Why is investing so difficult?

Many people find that after some failed attempts at investing they make the decision to give up and turn their funds over to a professional investment manager. This is even though the performance of the professionals is poor, with more than 70% of fund managers underperforming their benchmark over a five-year period.

By contrast, the small investor has the advantage that he/she can move quickly, invest in small cap stocks which potentially provide much higher returns and can avoid being invested during a bear market. So potentially the small investors can do better than most professionals so why do so many small investors fail? There are three things that prevent the novice investor from succeeding

Lack of planning. Surveys show that about 70% of investor have no investment plan. The first essential is to have a plan which when implemented provides not only the roadmap but also the discipline… Continue reading

What investors want

The recent survey of 7100 investors in 22 countries by Natixis is of particular interest. It includes 300 Australian investors and provide a glimpse into investor behaviour and beliefs. It seems that most investors are very concerned and recognised the need to invest for retirement but they simply have no idea how to invest to get the returns that they will need.

Investors have unrealistic expectations of the equity markets and:

  • are looking for returns of about 9% over the inflation rate.
  • have little understanding of the issues of volatility
  • do not understand the relationship between risk and return
  • are unduly cautious and risk adverse
  • fifty-one percent of investors did not have financial goals
  • amazingly 63% of investors had no financial plan.

Most investors have little understanding of risk, return and volatility. About 60% of investors worldwide did not seem to understand the role of bonds and equities in asset… Continue reading

Should investors chase yield or growth?

This is a difficult time for investors. Markets are uncertain and interest rates are at record lows. Most investors have little alternative but to invest in the equities market in an attempt to get a reasonable return. From the viewpoint of safety most investors tend to buy the higher yielding blue chip stocks. Certainly many investment advisors have been concentrating on yield and for the past 18 months have been advising investors to buy high yielding blue chip stocks. Their advice is presumably based on the fact that the dividends would be secure and that the blue chip stocks are safe. Let’s examine just how poor this advice has been.

Consider a strategy which compares the performance of a buy and hold blue chip portfolio with a managed portfolio of growth stocks. Both portfolios had a starting capital of $100,000 in January of 2015 and each held 10 stocks.… Continue reading

The thinking investor

In a recent newsletter economist John Mauldin noted that successful investors understand their investment beliefs and the principles that underpin all of their investing activities. This caused me to reflect on my approach to investing.  The following is my approach, the process that I go through and the questions I need to ask when considering any investment:

  • Is this market efficient, does it represent reality given the available fundamental data?
  • Am I truly objective in my assessment of the market and its potential to yield a profit?
  • What returns do I require from my investments?
  • Given my assessment of macro-economic conditions and the position of the market, is my investment plan… Continue reading

Raising financial literacy in Australia. Education vs Information

Financial literacy is all about understanding how money works in the world, how to manage it and how to invest it.  Australians need sufficient background in financial literacy so that they are able to make informed choices about the way in which they use money, use financial products and make investment decisions.   The problem is that the level of financial literacy in Australia is poor, reflecting an inadequacy in our education system.

Financial literacy as applied to investing can be improved in two ways, through education and information.  There needs to be a clear understanding of the difference between financial education and financial information. Not all investors need or want investment education and for many people investment information is all that is required.

Financial education aims to raise the level of financial literacy through a series of planned and relevant courses at different levels. … Continue reading

The uncertainty of equities

There is the old adage that “investing is simple but it is not easy”. This is very appropriate because while investing per se is not difficult, investment decisions are always made in the light of uncertainty and investors do not handle uncertainly well.

Consider the Australian market which has about 2000 stocks. Some of these stocks have sound fundamentals while others are speculative and do not pay a dividend. Some stocks have rapid rates of share price increase while others show significant losses. Also, there is too much choice and there is also the problem that there is often little correlation between the intrinsic value of a stock and its performance over the short and medium term. These things considered it not surprising that more than 60% of investors in the stock market lose money.

But the problem of handling uncertainty is not simple because in making an investment decision… Continue reading

Baby-boomers, financial scams and education

Investment scams are commonplace and despite regulation will undoubtedly continue. Recently REST Industry Super, a large Australian industry super fund commissioned a study of Australian baby-boomers. The study showed that there are between four and five million baby-boomers who are now starting to retire and this creates a serious issue for future Australian governments since only 14 per cent of Australian Baby Boomers feel financially prepared for retirement with 35 per cent saying they are completely unprepared.

When potential retirees become aware of their lack of preparation they will often try to find investments with higher returns without considering the higher risks that come with such investments which almost inevitably end badly. Many of these high return investments are outright scams. Investor vulnerability to scams is not confined to the poorly prepared retiree. A recent example of this was the Madoff Ponzi scheme in the United States where an estimated… Continue reading

The issues of financial education

I read an interesting item in The Economist related to evaluating community financial literacy using the following test.  “Suppose you had $100 in a savings account that paid an interest rate of 2% a year. If you leave the money in the account, how much would you have accumulated after five years: more than $102, exactly $102, or less than $102?”

Apparently only half of Americans aged over 50 who were surveyed gave the correct answer to this test and there is no reason to suspect that the test results would be any different in an Australian population.  If a survey found that so many people are mathematically challenged, it is hardly surprising that they struggle to deal with the simple contracts, much less the complexities of investing.

The solution seems obvious: provide more financial education which is an important deficiency in the Australian education system.   … Continue reading

Investment education

Why do people take so little interest in investing?  I have always been intrigued by the fact that so many very intelligent Australians will work very hard over their lifetime to accumulate assets but on retirement hand those assets over to an investment professional.  While some investment professionals do perform well, some, perhaps many of these professionals have a very poor investment record.

During the global financial crisis I witnessed many of my family members and friends lose up to 50% of their assets because they took no interest in their investments and left that responsibly to the professionals.   This is the one thing that has stimulated me to become active in investor education.

I have been presenting investment courses around Australia for the last 4 years for the Australian Investors Association and the Australian Shareholders Association.  Recently I have made the introductory course available… Continue reading

Extended life expectancy and financial literacy.

We are all aware that life expectancy has increased dramatically over past decades due to medical advances etc.  The data below from the US Social Security Administration show the life expectancy for males at age 65 in the US and compares the data for 1986 and 2006.  Life expectancy in the US has been extended by 5 years in just two decades. 

The interesting but perhaps not surprising fact is that there the higher earning individuals have had a very significant increase in life expectancy compared to those of lower earning status. 

It is reasonable to assume that there has been a similar trend in longevity in Australia, with the average male living to age 86 and that will continue to increase. There is an important consequence of these data.  Those with a higher earning capacity are the persons whom the government expects to be… Continue reading

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