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BlueRocke Newsletter Nov 2022

Albert Einstein is reputed to have said: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

As an investor, making your money work for you is the best way to increase your wealth. And the wealth you will accumulate is the result of 2 things: how long you invest and the rate of return on your investment.

You will also need psychological qualities to make the whole thing work. Qualities like being patient, disciplined, knowing the value of things, and being able to act decisively on your own reasoning (and not on the opinion of others) when the  odds are in your favour.

Doing the maths

Why is compound interest so “magical”? The simple answer is: “Because it’s reinvested”. Compound interest is, simply put, interest on interest.

Here’s an example. Assume you invest $100. The following table shows how much return you’d get over different lengths of time, and at varying rates of return.

The power of compounding – in a table

If you invest $100 at 5% over 5 years, you get $128, but if you wait 10 years, that amount rises to $163. The longer you wait, the more you make! Of course, this goes even higher if you can get a higher return. For example, if you can find an investment that returns 15% for 10 years, you multiply your money by a factor of 4. If you wait for 20 years and still earn 15% a year (which is a lot), you get 16 times your money back.

Twenty-percent seems like a very high unachievable return. Actually, it’s pretty rare, reserved to the most talented  investors, such as Warren Buffett (the annual return of per-share market value of Berkshire Hathaway has been 20% per annum, over 55 years…).

Two factors to remember

If you want to accumulate wealth, you will need to start as early as possible and then focus on the best prospective return you can find.

The second factor is obviously the most difficult to get, because it depends on careful study of key elements such as the price you pay for the assets in which you invest, and their intrinsic qualities.

For instance, if you want to invest your money in stocks, you will need to select individual companies that boast high quality, and that trade at cheap valuation.

High quality companies are companies that have a strong competitive position in their market, have growth in their industry, generate high return on capital and growing free cash-flow, a strong balance sheet, and are managed by competent people.

You can’t control the market

Cheap valuation is also not an element you control. It’s usually the reflection of other people’s opinion, aka “Mr. Market”, that sometimes agrees to pay a lot for a company and at other times is willing to sell at a huge discount (per Benjamin Graham’s real quote in his must read book The Intelligent Investor or those quotes from Warren Buffett in his 1987 letter to shareholders).

But if you’re patient enough and know which companies/assets you want to buy, you just have to be patient and wait for the market to provide the opportunity to buy something you like at a fair price.

Then you will just have to stick to your guns and wait for other opportunities to come along.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article Source: https://spotlight.morningstarhub.com.au/the-power-of-compound-interest/?utm_source=eloqua&utm_medium=email&utm_campaign=thought_leadership_research&utm_content=31686

It might be unwise to extrapolate too much from this week’s inflation data on both sides of the Atlantic. This is peak bounce back. Like the surge in corporate earnings that we will see in the results season that started this week, the rise in inflation is largely a matter of arithmetic. The world shut down a year ago and is re-opening today. This was always going to distort the figures.

Take the biggest contributor to this week’s rise in UK inflation, transport costs. The recovery in the oil price has been dramatic, and petrol at 130p a litre versus 106p a year ago reflects that. But this is a return to a more normal world from one in which producers were, briefly, paying others to take oil off their hands and the cost of a barrel of crude was, for a short time, negative. Likewise, the increase in second-hand car prices is largely about a temporary semiconductor shortage affecting the production of new cars. This too shall pass.

So, while the inflation prints in both America and here have been significantly higher than forecast this week, we should not assume that central banks on either side of the pond are necessarily wrong to believe that price rises are transitory. The peak may be a bit higher than predicted but their assumption that inflation will settle back in due course could turn out to be correct.

Let’s hope so. It would certainly be reassuring to those of us whose memories stretch back to a time when we last misjudged the inflationary straws in the wind. Central banks, notably the Federal Reserve under former chair Arthur Burns, ignored the warning signs of rising prices in the late 1960s and early 1970s, and we know how that ended. Inflation never looks like being a problem until it is a big one. It’s far better to keep the genie in the bottle than to have to stuff it back in again.

This week I took questions from investors about my quarterly Investment Outlook. The most popular topic by a country mile was inflation: should we worry; what can we do about it; where are the opportunities? Reading those questions, it struck me that inflation is not a one size fits all problem. Depending on our age and circumstances we will experience inflation in different ways.

For my parents, now in their eighties, inflation was just a given, a part of their world view. They would prefer to spend money today in the knowledge that it would be worth less next year. They were happy to take on seemingly eye-watering mortgage debt because they knew that within a few years, rising house prices and salaries would reduce the burden to a more manageable level. The conventional wisdom was to buy the most expensive house you could stretch yourself to afford.

The biggest difference between my parents’ experience and mine and that of my now adult children, is that inflation was not really their problem to solve. They worked in the public sector (Air Force, teaching) so their salaries and subsequently their pensions were a political rather than a commercial decision. The 1970s was a dreadful period for asset prices – both shares and bonds performed terribly, as investors questioned whether capitalism even had a future. But the collapse in valuations between the mid-1960s and 1982 was an ‘out there’ kind of problem for a family in the embrace of the state.

For my generation, on the brink of what we hope will be a long and healthy retirement, the prospect of inflation is a much bigger concern. I hesitate to complain too loudly because, like many people in their fifties, I too have been a beneficiary of rising asset prices. My children smile through gritted teeth when I tell them that we put down £3,500 to buy our first, inner London, flat in 1989.

