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
Mind games 06 Dec 11
Why do so many share investors sincerely believe they have the ability to beat the market time and time again?
This is a question that behavioural economists and psychologists have long tried to answer given the reality that even highly-informed investment professionals rarely succeed in consistently outperforming the market.
Psychologist Daniel Kahneman, a winner of the Nobel Prize for economics, has long made a study of how past failure in making predictions often doesn’t shake a person’s confidence in their predictive powers.
He refers this inability to recognise reality as a “cognitive illusion”. In other words, the investors are fooling themselves.
In his new book – Thinking, Fast and Slow – the Nobel Prize winner points to the many flaws in decision-making that can have costly consequences for an investor.
Clearly, Kahneman is unsettled by optimistic projections.
“It is wise to take admissions of uncertainty seriously,” he writes, “but declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true.”
In a review of Kahneman’s book published in Bloomberg Businessweek, columnist Roger Lowenstein notes that the author has much to say about how we think, react and reach – rather, jump to – conclusions in all spheres. What most interests Kahneman are the predictable ways that errors of judgment occur.
“…Kahneman lays out an architecture of human decision-making – a map that resembles a finely tuned machine with, alas, some notable trapdoors and faulty wiring.” (Read this review).
Perhaps the bottom-line for investors is to recognise the fallibility of their decision-making and the decision-making of others. In short, the views of Kahneman should underline the value of having an appropriately diversified portfolio, and avoiding the potential traps of market-timing, stock-picking and making emotionally-driven investment decisions. (Click here for an extract of Kahneman’s book).
* Written by Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.
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