The New Year resolutions to get fit, eat healthier and tidy the attic should also come with an asset allocation review. It's not that frequent changes to a strategic allocation are essential, but checks on how a portfolio has moved due to market changes, and an audit of the risks and market conditions, are warranted at least once a year. The SMSF Association reports that 65% of SMSFs do not adjust their asset allocation each year, which means rebalancing is often ignored.
Correlation between asset classes should also be watched, as it's not much of a diversification strategy if everything moves together. As Warren Buffett wrote in 2003:
"When things go bad, all kinds of things correlate that no one ever dreamed correlated ... And there’s nothing more deadly than unrecognized concentrations of risk, but it happens all the time."
For those who consider the stock market fall may build a new floor, check Robert Shiller's Total Return Cyclically Adjusted Price to Earnings (TR CAPE) data for the US. The black line is the long-term trend since 1860, and the green line shows the current market (at about 36) is well above trend even after the recent fall. To what extent do lower interest rates warrant this? The CAPE is a warning that future returns from equities will be less than delivered in the bull run since 2008.
To see what its largest clients are doing, BlackRock surveyed 230 institutions (one quarter of them in the Asia Pacific) in November and December 2018, with the following results. The major trends are lower allocations to listed equities, more to fixed income and significant increases in private equity and real assets such as property.
Source: BlackRock global survey of 230 institutions managing US$7 trillion.
In this edition, Ashley Owen checks four factors he has identified as warnings for a major correction. He shows how 2018 shattered a wonderful time for investing and he gives his views on portfolio construction in 2019.
And via The Australian Financial Review, Carrie LaFrenz interviews Gail Kelly, Chris Cuffe, Antonia Ruffell and Graham Hand on tax-effective gifting to charities.
Summer Series with Guest Editor, Tim Keegan
"AMP Capital’s goal is simple: secure the financial future of as many investors as possible. As part of that I am always looking for new ideas, trends, conversation starters and stories that make me think. Contemplating the future is what Cuffelinks and its array of authors does best. Here are five of my favourites.
1. Let’s start at the beginning, with the basics of investing. The holiday season is a time for reflection and a couple of years ago, Cuffelinks put together a comprehensive guide to investing by asking more than 30 investment professionals to provide advice to their 20-year-old selves. From the power of compound interest to the exhortation to 'start now!', from playing to your strengths to learning to manage your emotions, it’s full of gems, and is linked here. As this was also selected by a previous Guest Editor, I've chosen another ebook on investment lessons from making a mistake.
What is an enduring investment lesson you learned from making a mistake?
2. Noel Whittaker’s 20 Commandments of Wealth is a classic. He tells us to ignore the prophets of doom that fill our media and make sure we take professional advice before investing, not after. The list is full of wisdom.
The 20 Commandments of Wealth for Retirees
3. Focusing more closely on share market investment, the eloquent Roger Montgomery offered a timeless primer back in 2015 that holds true. He says first, identify superior businesses, and second, estimate their true value. And then laments how hard it is for investors to follow these simple rules.
How to think rationally about shares
4. In a similar vein is David Bell’s argument against get rich quick schemes. There’s no easy way to make money, he says. And that really is a truism of investing.
No easy way to make money
5. And finally, this time of the year is a time of thanks – thanks for the life we’re living, the society that allows us to live so well and the people with whom we spend our time.
No article contemplates this better than Chris Cuffe’s own thoughts on life, family and death – and his frustration at the still true fact that 45% of Australians do not have a valid will. What could be more important than ensuring your loved ones are safe and cared for after you’ve gone? Chris contemplates the basics and benefits of leaving an enduring legacy for your children and grandchildren.
But also, perhaps more importantly, he considers how we can also leave an enduring gift for society at large – the very society that has enabled us to live so well in the first place.
Planning to make your money live forever"
Tim Keegan is Global Head of Marketing, Digital, Innovation and Direct at AMP Capital.
For a PDF version of this week’s newsletter articles, click here.