The Personal Super option is here!

Fifteen months ago we started investing money for clients with a vision to bridge the gap in investment solutions for everyday people looking for the middle ground between cookie-cutter robo-advice and high-cost financial planning.

We started investing in all forms except for retail superannuation, with the plan to offer retail superannuation shortly after launch. Unfortunately, our chosen platform (Linear) was taken over within months and have not been adding any more superannuation managers while they build a new product. Eventually, we tired of waiting, went back to market and (finally!) we can now offer everyone the opportunity to invest superannuation in our funds. 

Core Portfolios

We believe everyone needs a core or nucleus of investment assets that are high quality, lower risk and well-diversified. 

For some investors, this makes up a smaller part of their portfolio, and they surround the nucleus with a range of higher risk assets like small capitalisation stocks, hedge funds, high yield debt or private businesses. 

Other investors are content for the high quality, lower risk and well-diversified part of their portfolio to make up the bulk of their investments.

In our tactical funds, we stick to cash (both local and international currencies), Australian Government Bonds, and the largest 1600 companies in the world (equivalent to the top 70 Australian stocks). Our investment process is biased toward quality stocks. We view this as the ‘nucleus’ of a well-run portfolio.

Investment outlook

The surest way to lose the next war is by preparing your troops for the tactics used in the last war. Investing is no different, and the sectors that drove performance over the last decade will not be the sectors that drive performance over the next decade.

In Australia the last 20 years have been dominated by twin booms, first a mining boom, following by a housing boom. Every 30 to 50 years, commodity prices boom. They are once-in-a-generation events and lead to rapid expansion and huge amounts of capital expenditure. Every 20 to 30 years, housing construction booms – a great source of employment for the construction sector, income for the real estate sector, profits for the finance sector and tax revenue for government coffers.

But that was the story of the last decade. As these booms fade, you need a portfolio designed for the next decade, not the last.

Our portfolios to date have been focussed on a diversified global portfolio. It is late in the economic cycle and our performance (see below) has been achieved in spite of holding elevated levels of cash and bonds to hedge against downward movements. In the past two weeks, these holdings have helped to dampen the downside from volatile markets.

The Structure

We have chosen to use separately managed accounts rather than a unit trust as it offers our clients significant advantages in tax, transparency and customisation. While we welcome self-managed super funds, we are hopeful given the above benefits, many investors will find they will never need a self-managed super fund as most of the benefits are included in separately managed accounts.

We had a lot of requirements for our platform, and so were pleasantly surprised after we chose Praemium as our provider that  Bell Potter concluded that Praemium in addition to its features was the most fee competitive of the major platforms (shown as PPS below):

Two other things to note on fees:

  1. We reduce our fee on low balance accounts to ensure that the total cost remains competitive
  2. As we get bigger we expect to be eligible for lower platform fees.  We will pass on any fee reduction to investors.  

Transparency & Customisation

Typical platforms give you historical information about your portfolio, ours gives you detailed information about the future – how is the portfolio positioned, which stocks or bonds do you own, why do you own each stock, which stocks have you chosen to exclude due to ethical concerns and what do we expect to happen.

We also blog frequently, podcast weekly and have semi-regular conferences. 

Given the structure we can customise a range of features for you:

  • Ethics – choose between 19 different ethical screens to customise your portfolio
  • Portfolio Customisation – you can exclude Australian banks or all Australian stocks from your portfolio 
  • Risk – we blend our key portfolios to create a mix appropriate for your risk tolerance
  • Income – we blend our portfolios to create a mix appropriate for your income requirements and can offer regular payments to your bank account customised to your needs.
  • Tax – we have a number of options for more advanced users

Our product has not gone unnoticed in the industry. We were a finalist in the fintech business award as “Financial Advice Innovator of the Year” the IFA excellence awards “Innovator of the Year”.

Invest directly or through a planner

We strive to keep your fees down by providing transparency and a flow of information far in excess of most fund managers.  We offer advice as to which of our products are best for you, but we recognise (and the Royal Commission has driven home the point) that we are conflicted and so can’t advise you as to whether you should invest in our fund over a competitor’s fund.

For this reason, acknowledging that many investors want and need a traditional face to face advice relationship, we can partner with a range of planners.

Performance to date

We will have our September performance numbers out shortly. Our latest official numbers are shown below:

Nucleus Performance
Source: Nucleus, Factset, Linear

Click here for a full list of our performance reports.

 

 

Damien Klassen is Head of Investments at Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Nucleus Investment Insights – Cold War 2.0

Join Nucleus Wealth Head of Investments, Damien Klassen, Head of Strategy David Llewellyn Smith and Tim Fuller as we discuss the new cold war between the US and China and how it affects the world of investment.

