The US election and investment markets

This scary clown craze has just gotten out of control. They've even got 2 running for president in the United States.

Regardless of who you might think will be a better or worse president, should you be making changes to your investment portfolio in light of the upcoming election and the uncertainty it poses? Other than investing in Mexican wall building companies - of course!

Well, I'll let you in on a little secret. Everyone already knows that an election is coming up and everyone already knows that both candidates of the 2 major parties seems to have some flaws - like is always portrayed. It's not a secret, you and I don't possess any special insight.

This is the thing with investment markets, they're amazing at pricing in today's news and pricing in risk and uncertainty. What you already know is already in the price.

Sure, if the unlikely scenario of Trump being elected actually happens, there probably will be some volatility, because at the moment, that isn't the expected outcome and if Trump is elected it will add some uncertainty, but the long term investor doesn't care about short term volatility. The long term investor will be invested for this next presidential term and probably the next 5 presidents as well.

The chart below shows the US market since 1926 and shows you the president and the political party they represent. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who was residing in the white house.

Equity markets can help investors grow their assets, but investing is a long-term endeavour. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in a favourable outcome. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

Glenn Hilber is a Certified Financial Planner with over 9 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

Compare the Pair

We all know this ad from Industry Super Funds, if at least not this ad, one of the variants?

Well it's been very successful for them and the premise of the ad is that if you pay low fees, you’ll be better off. And I completely agree with this, keeping costs low is critical to achieving success when it comes to investing.

But industry funds aren’t really that cheap, and particularly not at Precision Wealth Management. Our clients pay about the same as industry funds, if not less, depending on the balance. This is because we are part of a large group that manages over $3 billion and have negotiated very low fees for our clients.

But the biggest determining factor of your financial success is actually the structure of your portfolio. How much do you have allocated to each asset class (Australia/International shares, property, cash, short term/long term fixed interest etc)?  On a simple example, this is evidently true if you look at the 5 year returns on QSuper. The higher risk “aggressive” fund has outperformed the lower risk “moderate” fund by about 4% per annum. That’s massive.

You might say, well shouldn’t everyone invest in the highest return? Well, it’s just not that simple. Risk and return are related and to achieve the higher return, you need to take on more investment risk, which might not be suitable for everyone. That is why a tailored portfolio that suits not only your tolerance to risk but also aligned with your objectives is so important.

On top of that, if you compared a third person ("Compare the Trio" doesn't quite roll off the tongue the same way) that had been salary sacrificing $50 a week for the past 10 years, that person would be light years ahead. I have a lot of dealings with people approaching, or in, retirement and I'm yet to meet one that said "I wish I didn't save so much. I wish I spent a bit more each week on discretionary expenditure". I think you can guess what most people regret when it comes to saving.

The other important aspect is the insurance offering within superannuation funds. The industry superannuation funds offer group insurance policies which are teeming with fine print and are not guaranteed renewable.  This means the insurer can change the terms of the insurance, the definitions, and possibly cancel cover all together. A good insurance policy is guaranteed renewable which means that providing you continue to pay the premiums, the insurer must continue to provide cover and is bound by terms and definitions when you originally took out the policy.  Changing the terms and definitions does happen.  Read the article from Shine Lawyers about the changes to the AustralianSuper definition on Total and Permanent Disability. 

Not only that, but the premiums in AustralianSuper have increased considerably over the past 5 or so years and now, a retail policy with the same level of cover can be cheaper as shown in these pictures. This is the same in almost every instance I see when comparing premiums for clients.

Superannuation is serious matter and one of the most important aspects of your financial life. And as a general rule of thumb, don't take advice from a guy with a mustache and a fedora hat. So if you want to "Compare the Pair", give us a call (1300 200 012) or email (admin@precisionwm.com.au) and I can give you a second opinion on your superannuation. 

Glenn Hilber is a Certified Financial Planner with over 9 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

Retirement Property Investment Strategy

I had a friend (older friend nearing retirement) receive a cold call (perhaps wasn't 100% but was pretty cold) a week or so ago and they were talking to him about a government incentive about buying property to build wealth in the lead up to retirement.

The person continually said government incentives and also used the term property support service or something to that effect, giving the very real impression that there was some sort of government grant or similar. The person was very good on the phone and even though my friend had no interest at the start, they were somewhat curious and interested at the end. The person also insisted that you needed to be 5 years away from retirement.

Nevertheless, I'll explain it here.

Firstly, there is no government incentive (other than first home owners grant which is not what these people were targeting). What they are referring to is simply tax deductions on being negatively geared and claiming depreciation. So that is the first thing to remember. In fact, not only is there no government incentive, but the state government loves it because the stamp duty you pay is huge.

But, the strategy goes like this:

• Buy a newly built property. Use your existing home or investment property as collateral for the borrowings.
• Rent the property out over the next 5 years, based on current interest rates, it should be roughly neutrally geared, but then also claim depreciation which can be quite high on a new property to get tax returns each year.
• Sell the property in a financial year after you have retired so any capital gains tax is minimised or eliminated. Because you are claiming depreciation each year, you are building up an unrealised capital gain, even if the property value stays flat. Over 5 years, this can be about $30,000-$50,000 depending on the value of the property.

So, the selling features of the strategy is:

• You're likely to get tax returns each year through depreciation even though month to month cash flow on the property will be close to neutral. So, pretty much free money from the government. Who doesn't want that.
• Even though you may incur a capital gain because of depreciation (even if the property value hasn't grown), if it is incurred after retirement, you should still not have to pay tax as you'll have no other income and the 50% capital gains tax discount.
• You have exposure to property (which everyone seems to love so much) so if you get growth in the property market you will also do well.