But, while there are some people my age who will enjoy an inflation-linked final salary pension scheme, they are few and far between. Most of us are setting out on a new kind of financial journey in which the onus will be on us to make sure that what we have managed to accumulate in the last 30 years of our working lives can last out the next 30 years of retirement.

The most important determinant of our ability to do that in any sort of comfort will be whether this week’s inflation numbers are indeed a temporary spike or the first signs of history repeating itself. If you don’t know the Rule of 72, now would be a good time to familiarise yourself with it and to pass it on to your kids.

If you want to know how long it will take for rising prices to halve your spending power, simply divide the current inflation rate into 72. At just 4pc a year, half-way between this week’s headline inflation rates in the US and here, it will take just 18 years for the pound in your pocket to be worth 50p. At 6pc inflation, it will take just 12 years. You will need to have put aside a great deal for that not to matter.

It is my children, all now in their twenties, that concern me more. They have the advantage over those heading into retirement that their incomes can rise in line with prices. Let’s hope they do because that has not been the reality for many since the financial crisis. And they are starting out with property prices high and interest rates low, the mirror image of my experience 30 years ago. I suspect they will look less kindly on inflation than their parents and grandparents have been able to.

Governments like a bit of inflation. Central banks think they can achieve it. It’s the rest of us who will have to deal with the consequences if they can’t.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article Source: https://www.fidelity.com.au/insights/investment-articles/inflation-friend-or-foe/

Many of us have probably received in our in-boxes spams for get-rich-quick-schemes with promises of making great amounts of money, effortlessly. If only getting rich was so easy.

Rather than pipedreams being sold by spammers, here’s a list of 5 investment principles that have stood the test of time.

1. Asset allocation is very important

Asset allocation – how you spread your money across various asset classes like shares, bonds property, infrastructure and alternatives – helps to balance the risk and return potential in your investment portfolio, anchoring it through different economic and investment cycles.  It’s a key driver of long-term investment performance.

By including multiple asset classes with investment returns that move up and down under different market conditions within a portfolio, an investor can protect against significant losses. This is because, historically, the returns of the major asset classes have generally not moved move up and down at the same time.

By investing in more than one asset class, you’re likely to reduce the risk that you’ll lose money and your portfolio’s overall investment returns should have a smoother ride. If one asset class’ investment return falls, you should be in a position to counteract your losses in that asset class, with potentially better investment returns in another asset class.

The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.

2. Diversification matters

The practice of spreading money among different investments to reduce risk is known as diversification. Through diversification, the overall performance of your investment portfolio isn’t overdependent on the performance of a single asset class or any single investment.

By spreading your money across a group of investments, such as in your super fund, you should be better able to limit losses when financial markets are volatile, and reduce the fluctuations of investment returns without sacrificing too much potential gain.

Asset allocation, along with diversification, is important because it can have a major impact on whether you’ll meet your financial goals. If you don’t include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal.

For example, if saving for a long-term goal, such as retirement, most financial experts agree to including at least some ‘growth investments’, such as shares, for example, in your portfolio.

On the other hand, a portfolio heavily skewed towards shares would probably be considered inappropriate for a short-term goal, like saving for a holiday or buying a car.

3. Higher returns come with higher risks

Risk is unavoidable when investing. No discussion of potential investment return or performance is meaningful without also considering the level of risk involved.

If you want the potential to earn a higher return on your investments, then you have to be willing to accept more risk or volatility (ups and downs in the value of your investments). But investment success isn’t always about chasing higher returns by taking on relatively high risk – it’s about finding the right balance between risk and return that works for you.

An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing some money occasionally, in order to get better long-term results.

A conservative investor, or one with a low-risk tolerance, tends to favour investments that will preserve their original investment. Conservative investors are concerned with a “keeping bird in the hand,” while aggressive investors seek “two in the bush.”

4. Your time horizon can influence your investment choices

Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile investment because they can wait out inevitable financial market ups and downs.

By contrast, an investor saving up for a near-term goal, would likely take on less risk because they have a shorter time horizon.

5. Time in the market is more important than trying to time markets

All financial markets, including share markets, have good days and bad days. From this, it might be assumed that the key to successful investing is simply to be invested on all the good days and not invested on all the bad days.

It sounds tempting, but very difficult to do consistently and successfully, even for investment professionals.

Consider the fact that market timing entails two decisions. One decision is regarding when to get into the market whereas the other decision is regarding getting out of the market.

Getting just one of those two decisions right is difficult enough. Getting both right is a very tall order.

Market timing can be costly

One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments.

The opposite of market timing is staying invested with a long-term view as the market goes through its cycles.

Here’s something to consider: a hypothetical investment of $US1,000 in the global share market as measured by the MSCI ACWI index, made in 2010, would have grown to $US2,060 by the end of 2019.¹

But if an investor missed the 30 best trading days of that period, they would have lost 99% of that return; and missing the 40 best trading days in that period would have seen the investor with a smaller amount than the original investment.

This emphasises the importance of patient capital – giving the market, in this instance, the global share market, time to grow your money rather than trying to pick the best time to invest. Even experienced investment professionals find it difficult to accurately and sustainably time markets.

One more thing

Sitting down with a financial adviser can help you will all aspects of investing, including investing your super.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article Source: https://www.mlc.com.au/personal/blog/2021/06/5_top_investment_truths