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Nucleus Investment Insights – Melbourne Seminar Recordings

Click here to view the playlist of our recent Nucleus Wealth Seminar series.

This video was recorded at the 2018 Nucleus Wealth / Macrobusiness Seminar held on Thursday 13th September in Melbourne.

nucleuswealth.com

Question guide (with time elapsed) :

0:38 Q0 – Does Chinese Stimulus come in cycles?

4:16 Q1 – Some questions around investing with Nucleus Wealth

6:42 Q2 – The US hitting the fiscal cliff impact on share market

9:24 Q3 – Will Labor back on negative gearing if successful next election?

13:19 Q4 – What weightings are typical and how does this compare to other international managers?

14:34 Q5 – How much can we trust Chinese economic numbers?

18:17 Q6 – What is the risk of a bank bail in / Is a US boom similarly as good as China for Australians?

21:28 Q7 – Why is the Aussie stock market no where near the GFC high?

27:51 Q8 – Will Labor back on negative gearing if successful next election 2?

29:44 Q9 – Is Australia still worth investing in?

32:30 Q10 – Will the share market (and NW portfolios) fall faster than Aussie housing?

36:54 Q11 – Physical Gold – when should it be considered?

39:43 Q12 – How does Australian’s record housing debt impact the broader Australian economy?

42:37 Q13 – Why is Australian retail growth still so strong, particularly in the cities?

46:36 Q14 – Will removal of negative gearing mean a surge in Primary Places of Residence?

50:13 Q15 – What are your thoughts on a potential inversion of the US yield curve?

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Nucleus Investment Insights – Special Guest Philip Soos

This week on Nucleus Investment Insights we chat to Philip Soos, an independent economist, PhD candidate investigating bank crime and mortgage control fraud and co author of the book, Bubble Economics – Australian Land Speculation 1830 to 2013 with Paul Egan.

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A statistical rival for Anscombe’s quartet

Quantitative and statistical models are extremely useful in investing. But they are guides, not gospel.

Forgetting there are real consumers behind the sales numbers and real companies beneath the profit numbers is the first step to an investment model that is going to fail when you need it most. There is a reason you never see a bad investment backtest – because if a quant analyst gets a bad result they simply run the backtest again and again until they get a good one.

Anscombe’s quartet

For years I have kept a chart of Anscombe’s quartet as a reminder of how stats can mislead. Anscombe’s quartet is a data series where all the summary statistics are close to identical:

  • The average x value is 9 for each dataset
  • The average y value is 7.50 for each dataset
  • The variance for x is 11 and the variance for y is 4.12 for each dataset
  • The correlation between x and y is 0.816 for each dataset
  • A linear regression (line of best fit) for each dataset follows the equation y = 0.5x + 3

However, graph the data and the differences become obvious:

XKCD’s Curve Fitting Methods

Along the same lines, XKCD has a light-hearted look at curve fitting models that many an investment analyst would be wise to keep near their desk. With many data sets, trends are in the eye of the beholder:

Curve-Fitting

 

Have US Earnings peaked?

The Wall Street Journal suggests that they may have:

I’m not seeing it yet in my data:

US earnings
Source: Factset, Nucleus Wealth

I use Factset rather than the Bloomberg data used by the Wall Street Journal, and so maybe there is a timing issue. 

But Thomson Reuters data concur with Factset:

Source: Yardeni, Thomson Reuters

Also, it is worth noting the fall in earnings in the Bloomberg data is about 0.5% – pretty much a rounding error that could easily just be the mark to market effect of the rise in the USD over the last few months. And these calculations aren’t simple, stocks dropping in and out of sample plus incorrect analyst data can easily make a change the size that Bloomberg is showing.

I posted a few weeks ago the following comment:

Investment markets are late in the economic cycle,  the issue being that you never know when the end will come. However, there are some signs that it is not here yet for US equities at least – and there is the potential that US equities will hold the rest of the world out of the abyss for a little while longer.

The main factor that gives me comfort with the US market is the strong earnings growth that continues to define the US market. In general, when forecasts earnings are rising strongly markets don’t have 20%+ corrections.

And I still believe that to be true – if there is going to be a major pullback it is unlikely to occur in a time of rapidly rising forecasts, and so when earnings do start to decline we will need to be more wary of stocks.

