Sharesight Blog

Sharesight and Xero

Posted by Scott Ryburn on August 11, 2009

We are pleased to announce that Sharesight has become a certified Xero network partner. Xero is a market leading online accounting system. Sharesight has partnered with Xero in order to provide a seamless solution between portfolio management and portfolio accounting. Learn more about Xero at www.xero.com, free trial accounts are available.

The Xero Synchronisation feature allows you to connect your portfolio to your Xero account. This allows you to send details of share purchases, sales, and dividends to Xero as draft invoices, which can then approved for inclusion in your financial accounts and used to reconcile against your bank account.

If you have a Xero account, Xero synchronisation can be set up by clicking settings, then ‘Xero Synchronisation’ for the portfolio that you wish to connect. Note that you must first generate a Sharesight Network key from within Xero. Full instructions can be found in the Sharesight help documentation here.

Below is a short video we prepared for Xero customers:

Should you invest in bank shares or bank deposits?

Posted by Tony Ryburn on July 31, 2009

On 11th February 2008 I wrote blog pointing out that rather than placing funds on deposit with a major bank, investors might like to consider buying shares in the bank instead. I pointed out that over the past 10 years this would have resulted in vastly superior returns.

I did not recommend that people switch to shares because I believe that investing in shares should be a long term proposition and funds on deposit are often required it the short-term . Obviously you should be very cautious about investing funds in shares that you are likely to need on a specific future date because if that date falls in a period of depressed share prices, you are likely to crystallise a loss. And individual investor circumstances need to be taken into account as well.

Having said that, I thought it might be interesting to compare the performance of bank shares with interest rates now that we have had had such a dramatic collapse in share prices. Does my suggestion that you would get better returns on bank shares rather than bank deposits still hold water?

Set out below is a Sharesight screenshot of a portfolio of shares in the four major banks. Initially $1,000 was invested in each bank on 28 July 1999. You will see that the compound return across the four major banks over the last 10 years has been 10.31%. This sure beats deposit rates.

What may surprise a little, is that over the last 5 years combined bank returns have been 9.61%. Maybe even more surprising, is that over the last year they have been 11.26% – see the second screen shot.

So are bank shares always going to give superior returns to bank deposits? History says usually but not always. No comparison is complete without noting the following:

1. You will see from the second screen shot that individual bank returns over the last year have been volatile.
2. Shareholders are last cab off the rank in the extremely unlikely even that disaster strikes and a bank falls over. So in theory they carry greater risk.
3. And finally, if you look at bank returns over the past 2 years – see the screen shot below – you will see that deposits win out handsomely. The banks’ overall return was -8.01% with ANZ and NAB taking a beating.

Disclosure: I have no shares or investment deposits in any bank.

Back to the Future (Have we got too smart for our own good?)

Posted by Tony Ryburn on April 17, 2009

I was brought up in an era when life in general, and in the world of finance in particular, was a lot simpler than it is now. Borrowing money was frowned upon. You worked and if you were frugal, you might save enough to buy a few non-essentials if not luxuries.

If we wanted something we saved for it. The idea that you could borrow and have things now, rather than having to wait, did not feature in our thinking. We didn’t know much about interest and we had no idea about compounding. But we did have this vague, uneasy feeling that if you paid interest you were heading down the wrong path and would be worse off in the long run.

But we didn’t have the benefit of the advice that Yuwa Hedrick-Wong gave us all a couple of days ago. He said:

“The benefit offered to the consumer to acquire a short-term loan anytime and anywhere without any security coverage is not available on any other payment option except the credit card. The importance of the option for a consumer to borrow for short-term needs is more significant today as the global economy is heading into a period of constrained credit.”

(Maybe I should mention that Yuwa Hedrick-Wong is MasterCard’s economic adviser).

I’m getting that vague, uneasy feeling again. It is telling me that we need advice like this like a fish needs roller skates.

What we knew clearly in the good old days was that if you did need to borrow, the bank might not have funds available when you needed them. So relying on borrowed funds was a bad idea. Today we have MasterCard and all those collateralised debt obligations and credit default swaps designed to ensure that banks always have the capacity to lend. But I for one am not convinced this is a step in the right direction.

We used to have this outdated belief that if you did borrow money you had to pay it back – no ifs, no buts, no maybes. Today we have revolving credit facilities and interest-only loans so that repayment is no longer necessary. I’m not sure this is a step in the right direction either.

Of course it wasn’t all bad in the good old days. Some of us did save a bit and stock exchanges were set up to allow us to participate fully in the capitalist society. These exchanges were pretty simple – they allowed you to buy and sell shares in companies. Despite this clear, simple mandate we had this irrational fear that somehow these exchanges would morph into giant casinos. Some would say this fear has now been realised which suggests that stock exchanges may not be heading entirely in the right direction either.

I hasten to add however that you can invest in the share market in a way that avoids the casino element, gives you good returns and enables you to ride out the volatility. See Why you should invest in the sharemarket

As well as the stock markets, what if the wonderful new financial instruments that are now available for us to make money were available in the old days? We wouldn’t have understood them, that’s for sure. But we probably would have had this vague, uneasy feeling that they had been developed with little regard for the risks. Risks that are inherent not only the instruments themselves, but also in the mechanisms for trading them.

However if the actions of the current generation are any guide, we would have headed off in the wrong direction. We would have ignored the risks, brushed aside our lack of understanding and gone for these  new financial instruments like rats up a drain pipe.

