Top client concerns about the market
Written and accurate as at: Feb 03, 2016 Current Stats & Facts
Link to Video
Video: Morningstar's Christine St Anne and David Simon
Video Transcript
Christine St Anne: As a financial planner, David Simon is continually involved in managing people's investment portfolios. He joins us today to discuss some of the key concerns on his clients' minds.
David, welcome.
David Simon: Thanks Christine.
St Anne: David, so how could people reduce the downside risk in their portfolio while also maintaining their short-term and medium-term goals?
Simon: It's an interesting question, Christine. We believe employing a method around having two portfolios. So, having one portfolio dedicated to their individual short-term needs and one for their long-term needs. By having two separate portfolios, they're appropriately investing their short-term funds and also appropriately investing their long-term funds. We find that when investors combine their short and long-term objectives with one single portfolio, they may be inclined to sell a growth-based investment prematurely with the need of funding their cash flow requirements.
Importantly, by having two separate portfolios, to make it work really well, is adequate planning. So, we find at Westpac that we encourage our clients to spend a lot of time around researching and planning their investment needs first and foremost to ensure that both portfolios can run smoothly without being interrupted.
St Anne: David, another key concern was how to get the right mix between the defensive and growth assets.
Simon: Yeah look, there is no right or wrong mix in terms of the blend between income or defensive and growth assets and it always does come down to an individual's needs and objectives. I know it’s a foregone cliché but it really does work. And you find that once you understand - you deeply understand an individual's defensive and growth needs, you can always then construct a portfolio that's relevant for their own situation.
For instance, there are a various characteristics that investors need to consider, which will drive enough information to then build a portfolio. Some of those characteristics include; their desire for income or growth. So, that is, is the individual paid to generate cash flow now, do they need that income now to fund their lifestyle, or are they prepare to defer that cash flow to seek growth and generate cash flow later on in life.
Other things such as timing; is the investor looking to invest in the short term or are they investing for the long-term? If they are investing for the long-term, well, then they probably got a little bit more time to endure their volatility, the lows and the highs. But certainly not if they're investing for the short-term.
Other aspects, such as liquidity, is the individual investor, do they need immediate access with an imminent purchase that's upcoming or are they prepared to lock their money away into the future. Some of the other characteristics include tax. So, is the investor tax conscious or are they unaware of tax? Do they care? So, once you combine some of these characteristics amongst others, it really does help to build a quality portfolio that's teed towards whatever their needs and objectives are whether it is income or growth.
St Anne: David, it's all about income at the moment and of course, another concern is how to get that income in your portfolio.
Simon: There is a real variety of ways people can access income and certainly now that interest rates are down and may continue to slide, cash doesn't look as attractive as it once was. But indeed, if you look into particular assets, including Australian shares, whilst the Australian share market remains profitable and whilst companies continue pay out their dividends and indeed whilst prices are relatively low, the Australian share market is a very good source of income.
Indeed, historically share market performance - well, the Australian share market performance, over half of its performance has been generated through dividend yield. Other aspects or other asset classes that can create income include fixed interest assets and REITs or listed property. Fixed interest assets can generate higher income than traditional fixed asset assets like term deposits or cash. Depending on the issuer can derive the outcome in terms of the yield.
So, for instance, if the Australian government is offering a bond or an Australian corporate is offering the bond, generally speaking, the income from the Australian government may be lower than the income generated from an Australian company. But nonetheless over time that may be greater income than that of an alternate asset such as cash. And indeed listed property is also a good source of income that generates rent, but it also can generate further income through its trading profits from buying and selling property.
St Anne: David finally, the other big concern is will investors ever get to experience the market highs pre-2007?
Simon: Yeah. Wow, I mean that is an interesting question and there is continuous debate. I mean, nobody knows, nobody has got that crystal ball, so they can't see what the future is going to behold. I recently did some research on this exact question and I reflected on, I suppose the worst financial crisis man has seen, and the last one we can see that almost resonates what we're going through now would have been the Great Depression of 1929. So, the Wall Street crash occurred in 1929 and it wasn't until 1954 where the Dow Jones actually reached its peak once again which equaled the pre-1929 levels.
So, once you look at that, there is almost a quarter of a century of lost performance. Then you add in the other litany of disasters which really affected the share market, which includes the impacts of Vietnam War, the oil crisis of the 70s, the crash of the 80s and even the tech-wreck. But once you combine all these disasters including the great crash of 1929, the Dow Jones still managed to average a position return of 5.3% per year.
St Anne: David, that's certainly a positive note to leave on. Thanks so much for your insights today.
Simon: Thanks Christine.