Digging a little deeper,  I had a quick look at the 19 different sectors that we break the US market into. Fifteen of the sectors are still increasing, and the three of the four worst sectors don’t look that bad. The only sector that looks poor is the mining sector (shown as non-energy minerals in the chart below) which is a small sector in the US:

Source: Factset, Nucleus Wealth

 

The US is going to start reporting 3Q earnings in about a month, and so if earnings downgrades are going to occur we would expect to see them over the next few weeks. 

The net effect? Alert but not yet alarmed. 

It is worth watching earnings forecasts more closely over the next few weeks, but I can’t yet see meaningful downgrades to US profits. 

 

Nucleus Investment Insights – Australian Dollar Reflation?

Listen in as Nucleus Wealth Head of Investments, Damien Klassen, Chief Strategist David Llewellyn Smith and Tim Fuller discuss the future of the Pacific Peso.

– What is sitting behind the recent fall in the AUD?

– Can the current drivers be relied upon for future direction?

– How is the Emerging Markets Crisis and Trumps Trade War going to impact the AUD?

The movement in the AUD creates significant opportunities for your portfolio – come along and hear how to take advantage.

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Nucleus Investment Insights – Special Guest Catherine Cashmore

This week on Nucleus Investment Insights we are delighted to spend some time with Catherine Cashmore, real estate commentator, President of tax reform think tank Prosper Australia and co owner of a property advocacy company called Anderson and Cashmore real estate.

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August 2018 Performance

Nucleus Performance

International stock markets ripped higher in August and both the Australian dollar and bond yields fell, completing a trifecta of investment themes that we have been positioned for. With this backdrop all of our portfolios performed strongly:

Nucleus Performance
Source: Nucleus, Factset, Linear

Given our portfolio tilt toward Quality stocks, our portfolios once again performed strongly over the month of August. Our International fund was up 4.5%, Australia up 0.6% and the tactical funds up between 0.9% and 2.7%.

The international performance was boosted by the Australian dollar devaluation tailwind (USD up 0.6%) and our underweight position in Emerging markets.  

Global bond yields fell in August on emerging market fears, with US 10-year yields declining 0.12% to 2.85%. Australian 10 year yields fell more than US yields, ending the month at 2.52%, the equal lowest since December 2017 – benefitting our bond positions. 

With so many of our portfolio positions being rewarded both this month and last month, we have begun to make some portfolio changes to reposition for the next wave.

Trade

August also saw tariffs imposed on Turkey by the US, sparking a sell-off in Emerging Markets globally.  On a day to day basis, there has been considerable volatility in stocks as news lurched between negative (worsening news from China / US trade talks) and positive (progress in Europe / US and Mexico / US trade talks). 

Our expectation (acknowledging the outcome is very uncertain) is China and the US will not reach a quick agreement and China will resort to further debt-driven investment spending to ensure that its economy is not overly affected.  This has a number of implications for our stock holdings.

Earnings

August saw the winding down of the US and European reporting seasons and the start of a month-long period of Australian company reports.  The US reporting season was good, with forward earnings continuing to rise – this is where our portfolio is most exposed. European earnings were less positive, and Australian earnings are weak.

On the whole the global reporting seasons saw earnings expectations exceeded by most companies, however, there were a few disappointments on the updated outlooks and guidance. In the US, with the notable exception of Facebook, most Technology companies delivered impressive results (the NASDAQ was the best performing US index) while Value companies were also rewarded when they showed evidence that any margin compression was contained. European results were more subdued with contagion concerns from Turkey seeing indices there retrace. Locally it was more of a similar story to the US, with the high P/E multiple stocks outperforming their Value peers ( with the notable exception of the Telecom sector where we saw industry consolidation via a merger).

Looking in more detail at the domestic reporting results, more than half of companies saw upward revisions to cost estimates, though they still remain relatively benign from a historical context. The few pockets of cost pressure came from higher raw materials prices and higher US labour costs. Dividends were on the rise with upward surprises from cash-flow rich resource companies and a number of Industrials. Higher growth expectations in company outlooks were amply rewarded with the Technology and Health stocks the stellar performers over the month.  

In Australia, Scott Morrison became the 30th Prime Minister of Australia replacing Malcolm Turnbull, after an impasse on the government’s energy policy. With a weakening housing market, Australia is hoping that a pick up in capital expenditure will rescue growth – and so political uncertainty will not help.

