Tag Archives: Investments

What’s next for Brexit?

By Robert Wright /November 16,2018/

A ‘black swan’ refers to an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.

Brexit arguably is a ‘black swan’ that, paradoxically, has taken years to unfold. Despite this, we still do not know what the effects of Brexit will be.

We know the basic facts: on 23 June 2016, the UK held a referendum on leaving the EU, in which a majority of British voters voted yes.

On 29 March 2017, the UK government invoked Article 50 of the Treaty on European Union, commencing the legal and political process whereby a member state of the EU ceases to be a member.

On 20 June 2018, the UK Parliament passed The European Union (Withdrawal) Act 2018, which became law by Royal Assent on 26 June 2018. This Act declares “exit day” to be 29 March 2019, at 11pm Greenwich Mean Time, or midnight, Central European Time.

There is a great deal that we do not know

Negotiations between Britain and the EU are ongoing, and there is still uncertainty as to the ‘deal’ they will strike. The next formal European Council summit, due to be held on 18 October 2018, had previously been viewed as the deadline for striking a deal, but talks may continue beyond this date.

Commentators have suggested that the outcome of these negotiations may fall into one of the following broad categories:

Hard Brexit:

The UK leaves the EU in every sense, giving up full access to the single market and customs union, as well as all EU rules and regulations, financial commitments to the EU and the jurisdiction of the European Court of Justice (ECJ). Hard Brexit would see Britain gain full control over its borders, the laws that apply within its territory, and the responsibility for making its own trade deals with other countries – and with the EU – under the World Trade Organisation (WTO) rules for trade.

Soft Brexit:

This approach would try to leave the UK’s relationship with the EU as close as possible to the existing arrangement, particularly so as to retain unfettered access to the European single market and customs union.  But since the UK would not be a member of the EU, it would not have a seat on the European Council, nor would it be represented in the European Commission.

No deal:

A hard Brexit without the arrangements being pre-agreed between the UK and the EU.

In the light of the above, anything seems possible, even a fresh referendum or a snap general election, which could change everything.

The politics of Brexit remains fraught

After the government issued a statement in July, which included a number of concessions aimed at reviving negotiations with the EU, politics remains fraught within the Conservative Party among those who are in favour of a Soft Brexit and those who are not.

Examples of a Soft Brexit include Norway, Iceland and Liechtenstein, which are not members of the EU but are part of the European Economic Area (EEA). In return, they must make payments into EU budgets (which sets out the EU’s long-term spending priorities and limits), accept the EU’s “four freedoms” of movement of goods, services, capital and people, and be subject to EU law through the European Free Trade Association (EFTA) Court.

A Soft Brexit could be applied in the same way to the UK, but the UK government is likely to insist on tighter controls for immigration into the UK.

Brexit is debated not only among political parties, but also among other organisations. These include, on the one hand, Leave Means Leave, the Bruges Group, and the European Research Group, and the Open Britain group, Best for Britain, Britain for Europe, InFacts, and the People’s Vote campaign, on the other.

The initial effect of the Brexit vote, which caused panic on the stock markets, is now in the past. The British pound was impacted by the Brexit vote, falling by 13.3% on the day the result came out, from US$1.50 to a 31-year low of US$1.3012. The pound fell as low as US$1.15 in October 2016, which the Financial Times called a 168-year-low in terms of a trade-weighted index measuring sterling against a basket of its trading peers and is now trading at US$1.28.

However, just as no-one can predict the final outcome of the Brexit negotiations, no-one could possibly state categorically that all potential final deals and arrangements are factored into stock market prices. Brexit is very much a black swan still.

 

Source: BT

Investing in ETFs

By Robert Wright /November 16,2018/

An ETF is an investment fund that holds a basket of securities – such as shares or bonds that tracks a specified index – and is itself a listed share, traded on a stock exchange.

ETFs are low-cost, simple vehicles that can offer exposure to a wide range of Australian and global asset classes, indices and sectors, currencies and commodities, as well as a variety of investment strategies.

Investors can gain cost-effective, fast exposure to different markets that were once only accessible to institutional investors, including asset classes and strategies through a single investment by buying an ETF. As ETFs are listed, the investment is liquid, and therefore tradable at any time, however like shares, liquidity is dependent on market volumes and during time of significant market stress, liquidity (the ability to buy and sell) could decrease.

The appeal of ETFs

Typically, ETFs tend to be much cheaper in their annual management costs compared to traditional managed funds. They have no entry or exit fees – investors pay normal brokerage when buying or selling in the same way an investor trades shares.

The attraction of ETFs is that they are very flexible investment tools, which allow investors to easily improve their portfolio’s diversification; or to easily implement an investment view; or to use investment strategies that were once too complicated or expensive for them to consider. An investor can use ETFs for their entire asset allocation, or they can act as a low-cost complement, or alternative, to existing investments with active fund managers.

