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Australian stocks are up 63,338% since 1900. This chart shows why long-term investing is not gambling

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The life of an investor inevitably involves periods of frustration and can prove to be an emotional experience for many – whether it involves shares, property or bonds – as we navigate the ups and downs of the economic cycle and the impact this has on our portfolio value. For this reason, some broad perspective can help appease these concerns and focus on the underlying objective of investing.

Are you an active investor? Are you a buy-and-hold investor? Or a reasonably balanced individual that wants to participate in the upside but avoid the major setbacks that occur from time to time?

long-term-chartAustin Donnelly was a great advocate of these perspective pieces, as they should instil a longer-term mindset. In the past 100+ years, we have faced two world wars, a great depression and multiple recessions. Yet, despite all of this, the market continued on a reasonably stable trajectory.

In fact, the market went up 63,338% excluding dividends in the past 116 years (equal to approximately 71% every 10 years). This is despite the fact it experienced 10 “crashes”, defined as falls of over 20%, meaning approximately once every decade anyone that was fully invested had to stomach up to a 20% loss to their life savings. Of course, there are techniques available to reduce the drawdown risk (such as diversification to negatively correlated assets) or one can attempt to identify the risks in advance and avoid the losses altogether.

Today’s concerns are arguably similar, as we face the short-term issues of a US election, US debt ceiling negotiation, an Italian vote, the Brexit process and Chinese debt concerns. We also face the long-term issues of an ageing population, high household debt levels, a seemingly elevated property market and technological change that can have a material impact on investment values. crashes

The truth is that there are no guarantees in financial markets. The best we can do is make reasonable assumptions on the best path forward and retain conviction throughout the noise and inevitable periods of market panic.   

Therefore, as an investor, it helps to consider in advance whether you have the knowledge and temperament to identify these risks in advance (plus a willingness to act on your conviction when most people remain optimistic) or whether a buy-and-hold strategy is more akin to your style.

Knowing that most people wish to avoid crashes, we provide a framework that hopefully helps you to identify the key risks and position accordingly. However, just like the 1987 crash or the 2008 financial crisis; the timing and depth of a crisis is often a great unknown. In the end, intelligent investing requires temperament and deep analysis – in that order.

 

 

 

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Worried about a property crash? These nine facts answer it better than most…

By | Investing Times News, Lifestyle, Recommended by the Investing Times | No Comments

IMG_2386What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple as common-sense about supply and demand?

There has been a long-standing fear that Australian property could tumble, with some of the world’s most renowned investors (Jeremy Grantham and Robert Shiller included) claiming the valuation metrics for Australian property appear distressed or weak. However, these investors have been proven wrong again and again.

It raises an interesting point about the real drivers of residential property. The Investing Times tracks nine key supply and demand data indicators to answer this question, and while we acknowledge is not a crystal ball, it does seem a useful proxy in a world of excessive fear-mongering and ignorance.

Here are nine metrics you might want to add to your watch-list if you are interested in the wellbeing of the property-market. For strong future returns, you want to see:

  1. Rental yields strong relative to interest rates (differential less than 1.5%). Positive (Current stance) 
  2. Overall employment growth above long-term average. Negative
  3. New building growth sustainable relative to the population (between 1-2x population/building ratio). Negative
  4. Total housing market sustainable relative to size of the economy (housing stock to GDP ratio less than 300%). Negative
  5. 5-year price growth at sustainable levels (equal to or less than nominal GDP). Negative
  6. Recession risk low (yield curve positive). Positive
  7. Overseas arrivals increasing (six-monthly trend change). Neutral
  8. Lending growth expanding (home loans and other credit) above long-term average. Positive
  9. Rental income growth exceeding inflation (YoY change). Negative

Property marketSaid another way, for a crash to occur, we should be able to identify it because the catalyst is likely to be rising unemployment, falling migration rates, a recession, an interest rate spike, or a realisation that prices are simply too expensive relative to the size of the economy. And as can be seen in the chart, the strength of the data has a strong correlation to the future 5-year outcome.

Of course, this could be narrowed on a state-by-state level, or suburb-by-suburb level, and would make the research even more relevant (eg. Sydney and Perth have very different dynamics currently). However, using the weighted average of the 8 capital cities is still useful for the overall health of the property market.

