will be significant due to the inability or reduced ability to earn an income while incurring additional expenses such as medical costs, and making provision for planned future expenditure such as children’s education.

Recent research from Rice Warner underlines the serious underinsurance problem that persists in Australia, including the following key findings:

o The median level of life cover meets only 47% per cent of basic needs.
o The median level of life cover meets just 28% of the amount needed to ensure that family members and dependants can maintain their standard of living after the death of a parent or partner.
o The median level of TPD cover meets only 14% of needs.
o The median income-protection cover meets 21% of needs.
o Only a third of the working age population have income-protection cover.

Finding out what life insurance coverage you need

A common misperception is that the default cover within superannuation funds will be sufficient to meet the need should it arise. However, Rice Warner indicated that the average level of default life cover within superannuation is around $200,000, whereas the average young family is estimated to require $700,000. Trustees need to strike a balance between the level of default cover provided and the associated costs and the long-term impact on member’s retirement savings. Therefore, as the evidence suggests, default cover within superannuation should be viewed strictly as a starting point.

Similarly, the safety net provided by government benefit payments or WorkCover is limited at best. Safe Work Australia reports that the median compensation paid from WorkCover following an injury at work is only about $10,000. This is for “serious” claims where one or more weeks of time off work was required. For all else, most government payments are means tested, relatively modest, and do not correlate with individual expenditure requirements.

Choosing the right life insurance

The best approach is to put the right amount of cover in place for your family’s circumstances, and ensure it is structured in the right way to save money and deliver the best outcome in the event you need to claim. This can get fairly complicated so it’s a good idea to discuss it with your financial adviser first. Talk to our specialist team about organising a life insurance plan that will suit your circumstances.

There is no magic number to start planning but the simple answer is, the earlier you start, the more chance you have to achieve the retirement that you dream of having.

The reason for this is because of the compounding interest effect. Below are some simple graphs showing how powerful this effect can be.

The first graph shows a beginning balance of $25,000 and rate of return of 6%, with no extra payments. Starting at age 25, by age 65 the balance has grown to over $257,000. If you delay the start by 10 years, the end balance is $143,500.

If you wanted to have $1 million at retirement age 65, the graph below shows how much you would have to save every month, using a 6% return, at different starting ages.

The table shows the amount that would have been personally contributed over the time to retirement and the compounded interest amount.

So what can you do to help achieve your retirement goals?

One of the easiest and tax-effective ways is through your superannuation. There is already a requirement for your employer to contribute 9.5% into super for you but you can add extra funds by either a non-concessional contribution (after-tax money) or by a concessional contribution (pre-tax money), salary sacrificing.
There are limits, caps and rules that apply to both contributions, so it is important to know these limits to ensure you don’t go over them as penalties apply to the amounts over these caps.

For concessional contributions, the cap is $25,000 per year and this includes the 9.5% from your employer contributions. Non-concessional contributions are capped at $100,000 per year. You may not have the capacity to contribute up to the maximum but every dollar helps. The important thing is not to leave retirement planning until you’re about to retire, the earlier the better.

Please visit the Australian Tax Office website for more information on the caps and rules. For more information, tools and calculators to assist in your planning, please visit ASIC’s MoneySmart website. If you require professional help, our team is capable and more than willing to provide bespoke advice for your situation.

It is one of the most important principles of investing and the chances are, you have heard it before “ensure you build a diversified portfolio” or “don’t put all your eggs in one basket”. However, most novice investors don’t really understand why diversification is so important to their investment strategy.

Here, we’ll take you through the fundamentals of diversification and a little look into the value it provides.

Firstly, how does diversification work?

Having a diversified portfolio doesn’t mean you are guaranteed to be protected against losses or guaranteed to have gains. It simply means you have a strategy in place to effectively manage the risk and reward trade off to help you achieve consistency in your returns over time.

For many reasons, the markets for different asset classes peak at different times and they don’t particularly move in exactly the same way. Different asset classes react differently to what’s happening in the economy and world around us. While one market can experience a surge, another can be on a downhill run.