Understanding the risks

Investments carry risk, and ETFs are no exception to this rule. While there is the obvious risk of gain or loss of value depending on market activity, there are other risks to appreciate.

These range from risks specific to the assets the ETF is invested in, to the liquidity of the underlying investments, currency changes should some of the assets be international or even counterparty risk that is the risk the issuer of the ETF will be unable to fulfil the duties of managing the ETF.

Using ETFs in investments

The simplest way in which investors use ETFs is to establish – or diversify – an investment portfolio. For example, an investor who does not own any shares can simply buy an Australian share ETF, giving them a holding in hundreds of Australian shares, in a vehicle that aims to replicate the annual performance of the Australian share market index (give or take some differences in returns due to challenges of copying the index exactly). Adding a global shares ETF to your portfolio can widen this exposure to an international shares allocation; this might add thousands of shares to the portfolio depending on the particular ETF, picking up the world’s top companies (and brands), and tapping into the global revenue streams these generate.

This same investor can then very simply extend the diversification of their portfolio into other asset classes.

ETFs can also be used to gain exposure to a specific investment ‘theme’, as part of a tactical asset allocation process. For example, an investor who believes that the resources sector is poised to out-perform the rest of the Australian share market can tilt their portfolio toward over-weighting the resources industry by buying a relevant ETF. This tilt can be short-term or long-term. Alternatively, an investor who believes that the European economy will grow more strongly than the other developed-world economies could ‘play’ that view by buying a broad European share ETF.

Similarly, an investor who believes that the emerging markets will outperform the developed-world markets could bring an emerging markets ETF into their portfolio, and hold it as long as they believe this outperformance will prevail. Alternatively, this strategy could involve a view on a particular industry: an investor who believes that global spending on healthcare will increase as populations in many countries age – both in the developed and developing worlds – can tap into this theme by buying a global healthcare ETF.

To find out more about ETFs, please contact us.

 

Source: BT Financial Group, 2018

7 budgeting apps to help you save in 2018

By Robert Wright /June 01,2018/

Where does all that money go? A host of apps are available to help you easily answer that question and even budget better, so you don’t get caught short in the event of a ‘rainy day’ and can feel more comfortable and in control of your finances every day.

The best place to start is with your bank. Most major Australian banks offer their customers great tools to help improve how they manage their finances.

In addition, we’ve found these seven apps to help you get off to a great financial start in 2018:

TrackMySPEND

This free app allows you to track your personal expenses on the go and is very simple to use. Made available by the Australian Securities and Investments Commission’s MoneySmart website (www.moneysmart.gov.au), it will give you a better picture of what you are spending your money on.

You can use it to record expenses such as your weekly household budget, work or travel expenses, particularly those cash expenses that are difficult to record or the costs of a special event, such as a wedding.

You can also separate your spending into categories like “needs” and “wants” to identify areas where you can rein in your spending and start saving.

TrackMyGOALS

Also available from the MoneySmart website (www.moneysmart.gov.au), this free and easy-to-use app will help you set realistic savings goals and help you to prioritise them, making it easier to achieve them and providing you with positive encouragement by tracking your progress.

You can also use this app to track how well you are saving for a holiday, wedding, car, house, renovation, school fees or anything else you are dreaming of.

Pocketbook

Also free, this popular budgeting app integrates with many of the major Australian banks. This means you don’t have to manually enter all your expenses onto the app. Instead, you sync the app with your bank accounts and credit cards to track where your money is going.

You can use mobile photos and geo-location to input cash transactions like coffee or a beer, or add additional details like photo receipts, bills and invoices to help you track your transactions.

Pocketbook automatically organises your spending into categories like clothes, groceries and fuel, showing you where money is being spent.

You can also set up budgets for each category, see your balances and view your transactions. The app ensures all your bills are automatically detected and in the one place. Plus, you get notified when bill payments are coming up and if you have enough money to cover them.

Mint

Another free app, Mint brings your bank accounts, credit cards, bills and investments together so you instantly know where you stand. You can see what you’re spending, where you can save money and can even keep track of your credit score. Plus, it allows you to easily create budgets you can stick to.

You get bill reminders so that you pay bills on time. And, you can schedule payments on the spot or for later, ensuring you never miss a payment again.

Acorns

This app helps you to save and invest proactively, by using your digital loose change.

You simply connect it to your credit card, debit card or another funding source and allow it to round up each of your transactions to the nearest dollar. It will then invest the change into a pre-decided diversified portfolio of investments that takes into account your investment goals and your risk tolerance. The transactions are small so hopefully you won’t even notice them.

This app is free to download. Once an account is opened, there are no fees on $0 balances. After that Acorns charges $1.25 per month for accounts with a balance under $5,000 and 0.275% a year (charged monthly, computed daily) for accounts with a balance of $5,000 and over.