Is a property crash likely in the next 5 years? With the current scenario showing only 3 of the 9 indicators positive, the data tells us there is an increasing reason to fear for the wellbeing of the property market in the short-to-medium term; although any calls for a crash would appear premature – at least for now.

One reason for continued demand is record low interest rates – especially relative to rental yields – and this is unlikely to change in the near term. Another reason is offshore demand, although the official numbers have shown overseas arrivals have stagnated since the currency fell below $1.00 in mid-2013, this currency drop has made Australian property 25% cheaper for an offshore buyer.

Therefore, while the general supply and demand outlook of property fundamentals has deteriorated over the past year, there are still healthy demand drivers. Overall, the data seems to illustrate there is a basis for growing caution, with the overall score  significantly lower than we have seen on average over the past 20 years, which may point to lower average returns and/or marginally increasing risk (although this should be no surprise).

What do you think of the supply and demand backdrop? What other factors would you consider? It is a healthy debate worth having.

Please note, this will be a regular feature in the Investing Times reports, so if you are interested in seeing more data like this (we run a similar model on the share-market with similarly strong correlations) then please request a free trial report below. We also have a range of other thought-provoking articles available at www.investingtimes.com.au or encourage you to subscribe at www.investingtimes.com.au/subscribe

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“Would you rather be a miserable millionaire or happy and homeless?” How do you answer these questions?

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IMG_0801 (480x640)The game of “would-you-rather” is a favourite past-time, usually involving an alcoholic beverage and a willingness to be embarrassed. However have you ever played a clean, moral-based version of the game that helps decode what’s most important to you? See how you answer these tricky questions.

Before we start, let’s clear up the rules. Each question starts with “would you rather” and there will be two options that follow. You must select only one – and your answer can’t be both or neither. As you go through them, you will hopefully find how much importance you place on money in comparison to the other important things in your life.

The 29 questions

“Would you rather have more time or more money?”

“Would you rather go back in time to meet your ancestors or go into time to meet your great grand-children?” (74% say the future)

“Would you rather live one life that lasts 1,000 years or live 10 lives that last 100 years each?”

“Would you rather know when I’m going to die or know how I’m going to die?” (59% say how)

“Would you rather be the best looking person or the smartest person?”

“Would you rather live in a world where there are no problems or live in a world where you rule?” (66% say no problems)

“Would you rather find true love or find $10 million?” (53% true love)

“Would you rather be the richest person on the planet or be immortal?” (53% richest)

“Would you rather secretly lose $500,000 on a bad investment or have everyone think you lost $500,000 even though you didn’t?” (53% would secretly lose)

“Would you rather receive $10 billion or give $10,000 to 100,000 African families?”

“Would you rather be famous or be the best-friend of someone who is famous?”

“Would you rather win the lottery or live two lives worth?” (60% say lottery)

“Would you rather always know when someone is lying or always get away with lying?” (54% say know)

“Would you rather have no-one turn up to your wedding or have no-one turn up to your funeral?”

“Would you rather be able to speak every language in the world fluently or be the best in the world at something of your choosing?”

“Would you rather change the past or be able to see into the future?”

“Would you rather email an embarrassing email to your entire company or secretly lose $10,000 on a bet?”

“Would you rather lose $1000 or lose all of your phone contacts?”

“Would you rather have been the smartest kid in school or the most popular kid in school?”

“Would you rather have lived like a king but have no family or live on the poverty line but have all your friends and family?” (74% say the latter)

“Would you rather go on a world tour with your enemy or never have a vacation?”

“Would you rather be a musician and have a number one hit or be an unknown with 50% more intelligence?”

“Would you rather have a small fulfilling life or a long unsatisfying life?”

“Would you rather have all your dreams fulfilled but have a 10% chance of instant death or be completely average with nothing special about you?” (63% say dreams)

“Would you rather visit a small house with your 10 loved ones or a mansion but not know anyone?”

“Would you rather change into someone else or just be you?” (52% say change)

“Would you rather be a hideous but popular person or happy but unrecognised?”

“Would you rather invest in a start-up which has lots of information or invest in a property chosen for you at random?”

“Would you rather be a miserable genius or a happy moron?” (56% say miserable)

As you can probably tell, the questions tell more about you than you first realise. Do you crave social attention, even at the detriment to your monetary objectives? Does money buy happiness in your mind or do you value other things more? Regardless, it might tell you a bit about your inner drivers and hopefully made you think twice about what is really important.

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