Investing and financial planning require discipline.
Each year we need to review our plans. How were they implemented? What unexpected events happened? What can we learn from the past year and apply to the year ahead? Below is my list of what I will be taking out of 2016 and applying in 2017.
Share market volatility is here to stay
The Australian share market moved by as much as 17 per cent in 2016. On 10 occasions in 2016 our local market moved more than plus or minus 6 per cent within one month alone. Volatility is here to stay. The latest S&P SPIVA Scorecard, which measures active managers versus their benchmarks, shows it is harder to outperform by relying on stock picking. Of note, 69.18 per cent of Australian general equity managers and 91.89 per cent of international equity managers underperformed their relative index/benchmark over five years. Other sectors are shown in the table below. Australian equity mid and small-cap managers are the only managers that have in the majority been able to outperform their relative index/benchmark over five years.
This year we have changed the methodology under which we construct investment portfolios. We are now recommending exchange-traded funds (ETF), that is, buying a basket of stocks that resemble a chosen index, for every asset class other than small caps. ETFs are cheaper to hold than managed funds, have daily liquidity on the share market and are extremely transparent – we can view exactly what companies/assets each ETF is invested in. For some more aggressive/high-risk investors a small-cap fund manager can provide exposure to the small-cap sector in Australia, that is, generally companies that are ranked outside of the top 200.
Don’t rely on pollsters
International events do have an impact on local investor sentiment and behaviour in Australia. If we were to believe the pollsters abroad this year, the United Kingdom would have chosen to remain in the European Union and Hillary Clinton would be the president-elect in the United States. Why did the pollsters get it so wrong with these two major global events? When voting is not compulsory, pollsters have to try to distinguish who is likely to vote and who is not likely to vote. They then have to try and accurately count the intentions of only those people whom they think will vote. Their work is certainly cut out for them and the predictions from polls this year have been largely inaccurate. It says something about the benefits of compulsory voting. We are the only English-speaking country in the world where voting is compulsory.
We live in a globalised world. I always retain a ‘war chest’ of cash. In times of volatility I have used some surplus cash to top up on share portfolios. A good cash buffer also gives peace of mind. It is prudent to maintain a cash buffer that is at the minimum equal to six months of living expenses. Cash reserves for investing will also cover property investors in the event their tenant leaves an investment property and a period of vacancy follows. I will continue to keep healthy cash buffers on hand in 2017 to take advantage of investment opportunities when they arise during times of volatility.
Quality in property counts
The property market continues to grow in Australia. Sydney is experiencing all-time price highs. Brisbane is nearing equilibrium with supply and demand. Melbourne is lopsided with oversupply in the central business district and Southbank/Fishermans Bend, but low vacancy rates in suburbs located within 5km to 10km of the CBD. It seems quality is proving to be the recipe for success. Most of the investment properties identified as ideal have between 20 to 40 units per building or are in prime locations with views and have unique features such as a courtyard, study nook or extra storage. These features have seen rental yields around 0.5 per cent higher than the suburb averages. The key to property investment is to have something unique and something that is considered premium quality.
Investing in a property that attracts a higher rental yield will help to shield investors from an environment where interest rates will eventually rise. It is important to take a national approach to property investment and not be limited to your own suburb or surrounds.
Andrew Zbik is a senior financial planner at Omniwealth.