To manage this risk, financial experts believe you should spread your funds across several markets. This may potentially offset any losses from a market downturn in one asset, by gains from another market that is performing better at that time. Spreading your funds across a number of different investment types means you will be well diversified and have limited your exposure to any single asset. In turn, your overall returns will be less volatile.

What constitutes as a diverse portfolio?

To diversify your portfolio, you need to invest across different asset classes. This should include a mix of growth assets and defensive assets:

Growth Assets
Investments that have a higher risk and reward – include investments that generally provide longer term capital gains such as shares or property.

Defensive Assets
Investments that have a lower risk and reward – include investments such as cash or fixed interest.

More characteristics of a diversified portfolio are:

Investments are across different asset classes such as cash, property, fixed interest, Australian and international shares.
Different types of investments are within asset classes. For example, having shares across different industry sectors.
Investments are across different fund managers. Applicable if investing in managed funds.

EXAMPLE: Diversification inside a particular asset class

Just to show you as an example, the below graph shows how different sectors of the Australian share market have performed over time. You can see that some sectors are more volatile than others.

Sectors of the Australian Sharemarket

Source: Australian Securities Exchange and Thomson Reuters 2013

The benefits of diversification

There are three main benefits to having a diversified portfolio:

Minimising risk of loss

As explained above, diversified portfolios have less risk than concentrated portfolios. If one investment performs poorly over a certain period, other investments may perform better over that same period. This reduces the potential losses of your investment portfolio.

Generating returns

We all know that sometimes investments don’t perform the way we expected them to. So, by diversifying your portfolio, you’re not merely relying upon one source for income. It also allows you to add riskier types of investments to your portfolio without increasing your overall risk levels.

Preserving capital

Some investors are not in the accumulation phase of life and are closer to retirement. These investors have a different set of investment goals which are oriented towards preservation of capital vs driving returns. Diversification can help protect their savings by reducing the overall risk in their portfolio.

Creating a portfolio for you

As you can see above, diversifying your portfolio can be beneficial but complicated. It depends on a host of factors including your appetite for risk, investment objectives, time frame and available capital. It requires a strong knowledge of the various asset classes, markets and sectors to ensure it is executed effectively.

To get the best results and create a portfolio suited to your particular needs and circumstances, it might be wise to talk to one of our financial planners.

Ever since I was quite young, I have been enamoured with the idea of scoring the best deal. I have been obsessed with this idea of getting the best bang for my buck. Some have called me frugal at times, and yet I still stand by my thriving ability that has allowed me to save thousands of dollars by utilising sales, shopping around and keeping my eyes peeled for opportunities.

From the age of six, I can recall waking at the crack of dawn to accompany my father to garage sales when we were on holidays in North Queensland. With dust covered hands, I would spend hours on a Saturday morning peeling through items big and small. I looked among their trash, and yet I was always able to find a treasure. “Beauty is in the eye of the beholder.” In a lot of ways, this framed my financial mindset growing up.

Benjamin Franklin once said, “A penny saved is a penny earned.” This is what I have lived by.

Maybe it’s the dream holiday for your family, a brand-new watch you’ve been hanging out for, or even a great deal on a new phone (iPhone X anyone?)—it’s such a rewarding feeling when you know you have saved money on something of value.

The truth is, we spend a lot of our time working hard to support our family and our lifestyle. Most people would agree that there is a certain beauty, and value to that.

It wasn’t until my early twenties when I realised that a lot of the ‘beauty’ and value that I had seen in my finances, had been placed in the material things or purchases in the present. Obviously, I valued my family and my lifestyle, however I operated my finances out of a tunnel vision mindset.

To reiterate: I learnt that as the beholder, I needed to place my value (the ‘beauty’) on not just the money I could save in the present on a deal, but what could I do to set myself up for the future.

Setting a Financial Planning Goal

To reference another supposed Benjamin Franklin quote, “If you fail to plan, you are planning to fail.”

I’m of the opinion that it’s never too early to start planning. And whilst I’m not personally earning high net wealth yet, I know there are things I can set in motion now to be future-aware.