Expensify

This app is great for people with work expenses. Not only does it help you track and log all your work expenses, it also liaises with your office while you are away.

Expensify automates every step of the expense management process. Its technology will read and scan your receipts and then add these to an expense claim that can be automatically submitted to your employer and approved. You could very well get your expenses reimbursed in just a few minutes.

A very basic service is offered to individuals for free. All the bells and whistles are available for US$9 a month on a corporate plan.

Goodbudget

This app is a modern take on the time-tested envelope budgeting method, where the cash for each month’s expenses is taken out and divided into envelopes for each budget category – for example, groceries, transport, eating out or rent.

The idea is to stop spending on that category once you’ve emptied the envelope or before, if you’re really disciplined.

Goodbudget helps you to stick to your budget limits. Rather than discovering that you overspent when it’s too late, you can plan your spending beforehand and only spend what you have.

Because you can share a budget across multiple devices, the app can also help couples manage the combined household budget and check know how each partner is tracking.

There’s a free version that allows you to create 20 envelopes and share across two devices. However, for US$6/month or US$50/year you get unlimited envelopes and accounts, the ability to share these across five devices and to keep five years of history.

 

Source: Money and Life.

How to stay focussed in volatile markets

By Robert Wright /June 01,2018/

Investing in markets means volatility. When done well, you are getting paid for taking on risk. So why is it that sharp drops in the market have such a visceral impact on us? We only have to go back to early February, when markets dropped 4.6% in a few days to recall such a time of alarming headlines and concerned conversations.

The first thing to say about February is that it was far from unusual. Since 1979, there have been 182 five day periods worse than the February decline. It happens, on average, every three months. It’s about as frequent as a 29 degree day in Sydney. Warm, yes, but barely worth a comment. So why do we all feel this way when the markets fall?

The second thing to say, is that it was not unusual and moments of this ilk will happen again. With central banks commencing or stepping up their interest rate hiking cycles and unwinding quantitative easing (QE) stimulus, together with a divergence in monetary and fiscal policies, the result should be greater volatility.

Preparing for the inevitable

So the market just fell. You’re reading headlines claiming billions of dollars of value have been wiped off the stock market in a matter of hours, days. You check into your account and see that your investments have also been affected. What will you do?

What most people do is act. They sell in fear. This is entirely natural, however, it is likely to be the wrong strategy. So what should you do?

For now, the best advice it to do nothing and to seek expert advice. That will feel all wrong. So let’s unpack why that is and what to do to manage those feelings. To paraphrase a recent Wall Street Journal headline, ‘The Share Market Isn’t Being Tested, You Are’.

We need to feel in control

Nothing undermines a sense of control over your investments like a sharp and unexpected stock market fall. The immediate priority for many is to re-establish that sense of control. One of the most tempting means is by doing something, anything. This is linked to a deep-seated part of human nature and manifests in a desire to maintain the illusion of control.

In our daily lives, in order to act, we need to be confident in our ability to make an impact. In most cases this confidence can be classified as overconfidence, but without it we might not act at all. Being paralysed by indecision can be as bad as acting with overconfidence.

Search for meaning

You will probably have a very strong need to know why the market movement happened. It is more than mere interest. Needing to know is linked to the desire to act. Because jumping blind into a strategy feels wrong, we need an insight to give us enough confidence to act. Hence, the pressing need to find out why.

Actions have consequences

Adjusting your market exposure to suit evolving risk and return opportunities can be valuable. However, selling in fear is a powerful behavioural bias that costs investors dearly. If you were to sell in fear in each bear market (20% down) for Australian Equities since the early 1980s, and only return to the market some months later or once a recovery has started, then instead of a compound annual growth rate of 10%pa, you’d have achieved 8%pa. This is a costly bias.

One of many costly biases

There is a panoply of behavioural biases which help us get through the day. They are valuable mental shortcuts that help us act fast, handle information overload and find meaning. Occasionally these mental shortcuts do not serve us well. Investing is one such domain. If everyone is running out of a building, our instinct is to join them, no questions asked. This is a good example of the ‘herding’ bias – after all, the building could be on fire. However, this same bias in the investing context can be costly. Study after study has measured the costs of these biases and estimates range from 1% pa to as much as 6% pa.

What to do

• Recognise that markets are complex.
• Seek advice and consider the impact. Ask yourself – why am I making this decision? Is this investment part of an overall plan? What might go wrong? What does the evidence say?
• Record your decision and why you made it – by tracking your decisions, you can reflect on the evidence and adjust or confirm your approach.

Keep your eyes on the prize

Keep your eyes on the prize, whether that prize is growth, income, capital preservation or a mix. Bouts of short term volatility don’t mean allocations have to change. Remember, this has happened before and will happen again. Selling in fear costs real returns in the long term. Financial advice is the best insulation from these and other biases waiting to erode our returns.

 

Source: Macquarie