John Cameron's personal blog

Whenever you invest, there is a trade-off between risk and return, and this is undoubtedly true.

But, when it comes to measuring risk, things are not always what they seem.

The problem arises with the way in which analysts measure this risk.

When comparing different superannuation funds, how confident can you be that you are comparing “like with like”?

The short answer is “not at all”.

Generally when comparing funds, the media like to bunch all those with the same label (such as “balanced”) together, and then compare the performances. Funds are classified as “balanced”, “growth”, “conservative”, etc., depending on the split between “growth assets” and “defensive assets” within each fund. 

There’s a common view that as you approach retirement you should tilt your investment portfolio towards more conservative investments. This means favouring things like term deposits, annuities and cash management trusts while reducing exposure to more volatile assets such as shares and property. The thinking is that preservation of capital is key, as without an earned income it is hard to recover from any downturns in the share or property markets. 

In the days of high interest rates this might have been a good strategy, but when interest rates are low and life expectancies long, being too conservative with investment can see the money running out way too soon.

Peter plans to retire on his upcoming 63rd birthday. He has $600,000 in super and wants this to provide him with an income of $50,000 per year. If his net return is 3% pa, Peter’s nest egg will last for just over 15 years . The problem is there’s a good chance Peter will live into his late 80s or even 90s. To give his savings a chance of lasting until he is 90 (27 years), Peter will need to target a net return of 7% pa.

Retirement: you’ve made it! And one of the rewards for all your hard work is that you can now access your superannuation. Suddenly a world of opportunities opens up – a Caribbean cruise, major home renovations or maybe helping your kids reduce some of their debt.

Of course you deserve to celebrate your retirement, but bear in mind that your super might need to support you for the next 30 years or more. Eat too far into your nest egg in the early days and you significantly reduce the time that your super will last. This is particularly the case in a low interest rate environment.

Take Ron and Val. They retire with a combined super balance of $800,000. At an interest rate of 4% pa this nest egg will fund annual living expenses of $60,000 for 19.4 years[1]. If they spend $100,000 on travel and home renovations and give a further $100,000 to their children, the reduced nest egg will now only last 13 years.

The twin elements of investment are risk, and return. We are constantly told that you cannot get a better return, without taking on more risk (but the reverse doesn’t apparently apply. If you invest in higher risk investments, it doesn’t follow that higher returns will necessarily eventuate. And, here the argument becomes fairly circular – more risk means more risk, which may mean no return, or total loss - if you get my drift).

The current way of measuring risk, is to look at the average volatility of returns over an extended period (in practice it is a bit more technical, but this is the essence of it). The more volatile the returns, the riskier the investment, and vice versa.

This way of measuring risk has been around since the 1950’s, and it was certainly a big improvement on what went before.

The video Securing your Future: featuring John Cameron was in the top 10 of the most viewed videos on The West Australian website Monday (12th Sept 2016).

"Different decades, different investment returns" 

You can watch it here: Securing your Future

What you need to know on Sequencing and Retirement Income - John Cameron - The West Australian on August 21, 2016, 6:00 am. Video Presentation & Article: Different decades, different investment returns.

https://au.news.yahoo.com/thewest/a/32389394/sequencing-and-retirement-income/#page1

Securing Your Future' was the most viewed material on The West Australian’s website yesterday. It’s the online version of The West’s financial planning supplement.  Read more here: http://us3.campaign-archive1.com/?u=1e6f34af574ca6cbaf30d3e8a&id=4d4b85dde5 

Ever since the GFC, economists have struggled to explain events, to direct policy, or to accurately predict trends.

Could it be that their models (theories?) are missing something vital?

According to Richard Koo, economist with Nomura Research Institute, the answer is definitely, “yes”.

In Australia today, we must all make important investment decisions for our future wellbeing.

We have an age pension system that acts as an important safety net, but our superannuation system is lump sum, with individuals being ultimately responsible for how their money is invested.

When making those decisions, it is essential (but often difficult) to try to separate the “noise” from the “information”. So, what exactly is the difference.

Black swan events are unexpected happenings in financial markets that have a big impact.

During my working life I have been “fortunate” to witness two of the biggest black swan events of the past 50 years – the decision of President Nixon in 1971 to cancel the convertibility of US dollars into gold at a fixed price, and the GFC.

Both had a profound effect on investment markets, with big implications on the best way to invest your savings. 

Unfortunately, much of what passes for financial advice today, amounts to little more than a box-ticking exercise.

For many of the bigger institutional advisor groups, the process goes something like this:

• Fill out a risk profiling questionnaire, and go into a risk profile box. Tick

It’s that time of the year when forecasters are thick on the ground.  It’s like they’re “breeding like rabbits”. But, however they breed, are they more like foxes or hedgehogs?

Hedgehogs are driven by one big defining idea. Their style is well suited to 10 second grabs.

Foxes, are into the detail. They look at lots of small facts However, they don’t come across well in the media, and their style can quickly bore the pants off just about anybody.