Risk, Probability and Investing

Successful investing is all about understanding and managing risk. One approach to managing risk is to consider the probability of longer term trends in major economic indicators.

Consider the probability that the following economic events will occur.

There is a very high probability that:

  • The AUD will continue to fall perhaps to 50 Cents
  • Equity market volatility will continue
  • World economic growth will be low for the foreseeable future
  • Low interest rates will continue at least through 2016
  • The problem of sovereign debt will continue
  • Deflation will continue

While the level of confidence is lower for the following events, there is a probability that:

  • The Australian economy will enter recession
  • The RBA will cut the cash rate by 25 basis points
  • Unemployment will rise in Australia
  • The United States Fed will not raise interest rates
  • Chinese economy will continue to weaken
  • The commodity bear market will continue

The assessment of… Continue reading

Expect further falls in the Australian dollar

The Australian dollar (AUD) has weakened considerably in the past few months and it is likely to continue to fall. Consider the following monthly chart of the United States Dollar index. The U.S. Dollar Index is the value of the USD relative to a basket of 6 major currencies. Much has been made of the recent rapid rise of the USD index but it can be seen from the chart that the index at its current level of about 95 is merely close to its long term average and considerably below its recent high of 120 in 2001 – not to mention its historic high of 165 (not shown) which it reached in 1983. USD indexWorld events suggest that it is very likely that the USD will continue to strengthen because the US economy is now quite strong at a time when the world economy is growing very slowly, interest… Continue reading

Where do I invest when the economic outlook is so uncertain?

Where does one invest in the current uncertain economic environment? With the RBA recently lowering the cash rate to 2.25% investors are now looking for investments with higher returns.

It is essential to have a diversified investment portfolio which might include shares, debt securities such as bonds, property, cash and collectibles. Most investors may have sufficient exposure to property through ownership of their own home so will be looking to get a return on assets through either shares or fixed interest debt securities.

Investing in equities.

The Australian share market has had an extraordinary rise over the last few weeks and was further stimulated by the Reserve Bank rate rise earlier this week. The daily chart of the ASX200 index shows the extraordinary trend in our market which has now taken out the previous market highs at A, B and C. Markets which move so fast can be expected… Continue reading

The RBA cash rate, growth and the stock market.

The RBA rate rise yesterday caused considerable volatility on the Australian market with the ASX200 index now at its highest point since the GFC. What does the market reaction to this rate rise mean?

The movements on equity markets anticipate the national economy some 6 to 12 months into the future. The behaviour of the Australian equity markets over the past few weeks would suggest that Australia economy is about to move into a strong growth phase. In fact from the RBA assessment and from the economic data, nothing could be further from the truth. Indeed there is the likelihood of not only higher unemployment in Australia but a recession in the foreseeable future.

It is worth reviewing the RBA statement which accompanied the rate fall. It included the following:

  • Growth is continuing at a below-trend pace, with domestic demand growth overall quite weak
  • The decline in the terms of… Continue reading

The failure of managed funds

Managed funds have a captive client base with Australian investors who are uncertain how to invest themselves or simply want diversification. But just how useful and competent are the fund managers?

I have used managed funds as part of our super fund investment strategy for more than 30 years. This has covered some 22 different funds and included the big managed funds as well as some of the smaller boutique funds. Over this period every one of these funds, without fail, underperformed the index. In many cases these funds actually lost asset value over several years.

In recent years I have continued to use what I consider to be the better managed funds as part of our super fund simply to get diversification.   Also an important motive was to provide a safe long term diversified investment portfolio for my wife if I predeceased her.

But I am now… Continue reading

Dark pools are not consistent with a transparent market.

The share market exists to enable businesses to efficiently raise capital and provide the investor with a secondary market. As such it should provide a fair and transparent market which does not disadvantage any investor.

The recent book by Michael Lewis raised public concern in the United States over trading practices such as high frequency trading and at the same time drew attention to trading activities known as dark pools. These dark pools are used mainly by institutional investors often for large orders which are matched off-market.  Institutional participation may also be motivated to use dark pools by a need for secrecy until after a transaction is complete.  Some former insiders have suggested that so much trading is now conducted away from exchanges that quoted prices for stocks may no longer reflect the reality of the market.  Dark pools disadvantage the small investor and do not inspire… Continue reading

Where should I invest in 2014?

Let me speculate on the potential for Australian equities in 2014.  The following appear to be the important issues for Australian investors in the coming year.

  • Continued quantitative easing will support world equity markets
  • Low interest rates will persist world-wide and in Australia
  • The AUD will continue to fall
  • Unemployment in Australian will continue to rise
  •  China growth will continue

A consideration of the above points suggests that equities should again be the best investment asset class in 2014.  Although the Australian market should do well in 2014, a falling AUD will continue to see repatriation of overseas funds so our market can be expected to continue to underperform compared to major world markets.

The continued accumulation of funds in superannuation accounts in this low interest rate environment means that high dividend paying blue chip equities will continue to be in demand.  TLS is the standout… Continue reading

Reflections on economic forecasting

“Economic forecasts are almost useless”.  That is the contention of Charles Morris in his book “The Sages” (2009) where he cites the example of the White House Council of Economic Advisers which comprises some of the best economists in the world.  How accurate were their forecasts?

Consider the economic forecasts of this august committee over a decade, starting from the years 1997 to 1999 when they underestimated the US growth by about 50%. Realising their underestimation they increased their estimates for the years 2000 to 2003 in time for the tech wreck and recession when for this period they significantly overestimated the… 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

Market volatility ahead of the debt ceiling decision!

The failure of Bernanke to announce a tapering of quantitative easing last week was effectively a warning from the Fed that the United States economy is still not robust enough to remove monetary stimulus without causing economic damage.  The market responded to Bernanke’s statement with a one day buying spree but it should have been a warning to investors to treat this market with caution.  Since the exuberance of the market on the announcement day there have been three down days on the American market which have now wiped out the gains which accompanied Bernanke’s announcement.

It seems that the market can only focus on one thing at a time and tapering is only one of a number of issues which can strongly influence the markets.  What about the debt debate?  Investors seem to forget that between 22 July and 8 August 2011, the market… Continue reading

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