Recently, our marketing manager Fabs and myself went along to Business Squared, and had the privilege of hearing four times best-selling author and digital influencer, Gary Vaynerchuk, speak. What was delivered with a humble self-confidence, were these words:

“We play the game where we want to achieve short-term success to impress others when we should be thinking long term.”

There is power in the plan! In addition to this, there is power in partnership. When you come to a humble understanding and seek the help you need to organise your finances, that’s where the beauty and value is. The value is in the long term, especially for those of high net wealth.

Reviewing your Goals

Having financial goals should be your first step, yet what should never leave your checklist is the task of reviewing your goals. Financial check-ups are the bumper rails on the alley of your life journey. It is impossible to separate your personal life from your finances; they go hand in hand.

Whether your goal is buying your first home or your sixth investment property, partnering with a trusted financial professional can be the key to a successful financial, and life journey.

Remember, today is the best day for you to take your finances by the reins. It’s never too late to make the decision to shape your future by shaping your today.

If reading this raised any questions for your finances – like it did for myself writing it! – then please feel free to get in contact with our team. Our financial planners are highly trained to develop the strategies that are about more than just investing money.

Money know-how can come from anyone, young or old. When it comes to financial wisdom, author and speaker Kylie Travers has taken her lead from the previous generation.

Get serious about saving

You can’t avoid it. To get on top of your finances you need to save and to save means you have to have financial discipline. Kylie was taught by her parents and grandparents that if you want to look forward to a better financial future, you need to take a serious approach to saving.

“My parents raised me to save money, set big goals, work hard and think about the future,” says Kylie. “They were both very open about money and my Dad gave me a copy of “The Richest Man in Babylon” by George S. Clason to read when I was just 12. So I learnt early about what you could do with money if you were prepared to save. My parents invested in shares and property and that helped me realise how much more freedom you have with other sources of income, apart from your earnings or salary.”

Seek out advice – especially from experts

Kylie has enjoyed the benefits of family advice on their finances. Several of Kylie’s uncles ran businesses, which has given her plenty of advice and real experiences to draw on when setting up her own company and brand. But she was quick to learn that well meaning friends and family will only take you so far. “I didn’t just rely on my own knowledge or what friends were saying,” says Kylie. “I engaged a lawyer I could trust to help me in my business and personal affairs and through them, found an accountant and financial planner. Their advice has been essential for expanding my business.”

Plan for tomorrow, live for the now

Although baby boomers are often praised for keeping a tight hold on their purse strings, perhaps they have something to learn from the millennial trend for living in the moment. Something else Kylie learnt from her grandparents was how much you could be missing out on if you only plan and save for the future. “I had one set of grandparents who lost everything and struggled to live on the aged pension when they retired,” she says. “My other grandparents planned carefully for a long and happy retirement but they both died at 63. So they didn’t have the chance to enjoy all those savings they’d worked so hard for. My Mum also died very young at 37. While I might be careful with my finances and make sure my daughters and I will be provided for, I also take time to enjoy what I already have.”

Everyone has something to offer

Kylie has a live in the moment approach, particularly when it comes to offering the best of yourself to others. “Don’t underestimate the impact you can have on people you encounter in the world,” is her advice to the rest of her generation. “By bringing a bit of fun and positive energy you can help people feel motivated to succeed in a world that seems full of constraints and obstacles.”

Kylie also advises young people to keep an open mind. She appreciates just how much the financial wisdom of her parents, uncles and grandparents helped her make positive decisions for her finances. “The basics of finance have stayed the same,” she says. “Digital has changed how we manage our money day-to-day and there’s plenty more information available, but the principles are just the same. And that’s why it’s worth listening to a generation who’ve already been through the same challenges we face – trying to find a way to live our dreams, with the money we need to do that.”

We here at Quill can offer expert advice to help you make the most of your finances today, and into the future.

The Australian market had a fair month in August. Mark takes us through the performance across the board to prepare us for what’s to come.

Stockmarkets

The Australian market had a fair month in August, with the ASX 200 Accumulation Index posting a 0.71% return for the month, which annualises out to around 8.5% which is within a few points of our expected long term returns. The commodities price was the action sector with Energy shares (+6.07%) delivered the biggest gains.

