A Good Time to Invest?

With some things in life, a good start is everything. Take the 100-meter sprint, the whole race is over in 10 seconds or less. The importance of getting out of the blocks quickly to ensure success can’t be understated. In the 100-metre sprint’s extended athletic cousin, the marathon, a bad start, while annoying, must be put in perspective. There are two plus hours ahead, unless a competitor’s feet have been glued to the pavement, there is ample time for them to regroup and overcome.

When investing, the thought of bad start can be a psychological hurdle. A common question an investor will ask their adviser will be a variant of “is this a good time to invest?” Concerns come with that initial investment commitment. In contrast to dollar cost averaging, where the entry is incremental and ongoing, a large sum in one hit can provoke more hesitation and second guessing. It’s a bigger unknown. It’s not that the investor doesn’t want to invest, but it’s the fear of making a mistake – is it the right time?

This occurs because we understand investment markets are volatile. They react to news and can quickly move in one direction or the other. This can make us feel either foolish, for not waiting, or smugly satisfied for buying when we did. Overall, it’s those feelings of foolishness and believing that we should have timed a better entry that we’re most trying to avoid.

Since 1980 the ASX has finished 36% of months in negative territory. So historically, the odds have been in an investor’s favour, but no one wants to start their investment journey in those 36% of red months. But does it really matter?

Whether a decline month happens in the first month or the tenth month, there’s no avoiding your portfolio going down at some stage – unless it’s exceptionally conservative. The concern with the first month is the psychology of immediately giving up some of your capital.

To illustrate the futility of focusing on a poor start, we’ve looked at the worst month to invest during each year in the 1990’s on the ASX.

Using $1000, we’ve tracked market performance for a full decade. With a 10-year time hold, it’s long enough to put a frustrating beginning back into perspective.  There are no additional contributions, it’s just tracking that initial $1000 for the next 120 months or ten years.

Examples of market returns are often done on a calendar basis, but rarely does an investor enter the market on the first day of a particular year. They are more likely to commit to a strategy sometime throughout the year. While this experiment doesn’t take into account individual days, it would be indicative of an investment experience.

To lessen chart clutter, we’ve split the returns across two charts. 1990-1994 and 1995-1999.

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1990-1994

As shown by the chart, there were varying outcomes in each of the five years.

The best result of the bad bunch began in June 1992. $1000 invested would be in the red for the first 11 months, but across the full ten years, patience was rewarded. If an investor set aside their bad start, an average annual return of 10.76% was their reward.

The worst result of the bad bunch began in November 1993. $1000 invested recovered quickly from its initial bad start, before encountering an ongoing rough patch that kept it mostly in negative territory until the 18-month mark. End result? An average annual return of 8.5%.

A good return, but 2.26% lower than the leader. Yet there’s no argument that the start made a difference. At varying points, it was neck and neck with the others - that time frame just had a poor finish in this experiment.

While not part of this experiment, if both starting points extended to 25-year periods, the difference between the two narrows to 0.76%. You never want to leave three quarters of a percent on the table, but it highlights with time, things begin to even up.

1995-1999

The returns in the second half of the 1990’s had an even wider variance over their ten-year periods, but again, their outcomes had very little to do with any poor beginning.

The worst time to start in 1995 was January, which wasn’t that bad - one negative month before delivering a 20.73% return for the calendar year. Across the ten years, the return for the ASX was 12.07%.

Yet it didn’t compare with October 1997 as a start month. In contrast to the charmed first 12 months of January 1995, an investment beginning in October 1997 was still under water 12 months later. However, the poor start meant nothing to its return over the decade, delivering an annualized return of 13.46%.

The worst start month in the whole experiment was May 1999. The tail end of the ten-year period took in the full financial crisis along with the beginning of the recovery. This severely impacts the annualized return. Respectable at 6.29%, but anemic in comparison to the other returns.

It is worth noting, after four years, the May 1999 start was the worst of the five scenarios, yet after eight years it was the strongest performer. Sharemarkets have a way of rearranging perspectives like that.

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Many of these returns are quite strong, which sets aside any argument a poor start will define an investment journey. There’s no curse or damnation involved if someone invests and the market moves down on them. It happens. Sometimes the rewards aren’t initially forthcoming. They may prove elusive for some time, but there are never mistakes with timing. There is no possible way of getting an entry absolutely right, unless it involves sheer luck.

The other thing to remember, one person’s investment experience isn’t going to be someone else’s investment experience, unless they’re beginning on the same day. The challenges they encounter will be unique to them because of their time spent in the market and how their capital has grown or not grown to that point in time.

