New research to improve investor returns

Written by multiforte on . Posted in News

There has been an incredible amount of research in the past 50 years on how financial markets work – concepts like the risk-return trade-off, the theory of interest, the efficient markets hypothesis – that has led to more sophisticated approaches to capturing equity premiums for investors.

Think of it like how cameras have advanced in recent years.  The advances in financial markets science are like the ability to capture images with much greater precision and clarity.

The latest research is on profitability – and how we can identify stocks with higher expected profitability in the market. In terms of investment outcomes, adding profitability considerations to existing strategies can generate a better expected return with lower volatility and greater reliability.

The retirement spending smile

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Could you be overestimating the lump sum you need to maintain a comfortable lifestyle in retirement?

New research, “Estimating the True Cost of Retirement”, suggests that your spending actually decreases gradually year on year. And yes there is an increase in the final phase of our lives with additional health care costs, as you would imagine. Yet, even this is not enough to offset the fall in spending in our last phase of life.

And that’s why the research so beautifully refers to our likely retirement spending as a smile.

Spending trends in retirement

The traditional assumption when it comes to retirement is that our expenditure will look like a straight line. Many of us expect that we will have higher activity expenses in the earlier years, and while these may decline, we are likely to have higher health and medical expenses in the later years.

Yet this new research asks us to think a little more deeply.

Perhaps take a moment to consider individuals and couples you know who are retired – they could be friends, family members, your own parents.

There will no doubt be a group who have recently “hung up their boots” who are very active. I can think of clients who have recently enjoyed 12 months traveling through the US and Europe, another has just returned from an extended sojourn in Spain, one couple has sailed up the east coast of Australia and is now in the process of buying a country property that they plan to renovate. And one inspiring client who on retirement immediately enrolled in art school to complete his Fine Arts degree.

And then, you can probably think of a group of retirees who’ve started to wind back a little from all that activity. They still enjoy golf, theatre, dining out, gardening – just that the level of activity has slowed. One of our clients is currently touring through Canada on what she has described as her last long haul trip. Another just wants to slow down and enjoy time with her children and grandchildren.

Finally, you would no doubt see a group who’ve slowed down significantly. Many of our clients’ parents are in this category. They still enjoy occasional outings, but their health and energy is not what it used to be. As a result, their consumption typically reduces to their day-to-day needs.

With those images in mind, the assumption that we will maintain a consistent level of spending is perhaps not what we experience at all.

So what does the data show?

The data in this recent study show not only a “curve” to retirement spending (rather than just a flat or declining line), but that retirees actually decrease their real retirement spending throughout almost all of their retirement. The rate of decline identified was approximately 1% per year, accelerating to 2% per year through the middle years, and then in the latter years reverting back to 1% per year declines again – with this reversion giving us the uptick of the smile.

What’s important is that spending remains below the starting point throughout the entire retirement period. So even with the anticipated increase in health care in our latter years of retirement, this is not sufficient to offset the decrease in other discretionary spending.

However, a note of caution. The retirement smile only results where retirees match their spending reasonably to their household net worth – either because they are high-spenders with a high net worth, or more conservative spenders with a lower net worth. The results are not contented for those who spend beyond their means. That experience looks more like a jagged cliff.

What next?

If you would like to have an improved estimate of the amount of money you need for retirement, we can assist with modeling that reflects the findings in this research. Simply call or email. We would be delighted to help.

Research undertaken by David Blanchett of Morningstar. With thanks to Michael Kitces in Portfolio Construction Forum (26 May 2014) for source information for this piece.

Should you buy your kids a car?

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Not if you want to create financial independence, in our view.

And it’s a view shared by other financial experts it seems. 

Read more in this excerpt from an excellent article by Debra Cleveland in the Australian Financial Review (6 June 2014) on the thorny question of how best to help your kids with a head start.

A sigh of relief for superannuation in 2014/15 Federal Budget

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The good news in this Federal Budget is the absence of changes to superannuation. Instead, the focus appears is more on clamping down on welfare, with cuts to benefits for middle Australia. Reforms to the Age Pension, as promised by the Government, have been delayed until the next parliamentary term.

We have highlighted below the key changes proposed to taxation, superannuation and social security. 

18 tips for financial year end 2014

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With just a few weeks to 30 June, have you prepared financial year end? What changes do you need to know about? And what opportunities can you take advantage of?  Here are 18 tips for things you could do to potentially improve your wealth before 30 June.

What kind of advice do you prefer?

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It seems many people, like our dinner party guests, have been disappointed with advice. And many are hoping that the Financial Advice reforms, known as FOFA, will fulfil their goals of improving the quality of advice and tackle conflicts of interest for investors.

However, while the reforms require advisers to act in the client’s best interests, and remove product commissions (except on insurance) there are some gaps.

Here’s what we shared with our guests.

What if you had to wait 4 more years to retire?

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How much do super fund fees affect retirement income? The short answer: A lot.

Most investors could be losing 4 to 7 years of their retirement income to fees, according to our analysis. What would that mean to your retirement plans?

Many individuals have their super in their employer’s default fund. And if you’re like most people, you have collected several funds as you have progressed through your career.

However, few people have considered the importance of the critical factor of fees in determining whether they will achieve the ultimate goal of their super – to retire when they wish with sufficient money for a comfortable life.

What are typical super fund fees?

Following forecasts? Prepare to be wrong

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The investment commentator in a well-respected financial report recently proclaimed, “We’re going to see a gradual pick up in the US economy with a rate of growth of 2.8% this year and 2.9% in 2015”.

Experimental monetary policy (quantitative easing), 300 million-plus people with unequal wealth, sluggish employment growth, shifting interest rates and weather – and they’ve figured it out to a tenth of a per cent?

It’s no wonder that Harvard academic and author of the just-released Fortune Tellers: The Story of America’s First Economic Forecasters, Walter Friedman finds that we simply can’t trust economic forecasters.

5 ways to gain more from your portfolio

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Most investors focus almost all their time and energy on managing their portfolio – picking individual stocks and bonds or funds. Unfortunately that leaves a lot of money on the table.

There are many other critical ways that we improve our clients’ after-tax returns. Here’s five:

The single biggest sell off in emerging market currencies since ‘09

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Bloomberg has dubbed the depreciation in many emerging market currencies as “the single biggest sell off… since 2009.”

As a result, argues Benoit Anne, global head of emerging-market strategy at Société Générale, “global emerging markets are now trading in full-blown panic mode.”

This is a significant turnaround from 2009 when emerging markets were seen as the saviors of the global economy. In 2009, when advanced economies’ gross domestic product (GDP) fell 3.43 percent, emerging market economies grew 3.1 percent. Capital poured in – from investors looking for a place they could actually grow their money.

But, according to Forbes, investors don’t invest in emerging markets like they do in developed markets. “Capital rushes in when the economy is hot; when the economy cools, investors dump their local currency holdings. That leaves piles of devalued local currency which the central bank is hard-pressed to prop up. (In developed markets like the US, United Kingdom, Japan, in contrast, investors are more willing to hold on to the currency.)”

What’s more, a cooling economy is exacerbated by the fact that worry breeds panic. Fear of weakening emerging market economies – and the panicked reactions that follow – is a bigger driver of currency depreciation than the weakness itself. Says Forbes: “it is irrational exuberance in reverse.”

What is causing the panic?