Investment Outlook

We continue to believe Investment markets are late in the cycle, the issue remains that no one knows how late. Here is a summary of what we saw over August and how it is affecting our thinking : 

  1. Europe: Growth continues to weaken, with business confidence down as anxiety over the US-China trade war grows. The question remains if the slowdown in the first six months of the year is a pullback from high rates of growth last year, or a sign of a looming downturn. We have largely been targeting European multi-nationals with global revenue streams as a shield from a weakening domestic economy.
  2. China:  Chinese factories posted their weakest expansion in 14 months in August, due to the fifth drop in exports in a row; new export orders – an indicator of future activity – have contracted for the longest stretch since the first half of 2016. While Policymakers are accelerating approvals for infrastructure projects, reducing business costs and stimulating via the financial sector, the question remains whether this will put a floor under the cooling economy.  We expect significant government support and increased lending to be a feature of the next twelve months in China. 
  3. US:  The reporting season showed the US economy continues to power ahead, however, the trifecta of increases in the first half—the dollar, interest rates, and crude oil may ultimately mute this growth. At the moment of all the markets, the US remains the most attractive though we have been cycling into more defensive exposures of late.
  4. Emerging Markets: As US rates rise, investor fears over idiosyncratic risks in emerging markets have climbed, including Argentina’s fiscal woes, Turkey’s twin deficits, Brazil’s contentious elections and South Africa’s land-reform bill. We have avoided emerging markets and few of our companies have direct exposure. We currently don’t hold any of the European banks with direct exposure to Turkish Loans.

Tactical Asset Allocation Portfolio Positioning 

In our tactical portfolios, we own cash, bonds, international shares and Australian shares. We tend to blend these portfolios for clients so that each investor receives an exposure tailored to their own risk and income requirements.

The broad sweep of our asset allocation over the last 18 months was to ride the Trump Boom, switch into Europe in March / April last year as the US became overvalued and then switch back into the US as the Euro rallied and the USD fell. 

We have been using rallies in stock markets to reduce our holdings.

We remain underweight shares in aggregate, overweight international shares and significantly underweight Australian shares. Given the strong performance of our portfolios in recent months, we are currently reweighting.

Over / Underweight positions by portfolio

Asset Allocation
Source: Nucleus Wealth

Tactical Foundation Portfolio

Our tactical foundation portfolio is designed for investors with lower balances, it uses exchange-traded funds for its international exposure rather than direct shares. The reason for this is parcel sizes,  you can’t buy half a Google (Alphabet) share directly and so we use exchange-traded funds which buy baskets of stocks instead. The tactical foundation portfolio is a balanced fund, not as aggressive in its holdings as the growth fund nor as conservative as our income fund.

In August this fund increased by 2.0%.  The fund continues to be underweight Australian stocks.

Equities 

We continue to have a considerable tech / IT exposure that has produced handsome rewards this month. The portfolio was largely unchanged as we monitored the second quarter results, although in early September we have been trading a number of stocks where the quality has been declining or are looking expensive. We are beginning to see to see some investor rotation into the unloved Value stocks that we have targeted and whose performance has languished this year.

Domestically, with the increased demand for Quality stocks stretching valuations. We have booked some profits in Treasury Wines, CSL and Cochlear and increased our exposure to the Commodity sector, accumulating some Rio Tinto following its share price weakness post result and the growing likelihood of further Chinese stimulus.

Performance to date

Portfolio performance can be cut a number of different ways. At its most basic level, you should care about the total return. At the next level, you should care about the total return relative to some sort of benchmark.

As you dig deeper, you should also be interested how the return was achieved – for example if your fund manager is taking lots of risk but only performing slightly better than the market then you should be concerned. Similarly, if you can get market returns but at a much lower risk then that may be an appropriate trade-off.

Our portfolios to date have been taking less risk and in most cases out-performing benchmarks. The disclaimer is that they have only been running for 13 months, and that is not enough time to make definitive judgements.

Nucleus Performance
Source: Nucleus Wealth

We manage our portfolios for investors through separately managed accounts, which have a host of benefits including transparency,  individual tax treatment, direct ownership, customisations (including ethical overlays) and low trade costs. 

However, because separately managed accounts are either subtly different (due to slightly different stock weights) or explicitly different (due to ethical screening) for every customer, there is not one performance figure that we can quote. 

The table below shows performance for a client paying the maximum administration fee. We have not added in any benefit for franking credits or for withholding tax credits.  

Nucleus Performance
Source: Nucleus, Factset, Linear

Epilogue

In summary, our view continues to be that Australian investors are better off holding international investments at this point in the cycle.

We retain relatively large cash balances to hedge against volatility and to look for a cheaper entry point. If markets continue to be weak then we will look to buy more equities. We are concerned about the potential for trade wars or an emerging markets crisis. These will be a key focus for us over the next few months.