It all seems so good. Getting good tax deductions while you are still working to then incur the capital gains tax in retirement when you might pay no tax, plus potential growth.

But, there is some downsides and this is what they gloss over and where the strategy has its pitfalls:

• Property has very high transaction costs. Over $14,000 stamp duty to purchase a $450,000 investment property. Then sales commission of approximately $10,000. A total of $24,000 of transaction costs is a big hurdle to get over.
• The properties that these people are selling are paying high commission. Whilst it isn't a direct cost to you, you are still paying it. If the developer can sell the land and property for $440,000 but then it is on sold at $450,000 (with a $10,000 commission), then the real value of the property is $440,000 and you need growth to recover that. This can impact the real growth you achieve on the property between when you buy it and sell it.

If I do some rough spreadsheeting on fair assumptions, it is very difficult to have turned a profit after you factor in these costs. And you definitely need growth to turn a profit.

But at the core of the strategy is huge leveraging (gearing) for someone nearing retirement and in my experience, not a prudent investment strategy (do we still remember Storm financial?). Investing in any growth asset should be done with a time horizon of at least (and I stress AT LEAST) 10 years, so any short term leveraged investment strategy is not wise. But, there will always be these things out there and based on the amount of people who share obvious fake Facebook competitions and get sucked in on scams in emails, opening attachments from fake email bills etc, I think there will always be a market for these people, in one form or another. 

Property Spruikers

I've been wanting to write a blog post for a little while now, but couldn't think of a topic that didn't have me writing for an hour then realising I'm just going into way too much detail, but struggled to get my point across without so much detail. Seriously, I have about 6 or 8 draft blog posts going.

So, I'll try on this one. Property Spruikers!!

Do you see ads on Facebook that is talking about how you buy a property per year for the next 10 years. Or retire in 10 years through property etc etc. and you can go along to a free seminar?

Whatever you do, don't do it. It's ridiculous. I can't believe how this is happening and so many people are getting sucked in and it isn't being shut down.

Let's look at some history of bad financial products/investments:

• Agricultural investment schemes (trees etc) - Huge commissions were paid, huge returns were promised, almost all collapsed
• Westpoint - Huge commissions were paid, huge returns were promised, collapsed.
• Structured/leveraged hedge funds (leading into GFC) - Huge commissions were paid, huge returns were promised, all collapsed.
• What storm financial was doing - Huge commissions (they technically were a fee, but it was a big % based on how much they invested so they were paid more if they invested more), the investments collapsed.

What I've written above about 'collapsing', they all mean a different thing. Storm financial investments didn't collapse, but the strategy failed and a lot of clients lost everything. The structured leveraged products didn't lose anything, but clients had to pay the interest on the loans for 6,7,8 years (whatever it was) just to get their money back.

Semantics aside, can you see the common theme amongst those poor investments.

Now, onto these property spruikers. Are they promising huge returns, are they getting paid huge commissions?

The answer is yes.

Do I think the property market is going to collapse and these investors lose everything? No, not really. I don't know what is going to happen. But I do know 1 thing, and that is, when there is a slick sales pitch and huge commissions involved, stay away.

Still think property is a good investment though? 

Fine, but you can do a lot better than listening to these spruikers. 

Don't listen to how they know what suburb is about to have the biggest growth (if you know anything of these spruikers, it's always suburbs with new developments because that is where they can sell newly built houses or off the plan houses for huge commission - they never tip some area where there is existing houses and you just go off and buy your own. They'll tell you the reason for buying new is because a new house is better because you can claim more in depreciation or for off the plan you can lock in the price now and don't have to actually buy it until its built - that's a good one, anyway, I digress), just go out, find a solid standing house on a good block of land (it's the land the appreciates, houses depreciate), get a low interest loan, get good tenants and a good agent to manage it, and leave it there for as long as you can, ideally 20 years +. Pretty much the same advice for any investment strategy.

Why gambling is better than trying to pick stocks

It is often thought that gambling is a bad financially but a good financial/investment plan is to buy certain stocks that have good prospects.

Before I get in any further, I just want to point out that I don't think gambling is a good investment strategy and should only ever be done with surplus money, money that can be lost.

So why could gambling be better than picking stocks?

Well, the concept between the 2 of them is the same. Identifying mispriced bets or stocks that provide good value for the risk they represent, and betting/buying that stock for gain.

However, the stock market, particularly in developed markets are very highly efficient. It is a completely free market mechanism where prices move with every trade and there is millions of market participants that are using all available information and buying and selling billions of dollars worth of stocks every day to determine fair price for that stock. Saying that you can pick stocks that have more upside potential than the market as a whole, with the same or lower risk is saying that you have more knowledge than all the participants combined.

With gambling on the other hand, the markets are more inefficient. The prices are set by the bookies and although do change, not every second of the day with every tiny bit of new information like how the stock market does. There is a much better chance of being able to identify inefficiencies within gambling markets.

That being said, bookmakers are very good and they consistently show very good abilities on setting prices.

So, should you gamble your way to retirement?

Absolutely not! 

No investment strategy should ever be based on trying to outsmart markets. It can't be done. There is no harm in having a flutter or trying to pick some stocks, but should always be done with surplus money and never the core of any wealth creation or investment strategy. The core investment strategy should be highly diversified to capture the return of each asset class and the makeup of the asset classes for your portfolio needs to right for your goals, objectives and risk tolerance.

Obviously this post is a bit tongue in cheek and even though picking individual stocks, albeit may under perform the market, will likely be a better strategy than gambling, however the point of the blog is to highlight that due to inefficiencies in gambling markets, it would be easier to find mispriced bets than it would be to successfully find inefficiencies in investment markets to be able to outperform the market.