Smart Investing
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The Federal Budget’s confirmation that the annual cap on concessional superannuation contributions for all fund members over 50 will halve to $25,000 from the 2012-13 financial year, has some investment commentators envisaging that more investors will turn to negative gearing.
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We've been told by the financial community at large that it's a tough time to be an investor. The financial markets are extremely volatile. Bond yields are near historic lows. The outlook is uncertain.
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The latest bouts of sharemarket volatility and this month’s cut in official interest rates once again highlight the crucial role of bonds in a properly diversified investment portfolio.
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Self-managed super funds typically have a much high exposure to cash than fixed interest.
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The Australian superannuation industry reverted this week to its unwanted status as one of the government’s favourite Budget ‘hollow logs,’ with billions of dollars in savings extracted from the system by reneging on a tax break meant to encourage higher retirement savings, and a doubling of the concessional tax rate on the super contributions of those earning more than $300,000.
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News & Commentary
Malkiel: Diversification is not dead 20 Oct 11
Sydney, 20 October 2011: With investors struggling against substantial headwinds due to the economic turmoil in the US and Europe, advisers need to realise the importance of diversification and merits of dollar cost averaging, renowned US economist Dr Burton Malkiel told media at a Vanguard briefing today.
Dr Malkiel, author of the best-selling 'A Random Walk Down Wall Street' outlined key investment lessons to help investors stay on the right course in the midst of volatile market conditions.
"People who say that diversification doesn't work have neglected to look closely at the correlation benefits of bonds, emerging markets and commodities, which have all been diversifiers to developed sharemarket investments over the past few years," he said.
Dr Malkiel explained how using a dollar cost averaging strategy, whereby a set amount of money is invested regularly over time, can be a very effective strategy in erratic markets, even more so than when markets are climbing as it ensures that the gains of the market are capitalised on.
Dr Malkiel also urged investors to avoid trying to time markets and instead take a less reactionary strategic approach to their investment.
"The penalties of moving in and out of the market based on judgement calls can greatly damage an investors' return, often quite considerably because more often than not they are buying high and selling low," he said.
"Over longer periods of time equity markets have delivered generous returns, however the average investor has not reaped these returns fully. This is mainly due to poor market timing and the cost of their investments."
"No one is able to time the market consistently and effectively – it's like looking for a needle in a haystack. Rather than trying to find the needle and potentially missing it completely, I say buy the haystack," Dr Malkiel said.
Discussing the merits of rebalancing regularly, Dr Malkiel showcased evidence of lower volatility and higher returns in an annually rebalanced portfolio as compared to a portfolio not rebalanced over a period of 5 years – the difference of return being almost 2 per cent.
"Rebalancing will not always give you a higher return however it will always deliver lower volatility to a portfolio" he said.
Reflecting Dr Malkiel's comments, Vanguard's Head of Corporate Affairs and Market Development Robin Bowerman says while it goes against many behavioural instincts, investors need to understand how difficult it is to consistently time markets.
"It is self-defeating and rarely successful to time markets. The recent market volatility is evidence enough that the average investor, let alone market commentators and advisers, are not able to accurately predict market movements," Mr Bowerman said.
"Challenging times like these point to the value of having a financial plan – this discipline helps to clearly set out long-term goals and the levels of risk you are personally comfortable to help you stay on course when markets are uncertain," he said.