Our intention is that our portfolio is positioned to take advantage of our key themes but minimise risk in the event that our themes take longer than expected to resolve themselves.

July and August have been a lesson for investors in positioning. The big picture macro themes that drove performance over the two months have been in place for a considerable period of time, but the price movements occurred over a very short period.  The issue now is positioning your portfolio for the next move.

 

Damien Klassen is Head of Investments at Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Nucleus Investment Insights – Special Guest Dr Cameron Murray

This week on Nucleus Investment Insights we have a special guest, Dr Cameron Murray.

Dr Cameron Murray. Cameron is an economist and consultant who specialises in property markets, environmental economics, and corruption. He teaches at the University of Queensland, blogs at fresheconomicthinking.com and co-author of last year’s breakout book, The Game of Mates. In todays interview we cover some of the key themes discussed by Cameron in his publications, and then look at some of the wider investment implications that we can then leverage in how we invest money everyday at Nucleus Wealth.

Join Nucleus Wealth’s Head of Investments, Damien Klassen, our Chief Economist, Leith Van Onselen and myself as we chat all things Game of Mates with Cameron Murray.

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Nucleus Investment Insights – The How To of International Investment

Join Nucleus Wealth Head of Investments, Damien Klassen, Head of Strategy David Llewellyn Smith and Tim Fuller as we discuss the various ways you can take advantage of the other 98% of world stock markets.

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Investment tips for the Nervous Investor

This post is dedicated to all of the Nervous Investors out there: you know who you are.  You want to start investing, or invest more, but are frozen by a myriad of concerns:

  • are you buying at the wrong time?
  • you wanted to buy last year but didn’t get around to it, and now you are waiting until prices fall
  • you can’t buy until you understand the difference between a fee and an ICR
  • is the market about to crash?
  • you don’t know what you are doing and so are worried at the next Royal Commission they’ll be using your investments as an example of all that is wrong with the system.

I have good news and bad news for you. The bad news is that as a Nervous Investor you will never find a perfect time to invest when everyone agrees that the markets are going to go up, you know everything you need to know and its safe to pile in. The good news is that I think I can help – and we also have a podcast out on the same topic.

I’m going to approach this from three angles:

  • Why retail investors underperform professionals, so you can avoid the usual traps
  • Typical assets, and how they typically perform so that you have an idea of the types of assets that you should own
  •  Five tips on what to do

Why retail investors underperform professionals

Morningstar regularly publishes studies showing that retail investors underperform by around 2% (and others think the gap is even larger):

Returns Gap

Morningstar Performance Gap
Source: Morningstar

The main factor is investor behaviour. When markets wobble, investors tend to sell or sit on their cash. When markets have been performing well, investors tend to invest their cash.

From a risk perspective, this might seem reasonable to the Nervous Investor – buy when risks seem low and sell when risks seem high.

But, from a return perspective, it is exactly the wrong strategy: buy high, and then sell low.

Your brain is actively working against you

What is clear from the studies is that the average investor in the heat of the moment makes poor investment decisions. 

The media doesn’t help – they generally only report two things: (1) the markets are up a lot and you should have bought last week, get in quick before you miss out (2) the markets are down a lot and you should have sold last week, sell now before you lose the lot

Getting perspective is difficult, especially if you rely on newspapers, financial TV or stock brokers. The first two are in the entertainment business and so creating an exciting story trumps any obligation to give you a realistic perspective. Stockbrokers are in the business of making money from turnover, so convincing you to buy one day and sell a few weeks later trumps any obligation to give you long-term advice.

You need to recognise that the instincts that evolved with humans over thousands of years to stay alive on the savannah are ill-suited to investment. Some of the many recognised biases that are harmful to investing include:

  • Loss aversion: Losses hurt more than gains. For a Nervous Investor, this might mean being overly conservative rather than taking calculated (and diversified) risks
  • Confirmation bias: searching out facts that support our view rather than facts that challenge our view. For a Nervous Investor, it means looking for reasons to invest later. And the internet is a big place, I’m sure you’ll find someone who agrees with you.
  • Planning fallacy: is our tendency to underestimate the time, costs, and risks of future actions and at the same time overestimate the benefits. For the Nervous Investor, this means “I’ll invest later after I have had time to learn the entire financial system and become knowledgeable about all of the risks”. But life gets in the way.
  • Choice Paralysis: Too many choices overloads us. For the Nervous Investor, this is a never-ending excuse – you just need to research the choices more.
  • Optimism bias: Humans are only correct about 80% of the time when we are “99% sure.”. 
  • Bias Blind Spot: We can see everyone else’s biases but not our own

The best way to overcome these biases? Create a plan and stick to it. More on that below.