Agonizing over the right time to invest becomes thought and energy down the drain on something that can’t be forecast. Even the best of starts will encounter turbulent markets at some point and the worst of starts can go onto flourish. Investors are better off just starting. There is no right or wrong entry point.

This is a marathon, not a sprint.

With thanks to FYG Planners for this article

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

The Royal Commission - Findings and Recommendations

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The findings and recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry have been delivered. Commissioner Kenneth Hayne made 76 recommendations and the early noises from both sides of politics were 75 of those recommendations will be implemented.

Whether this is true or not, is another matter entirely, as is the issue of how the recommendations will actually be implemented. Politics tends to move on very quickly to other issues where there’s less agreement between the parties. Despite their contrition, anything the banks (or any other vested interest) want watered down will be subject to furious lobbying behind closed doors. Friendly media mouthpieces will also do their best to soften the public along these lines.

This brings us to the reaction from the media throughout the affair. Before the Royal Commission was called, many notable financial and business journalists were in furious opposition. “A royal commission into the banks is a complete waste of time,” said one. When the Royal Commission was sitting and the ongoing horror stories were being told by customers and clients, the financial and business journalists were suddenly outraged, many screaming “I admit I was wrong” and “it was worse than we imagined”.

On release of Commissioner Hayne’s findings, the tide had slightly turned again. With the banks escaping mostly with a wet lettuce bashing, the commentators who were first against the royal commission, before pivoting to outrage at the revelations, were now patting Hayne on the back for “not going too far”.

Weather-vanes have a good sense of where the wind’s blowing from. When even the under-fire banks weren’t bothering to do public relations in the midst of the dirtier royal commission revelations, supposedly independent journalists had no choice but to align themselves with the public mood. With the RC all over, it’s back to business as usual for the financial media. The wooden baseball bats have been tossed on the bonfire. The long game is maintaining access for stories. For the better-known media personalities, there’s those high paying MC and speaking gigs at bank functions and conferences to think of!

Keep this in mind about financial media toadies. If you need trusted financial direction or an opinion on a financial matter, your adviser should be the one to give it. You know it will always be consistent.

Many of the recommendations relate to banking, but we’ll focus on the recommendations relating to financial advice and other points of interest.

Annual renewal & Fees

The current opt-in period is recommended to be shortened to one year. Obviously, some clients find continually opting in frustrating and our compliance burden increases, but this is the reality now. There will also be an explanation of fees and services, but our fees are already fully disclosed.

Disclosure & Insurance

Anyone receiving an insurance commission can’t call themselves independent, unbiased or impartial according to the Corporations Act. Spencer Private Wealth has no affiliation with product providers, banks or financial institutions, neither does our financial services licensee, FYG Planners. We do receive insurance commissions, but we choose insurers and premiums on their merits and suitability for each individual client. Where possible, we rebate these commissions in the form of a reduction in fees. These commissions are already disclosed in your advice documents. This brings us to the insurance commissions which may be reduced to zero.

Grandfathered commissions

These commissions are paid from within investment platforms and are a legacy from old life company products and some of the ‘no frills’ platforms. Occasionally clients have these products and, if it’s in their best interest, we recommend alternatives.

Superannuation

The most notable superannuation recommendation is that investors have one default account. The first superannuation account a person has will remain their only account, unless they choose otherwise. It’s suggested that a framework is to be developed to ‘staple’ a person to their account. This is possibly a better idea for younger investors who have been prone to accrue multiple accounts due to either inattention, or employers designating a new account for them due to workplace agreements.

Bank Financial Advice 

One of the missing elements was any separation of financial advice and product sales. Many expected there would be something relating to vertical integration, given much of the outrageous conduct exposed at the RC stemmed from employees pushing their company’s products. As we’ve said in the past there are advisers and there are salespeople. Unfortunately, the consumer still doesn’t get a clear distinction.

Mortgage Broking

Mortgage brokers were the surprise losers. The key recommendation was the removal of all trail commissions for brokers, to be replaced with an upfront fee to be paid by the borrower to the mortgage broker for the work done. This was the one point that the current government didn’t suggest they’d implement.

With less lending originating from bank branches, the mortgage brokers have been the largest originators of mortgages in the country. It’s arguable that mortgage brokers do provide a valuable service, saving the consumer from measuring up every available loan to find the best one to fit their needs.

Summary

The Royal Commission uncovered some rotten behaviour and has firmly put those at fault on notice. Hopefully, shining the light will ensure the ruthless areas of the financial industry clean up their act. A lack of trust often results in everyone being tarred with the same brush, meaning consumers who could use quality financial advice end up not seeking it.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.