Why share markets are like teenagers

Written by multiforte on . Posted in News

As we navigate the last months of his HSC year with our 18-year old son, we’ve decided that share markets are just like teenagers. They are wonderful when you stand back and take a long run perspective – but on a day to day basis, well, they don’t always behave the way you want them to.

And if you think about it, that is perfectly normal. In fact, if our teenagers didn’t ever have an outburst, were always home on time, and kept their room perfectly tidy, we’d start thinking that something very strange was going on.

And it’s the same with share markets. They don’t always behave the way we want them to. Most of us would prefer that they rose on a steady trajectory – but they don’t. But then, they probably wouldn’t give us as much long term reward. Because it is this very uncertainty that is why we can expect shares to return more than cash or bonds over the longer run.

How to make better financial decisions

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We are both keen sailors and enjoy racing – particularly when the wind is up and our little boat scoots across the Harbour. Our less favourite times are those when there is little or no apparent wind and the sailing skill is different and demanding.

That’s because, even the most talented of sailors can get stuck in a patch of no wind. All you want to do is get moving. Your instinct is to work the sails, to force it. Yet forcing it is one of the worst things you can do.

We don’t need force. We could be moments away from a breath of breeze. If we’re smart, we will keep an eye on the distant signs of approaching wind, set the sails, shift our weight to leeward and wait. The wind will come.

The same approach applies to making financial decisions. There are times when decision-making is swift and clear. However, there are also times when clarity on the best decision is as absent as the breeze. It feels so frustrating, and most want to push forward with a decision just to get the issue resolved. Yet this is dangerous. When you feel like you have to force a decision it probably means that you haven’t found the best option – yet.

Just like for our boat with no breeze, you need to take a different tack.

Here are some valuable ideas to help you make better financial decisions.

The Federal Budget: 4 key focus areas

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The good news is that this is a more positive Budget than the “tough” budget of last year. Our four key focus areas here are: no new taxes on superannuation, generous tax cuts for small business, significant changes to the age pension assets test and childcare boosts. 

18 financial year end tax tips 2015

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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.

Is the stock market ripe for a fall?

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The world is an uncertain place. Yet, as humans, we crave certainty. So it’s no surprise that, as media speculation on a stock market fall becomes louder, we are drawn to the opinions of those who provide us with certainty.

In finance, the more certain an investment expert or commentator is, the more likely it is that individuals will believe in what they’re hearing as though it’s guaranteed.

Are we in a house price bubble?

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Many people are in a frenzy about buying and investing in property, fearful of missing out on the gains that others appear to be making.

The key question is: will house prices continue to rise – or are we in a bubble?

This isn’t an easy question to answer.

This is for two reasons. First because property is an emotional asset, and second because the behaviour of individuals in asset bubbles is based less on fundamentals and more on psychology.

Consider this quote from Bill Powell in TIME on the complacency that existed in Japan in the late 1980s: “Looking back, it’s odd that so few people saw the bust coming. I certainly didn’t. In 1989, I was Tokyo bureau chief for Newsweek, and I lived through the bubble years acutely aware of what strange days they were, yet without quite realizing those days were numbered. It should have been obvious that such excess was unsustainable.”

Yet human nature is such that we seem poor at learning from history. In December 2005 the New York Times posted a piece warning of a possible US house price bubble – “Take it from Japan: bubbles hurt”. Here’s an excerpt:

“During a bubble, people don’t believe that prices will fall… This has been proven wrong so many times in the past. But there’s something in human nature that makes us unable to learn from history.”

Just one year after this piece was published the US housing market crashed 67 percent.

So, here, we want to dig into the data to see if we can get clearer on whether there is good reason for our local property prices to continue rising, or if in fact we are in a bubble that is waiting to burst.

A fitness tracker for investing? No thank you

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I’ve recently joined the tribe of people wearing a fitbit and tracking my 10,000-plus steps a day. “Does it really make a difference?” a client asked in a recent meeting.

For me, it does. Tracking a daily goal has increased my average weekly steps and time out walking by around 30 per cent – more steps per day, more days walking a minimum 10,000 steps. Which all leads to greater achievement of my end goal: maintain a fit and healthy mind and body.

Which got us thinking – does the same apply to tracking your investments? Does focusing on a goal for a defined timeframe – like annual returns – help you achieve your longer term goals? Surprisingly, our conclusion is that it’s counter-productive – the myopic view of a single annual period is the reason most people fail when investing – here’s why.