Hindsight is 20/20

One of the most dangerous historical biases is judging a past decision by its ultimate outcome instead of based on the quality of the decision at the time it was made, given what was known at that time.

Humans are constantly rewriting history – especially anyone who writes about the markets the following two are staples of investment prediction:

  • “Last year was much easier, all you needed to know was [INSERT THEME THAT IS KNOWN NOW BUT WASN’T 12 MONTHS AGO] – this year will be more difficult”
  • “Last year was all about [INSERT ONE OF GROWTH / VALUE / QUALITY / MOMENTUM]. This year will be a stock pickers market” (its always a stock pickers market)

The reality is that investing is never riskless and there are always reasons for markets to fall or to rise – stocks “climb a wall of worry”  is a more valid quote – meaning that stocks rise while a range of concerns keeps some people on the sidelines. The full quote being:

“If bull markets climb up a wall of worry, then bear markets slide down a slope of hope. A bull, or rising, market often begins in an atmosphere of gloom and skepticism when all sorts of reasons why prices should not rise prevail. The majority of market participants are bearish, thinking that prices will fall. On the other hand, when a bear market starts and prices begin falling, it is often in an overwhelming spirit of hope and optimism. The majority expects prices to rise.”

So, don’t re-write history. Yes, the market might have risen 20% last year, but it was never a “no-brainer”, no matter how obvious it may seem with hindsight. 12 months ago there were plenty of people warning of the dangers.

Typical assets, and how they typically perform

First, you want to diversify to smooth out your returns. For example, consider the apocryphal portfolio owning an umbrella seller and a sunscreen seller – some days one does well, other days the other does well. An investment in only one gives a volatile return, an investment in both smooths the return:

Cash / Term Deposits:  

The big advantage of cash is that the value doesn’t fall in times of stress. The two main disadvantages are:

  • Over the long term, cash gives a poor return relative to other assets. 
  • In times of trouble, central banks cut interest rates which flow through to cash balances almost immediately. If you are relying on the interest payments to live then this can create problems at the worst possible point of the economic cycle. While you can mitigate somewhat by using term deposits, now you have lost the liquidity of cash and may be up for break fees if you need to use it.

Most Nervous Investors will already be intimately acquainted with cash. The danger is that you own too much.

Government Bonds

The big advantage of government bonds is that in times of stress the value often (but not always, depending on the type of crisis) rises. This is hugely beneficial as it provides diversification when you want it most.

Bonds also provide a much steadier income relative to cash. What I mean by this is that bonds pay fixed amounts until they expire, and so if interest rates get cut then your bond portfolio might take 10 years to fully reflect the change in interest rates – very useful if you are living off the interest payments

The main downside is that the value of the bond does change, and so bonds are riskier than cash. Over the long term, bonds perform better than cash, but not as well as stocks.

Corporate Bonds

Corporate bonds provide a higher return (interest rate) than government bonds. The downside is that there is a much larger chance that the company you are investing in goes broke vs investing in government bonds.

This then manifests itself in a poorer level of diversification. i.e. when the economy goes through times of stress, more companies default and even the value of corporate debt for companies that don’t default declines.

This makes the returns for corporate debt more similar to stock market returns – meaning that for the Nervous Investor corporate debt is less useful.

Stocks

Stocks are the most volatile – in boom times they will return the most, in bust times they will lose the most. As a Nervous Investor you want to have a diversified weighting to stocks over the long term, but keeping this exposure to a level that you feel comfortable is important.

Five Areas of focus on for the Nervous Investor

1.  Asset Allocation:

Get your strategy right and then stick to it. Write it down. Put it somewhere safe and refer to it before you make any investments. As a Nervous Investor, don’t let your emotions rule.

Diversify. Diversify. Diversify.  Very useful for ordinary investors, doubly so for a Nervous Investor.

2. Regret Minimisation:

As a Nervous Investor, you need to realise that every investor is wrong at some stage. Your goal as an investor is not to make zero mistakes, its to make sure that your mistakes don’t ruin your portfolio. Accept that mistakes will be made, but we are trying to minimise the level of regret.

First, evaluate the fear vs greed trade-off. If you really want to be the person at the BBQ talking about how much you made on the stock market, then you are going to have to take some risk. And some years you are going to have to own up to some big losses. For many Nervous Investor’s, this is unrealistic – abandon your dreams of being the hare and embrace the role of the tortoise.  