The rolling one year historic returns for the ASX200 Accumulation index is now 9.79%, rolling off some good periods in FY 2017 which saw a great return of 14.09%. Sentiment on Australia remains patchy. Banks, our largest sector have plenty of sceptics due to the high capital city house prices, and highly leveraged consumers. Our other big sector being materials, seems captive to sentiment about what China will do next.

Looking globally, the MSCI World Index gained 0.85% in AUD terms during August, supported by Asian markets which we favour as having the lowest valuations, and most room for improvement thanks to demographics and lower levels of current consumer debt. The rolling one year historic return for the MSCI World in AUD is now 10.71%, while the Emerging Markets gained 18% over the last twelve months.

Property

The S&P/ASX 300 A-REIT Accumulation Index gained 1.51% in August after coming under pressure in July. It has been a relatively good reporting season for listed property. Both of the giant Westfield entities are still under pressure as the market realises that there is a breaking point with retail rents. Add to that the Amazonian threat, and we are seeing the big malls trade closer to fair value.

While listed property prices have come off recently, direct commercial, industrial and retail property sales continue at higher levels. In some sectors it is possible to buy trusts at a discount to the value of their assets when like for like sales of direct assets are compared. In addition those listed trusts give you 3 day liquidity, and no stamp duty.

Residential markets appear to be softening in Sydney, but less so in Melbourne. Asking prices in Sydney fell by 2.5% over the last week, but are still up 12.5% year on year. Listing in Sydney rose 5% over the month of August, and will likely increase again going into spring. However, when we compare the August listings for Sydney, at 27,614 with Brisbane’s August listings at 29,587 it’s not hard to see why there is so much upward price pressure in Sydney. Melbourne listings have actually been falling, and that city had only 30,055 listings, down 15.3% on the year prior. The big fall is in Hobart, where listings have fallen 20.2% YoY, and asking prices have increased 2.2% over the week to 5 September, and 14.2% YoY. It looks like more Taswegians are hanging onto their cheaply priced little slices of paradise.

Interest Rates

Global yields fell in August as investors sought safer ground in bonds and gold. The Australian 10-year Treasury yield rose from 2.68% to 2.71%, but was still down on its March peak of 3.05%. This resulted in a flat return for the Bloomberg Australian Bond Composite 0+ years index and a -0.66% figure for the year to 31 August. This is due to bond rates being generally slightly higher than this time last year, and the lower mark to market value of longer dated bonds that come with that. The bank bill index did slightly better, with a gain of 0.14%. Global bonds as represented by the Barclays Global Bond Agg index gained 0.96%, and showing 1.04% for the year to the end of August. This gain was helped along by the US 10-year Treasury yield which fell from 2.30% to 2.12%. Clearly the bond market is not yet willing to hitch its wagon up to the Reflation train just yet.

The RBA kept the cash rate steady at 1.50% during the month. They did point to a more bullish employment outlook versus previous months. However, it is a challenge to achieve a balance between stimulatory monetary policy and the medium-term risk of high and rising household debt. Add to the mix an appreciating dollar over recent months, which will likely contribute to subdued price pressure, and it seems rates are destined to stay on hold for some time yet.

Household Finances

We include a chart of household finances this month to illustrate the rock on one side of the RBA, and the hard place on the other.

The hard place is the level of household indebtedness.

In the chart below we see how much debt has risen for the average household. The right-hand panel shows the amount of average income it takes to service that debt.

You will note that back when interest rates peaked in the late 80’s at around 18%, it took just over 9% of average after tax household income to service the average debt. Now that we have record low interest rates, it still takes almost 9% of average (and a whole lot more in the marginal borrowers) to service their debt. This is thanks to the now much higher household debt levels, which have also helped to push up house prices. At present, with benign inflation it is only the ‘rock’ that the RBA has to worry about. If ever inflation really starts to pick up, and interest rates need to rise will the RBA have to worry about the ‘hard place’. Food for thought if you are increasing debt right now.