5 principles of happy money

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With the festive season fast upon us, many of us can feel challenged by time and money. It seems then a perfect time to reflect on the science of happy money.

In their book on the subject, academics Elizabeth Dunn and Michael Norton argue that, if you spend your money in the right way, it can make you happy.

1. Buy experiences. Don’t bother with material things. A new Porsche may make you happy for a while, but the joy soon palls. The vast majority of Australians aspire to own their own home. And yet research shows that home ownership and happiness don’t happen to necessarily correlate. Material things – from a beautiful home to a flash car turn out to provide less happiness than experiential purchases.

So spend your money on experiences instead – go on holidays, see a show, listen to live music or dine out with friends. Such experiences will make you happier than owning stuff. Why? Because they are usually enjoyed with others, and so build our social relationships and create shared memories.

2. Make it a treat. Because human beings quickly habituate to the status quo, even enjoyable experiences eventually become boring. So try to dole out your pleasures. Make your morning coffee a special treat rather than a daily routine. Instead of staring at the TV for hours, save your viewing for special shows. Break out of a rut by rewarding yourself and your partner with the occasional date night.

3. Buy time. We love the idea of time affluence – that sense of freedom that comes with feeling that you have the luxury of time. Research shows that this is a potent predictor of people’s satisfaction with their lives.

For most of us, time is too precious to waste shopping. Instead, we benefit where we use time for activities that produce lasting effects on happiness. Enjoy visiting a gallery, get out in the garden, take a leisurely walk, go bushwalking, swimming or cycling with your kids. Maybe even spend time experiencing something completely new.

When you’re considering a purchase, ask yourself this question: how will this purchase change the way I use my time? Just by focusing on this question Dunn and Norton believe you will better identify purchases that improve your well being.

4. Pay now, consume later. In our e-commerce world, it is so easy to consume now and pay later. Not only does this create the risk of increasing debt, it also creates risk to our happiness.

Dunn and Norton suggest reversing the habit – and exchanging “buy now, pay later” for “pay now, consume later”.  They argue that pleasure of anticipation provides an extended source of happiness. Research shows that waiting, even briefly, for something as simple as a piece of chocolate, enhances our taste experience when we finally enjoy it. So, imagine the boost to happiness for bigger things. Think about booking and paying for your winter ski holiday in the summer – you then get to dream about the slopes for months before you depart. When you finally get around to going, it will be so long since you paid it will seem as if the holiday were free.

5. Invest in others. If happiness is your goal, then the single best thing you can do with your money is to spend it on someone other than yourself. Research shows that spending money on others provides a bigger happiness boost than spending money on yourself. Investing in others allows you to connect with other people and to make an impact on the world – and it is good for your health as well.

Uniting the five principles is one simple premise. Before you spend your dollars, stop to ask yourself: is this happy money? Am I spending this money in the way that will give me the biggest happiness bang for my buck?

Dunn and Norton: Happy Money: The Science of Happier Spending (2014)

Reprogram for your finances for wealth and wellbeing

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We’re fascinated by the science on body and brain performance – the connection between physical health and psychological performance.

You won’t be surprised to hear that we jumped at the chance to hear Paul Taylor, Director of the Body-Brain Performance Institute. Paul was speaking at this week’s AFA Conference on the connection between our physical wellbeing and our brain – and what we can do to reprogram our body and mind to optimise performance.

Here, we share key insights from his talk – and our thinking on how this translates to achieving wealth and wellbeing.

How to respond to forecasts of a market crash

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The doomsdayers are out again. Can you rely on their forecasts of a market crash?

Let’s start by going back to late 2012. You may recall that the headlines in the financial press were dominated by gloomy predictions for the share markets. Investors were waiting anxiously for the next calamity to occur. But it didn’t happen. The fiscal cliff was averted. The euro zone did not fall apart. China’s economy and the stock market did not crash. Bonds did not implode.

Instead, in 2013 the US market was the top performing developed market in the world in 2013. The S&P 500’s gain of just over 30% represented its best calendar year performance in 16 years and was three times the forecast of the Barron’s survey.

European markets were close behind, with Germany posting gains of a little over 30% in the year. Spain, which in late 2012 was pleading for money to bail out its banks, was the third best performing developed market in the world.

Now, we are not suggesting that the current situation will follow the same pattern.

What we are suggesting is that it is extremely difficult to develop a sound investment strategy on a forecast. We have seen that the media – and even the most highly paid stock analysts – struggle to get it right.