Second, don’t invest all at once.  Make a plan, for some this will mean gradually investing over a few months, for others, it will mean gradually investing over a few years. Stick with your plan. You will probably be alternatively kicking yourself for not investing earlier and then berating yourself for not waiting for the market to fall.  Accept that now and move on.

3. Self Evaluation:

  • Do you have the knowledge to make investment decisions? If not get a professional to do it. If you “just need to read up on a few more things”, then get a professional to do it for you in the meantime, just in case it takes you a few years longer than you expect.
  • Do you have the temperament to make investment timing decisions? If not get a professional to do it. You need to stick to your plan above – as a Nervous Investor if you are unsure of your ability to do so, then leave it to the professionals.

4. Self Control:

Rebalance regularly. As a Nervous Investor, this will be a painful process because it will entail selling assets that are doing well and buying assets that have done poorly. Do it anyway.

For many investors, near the end of the tax year is a good time.

Don’t watch every market tick. Once your plan is set up and running, turn off the live prices and financial news. As a Nervous Investor, they are going to pander to your worst instincts.

5. Analysis Paralysis:

As a Nervous Investor, you are probably already a few years overdue to “do something”. Do something is far better than doing nothing. 

If you are really nervous then write down a longer-term plan to start investing. – take years to be fully invested if that is what you feel comfortable with. But start now – don’t keep making excuses.

 

 

 

Damien Klassen is Head of Investments at Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Nucleus Investment Insights – The Nervous Investor

Join us as Nucleus Wealth Head of Investments Damien Klassen, Chief Strategist David Llewellyn Smith and Tim Fuller discuss current market conditions and how someone who is nervous about entering sharemarkets can still take advantage of opportunities. 

  • Capital protection whilst still capturing some upside of shares 
  • When to climb the wall of worry and when to sit it out 
  • Tactics used by the professionals to protect a portfolio

If you are currently sitting on the sidelines, or need some insight into how to protect your wealth and yet still seek growth, this is the episode for you. 

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The end is nigh, but not that nigh

Investment markets are late in the economic cycle,  the issue being that you never know when the end will come. However, there are some signs that it is not here yet for US equities at least – and there is the potential that US equities will hold the rest of the world out of the abyss for a little while longer.

The main factor that gives me comfort with the US market is the strong earnings growth that continues to define the US market. In general, when forecasts earnings are rising strongly markets don’t have 20%+ corrections:

US EPS Growth
Source: Nucleus Wealth, Factset

There are occasional exceptions, the Asian / Russian Rouble / Long Term Capital Management crisis being one of them where the US market fell  20% in a few weeks despite an uptrend in earnings. However, it is worth noting a few things that characterised this crisis:

  • The Asian crisis started in May 1997 with an attack on the pegged Thai baht. The crisis rolled through the rest of Asia over the rest of 1997.  From May 1997 until the time The Russia Rouble crisis occurred in late 1998, the US market had already risen 40%. The Russian crisis sparked the collapse of Long Term Capital Mangement, a US hedge fund which was so highly leveraged that it needed a bailout organised by the NY Fed so that it wouldn’t bring the financial system down. 
  • So, while the correction came in the middle of increasing earnings, it was a financial shock from excessive leverage rather than the start of a recession. Also, the crisis needed to spread directly to the US before the US stock market reacted.
S&P during Asian Crisis
Source: Nucleus Wealth, Factset

You do get smaller ~10% corrections in the middle of earnings booms, although again they are more likely to be reactions to shorter-term issues rather than the start of significant bear markets.

The more common outcome is that earnings peak either before or at the market peak:

 

So, what I am suggesting is that the end of this economic cycle is unlikely to begin until earnings growth slows down and we start seeing earnings downgrades rather than upgrades. And so far that is not likely. 

With considerable earnings growth yet to come over the next six months from tax cuts and increased buybacks, we expect earnings to continue to grind higher for the next two quarters:

 

 

Often the peak in earnings also represents the peak in the economic cycle, but if you took cover every time earnings flattened you would miss a lot of good times as well. The logical inference I’m drawing is that when US earnings flatten, it might herald the end of the US economic cycle, but with rapidly rising US earnings it is unlikely that the end of the US economic cycle is here.

Australia is a completely different story – I’ll deal with that in a different post:

Australian EPS Growth
Source: Nucleus Wealth, Factset

An investment view of Trump

The Hitchhikers Guide to the Galaxy has a galactic president:

The President is very much a figurehead… the qualities he is required to display are not those of leadership but those of finely judged outrage. For this reason the President is always a controversial choice, always an infuriating but fascinating character. His job is not to wield power but to draw attention away from it. On those criteria Zaphod Beeblebrox is one of the most successful Presidents the Galaxy has ever had- he has already spent two of his ten presidential years in prison for fraud.

I’m not sure if I need to point out the parallels to Trump.

Trump loves the spotlight, loves to troll other political figures and loves to get a reaction – particularly from the politically correct. Also, he loves to create distractions – pick any one of a dozen slurs, insults or outright lies that he has tweeted leaving the press in a lather about his insensitivity, while all but ignoring substantive changes in a completely different area.

As an investor, part of your job is to ignore the obvious distractions to work out what is being done in the background. Before we get to that, another feature of The Hitchhikers Guide to the Galaxy is that they have discovered a cloaking technology can render things invisible:

An SEP is something we can’t see, or don’t see, or our brain doesn’t let us see, because we think that it’s somebody else’s problem. That’s what SEP means. Somebody Else’s Problem. The brain just edits it out, it’s like a blind spot. The Somebody Else’s Problem field… relies on people’s natural predisposition not to see anything they don’t want to, weren’t expecting, or can’t explain.

As a human being, I feel the pain and worry about the effects of Trump’s presidency upon a range of important social issues.

But, as an investor, I need to recognize that skewing the playing field toward companies (away from workers) and reducing the regulation for companies is good in for short-term profitability but bad for long-term profitability. And I don’t think that bothers Trump. By the time it comes crashing down it will be SEP.

Imposing tariffs on other countries is probably good for short-term profits and jobs at US companies. By the time the negative effects eventuate it may well be SEP.

Breaking long-standing agreements, disrupting treaties and antagonizing allies is bad for long-term relationships and long-term trade – why will countries cut a deal with the US if you can’t expect them to honour it for longer than an election cycle. But (for the most part) its probably beneficial to Trump in the short term politically and beneficial to America economically. And I don’t think that bothers Trump. Longer term ramifications are SEP.

Running up government debt on tax cuts to the rich and companies has short-term benefits but the bill will eventually need to be paid. And I don’t think that bothers Trump. It is SEP.

Denying climate change and helping coal will attract a few votes from miners in swing states at a huge long-term environmental cost. SEP.

And you know what? Trump is probably right about most of these. He will either be no longer president, impeached or (for climate change) long since passed on by the time many of these become major issues. Its all about living in the now.

So, as a human being, I worry about his effect on a range of different things: governance, political discourse, homophobia, nepotism, sexism, racism and probably a dozen other “isms” that I have forgotten about. They are all issues for society that we need to do what we can to combat – but they are not significantly affecting the investment environment.

The things that I think an investor should be considering: 

  • Tariffs: Not an issue at the levels discussed. Also, Trump is right that China has been cheating on its obligations, so some positive steps in the right direction might even be a gain for the world economy. The key risk is that both China and the US continue to up the ante.
  • Worsening Inequality: This is important, but not in the short term.
  • Growing US Debt: Not really. See Japan for a preview. I’ll write more about this in the coming days.
  • Infrastructure spending: Trump has been very quiet on this front. My expectation is that if the Democrats do well at the mid-term elections then Trump will look to do a deal on infrastructure. This could extend the US boom. 
  • Environmental rollbacks: Short term it is a positive for some companies. But I would be very wary of investing in those companies. Political environments are a pendulum, reduced regulation in the short term might seem helpful but odds are that regulation will return and quite possibly at greater levels than before. 
  • Iran Sanctions: Oil prices are important in a range of ways. Given the US is now largely self-sufficient in oil, high oil prices no longer slow the US economy the way they used to. Given the capital expenditure on new oil well drilling when oil prices are high, some argue that higher oil prices are more helpful to the US than harmful – I don’t buy that argument but there are elements of truth. However, the rest of the world (especially Europe and China) are negatively affected by high oil prices and so higher oil prices will increase the gap between US growth and the rest of the world
  • War/Military Spending: Military spending is likely to increase globally.  Chances of a war would appear to be higher under Trump than a typical president.
  • Emerging Markets Crises: Turkey’s recent problems are illustrative.  Like a bushfire, conditions need to be right to have a currency crisis: very dry, lots of dead undergrowth and then a spark. The lesson is that Trump has no compunction about providing a spark. It is likely that the current cycle will finish in some sort of emerging markets crisis as strong US growth drives the USD and US interest rates higher. An emerging markets crisis might be imminent, my expectation is that this is some time away still, but don’t discount the risk.

There is a lot to dislike about Trump.

But don’t let that distract you from the fact that some of the things that he is doing will be helpful. And most of the bad economic effects are still some time away – and we don’t know what will happen before then.