How do you choose which shares to buy?

Posted by Tony Ryburn on November 26, 2008

As DIY investors we all have our own strategies for achieving better than average returns by making our own investment decisions rather than putting these decisions in the hands of a ‘professional’.

In a previous article on why you should invest in the Sharemarket, I gave my top 10 tips for DIY share market investment.

One of my tips was as follows:

“There are innumerable share purchase recommendations for free and there are many individuals and organisations that provide recommendations to paying subscribers. They can be a valuable source of guidance and information but don’t follow them blindly. Do your own homework and come to your own decisions.”

Clearly some recommendation services are better than others, and I didn’t want to bias the article with my own personal opinions on the matter, particularly as there are probably some great services out there that I have never used and some that I have not even heard about.

I’m sure I’m not the only one who’d be interested to hear what services others are using and what they think of them, so here’s your chance to contribute!

Please post your comments on which services you subscribe to, how closely you follow their recommendations, what you think of them and why.

God Bless America

Posted by Tony Ryburn on November 14, 2008

Have you noticed how America always has to be centre front on the world stage?  The Iraq war did the job nicely for quite a while and just when even diehard Americans started tiring of that, they conjured up a financial crisis that started in their banking system and then reverberated throughout their entire economy before engulfing the rest of the world.

Things got seriously out of hand as we are all now painfully aware and America turned to its economic policy advisers to come up with a solution. Unfortunately what they came up with left a lot to be desired.

Their solution was to grab $US700 billion of tax payers’ money and buy bad bank loans.  This would have been grossly unfair to taxpayers who were basically being asked to pay megabucks for a load of worthless junk with no compensating upside.

Fortunately the European Union and Britain were alert to this inequity and came up with a much more reasonable, if blindingly obvious solution.  If tax payers’ money had to be used to bail banks out it should be used to purchase equity in the bank.  That way, long-suffering taxpayers would get a commensurate share of the good stuff as well.

Eventually, the wisdom of this proposal dawned on the Americans and they announced that they would follow the European and British lead.  And what happened when they finally got it right? A few billion (or was it trillion?) was promptly wiped off the American share markets! So it’s not just the banks and economic policy advisors in America who seem to have lost the plot.

And the point is? Well, the Americans led us into this mess but, based on their performance to date, we would be foolish to expect them to lead us out.

When Will the Share Market Bounce Back and How high Will it Bounce?

Posted by Tony Ryburn on November 3, 2008

For those of us with an interest in the share market this is an issue of some importance.  We all know that when the markets take a tumble they will rise again, but it would be great to get a handle on how long it will be before we see an upturn and how strong that upturn will be.

Here’s my take on the situation. Caveat: I might change my mind next week!

There is no doubt that there is going to be a major reorganisation of credit globally.  The consequences of such a massive change that will embroil the Government (and quasi-government organisations) so extensively in the financial markets, are impossible to predict.  However history suggests that anomalies, distortions, loopholes, exploitation and ever increasing complexity and cost will rule.

Despite this gloomy prediction, I also think that while the process of restructuring the world’s financial markets is occurring, the productive sector will quickly get back to something approaching normalcy.  In other words the players will soon stop obsessing over the score and start concentrating on the game.

Clearly Australia will not escape the impact of the credit crisis or the effects of the recession that is likely to hit most of our trading partners. In view of this it is slightly surprising to me that PM Kevin Rudd has predicted 2% annual GDP growth and that this is supported by similar predictions by the big 4 banks.  In fact Westpac is predicting GDP growth of 2.8% over 2008 and 2.2% in 2009.

Whether these predictions prove to be unduly optimistic remains to be seen but there are good reasons to believe we will be less severely affected than most.  Unlike many countries we have not had major bank collapses, our financial system has not been hijacked by out-of-control derivatives trading and the Reserve bank has more latitude than most its overseas counterparts to provide further stimulus via interest rate cuts if necessary.

And there is further reason for optimism as well.  According to Westpac CEO Gail Kelly http://www.theaustralian.news.com.au/business/story/0,28124,24578232-30538,00.html

who should know if anyone does, Australian banks, in contrast to their counterparts in the US and Britain, have been more conservative in their lending over the past decade. She claims that there has been little or no sub-prime lending by the major banks, and that average loan-to-value ratios are remarkably low.

So back to our share market. What might all this mean? I believe it will be good news. Our economy will be less severely affected than most and this will enhance Australia’s reputation as a sound place to invest. This in turn will re-stimulate investment in our share market from both local, and more importantly, offshore investors.

This is not to say it will not be much tougher than it has been over the past 10 years or so.  For a start, lack of international demand is likely to depress oil, iron ore and coking coal prices. However this is already fully reflected and more in the share prices of the likes of Rio Tinto and BHP.

For those of us interested in the share market this is surely the key point. The collapse in our share market prices (the S&P/ASX has fallen from 6828 points a year ago to 4018 today) seems out of all proportion given an economy with a sound banking system and forecast growth in GDP that most countries could not contemplate in their wildest dreams.

So how long will it be before common sense prevails and how strong will the bounce back be?  I don’t know, but I have certainly persuaded myself not to give up on the Australian share market.

What are your thoughts?

Why you should invest in the Share market

Posted by Tony Ryburn on August 29, 2008

I wrote the following article for Her Magazine, which was published in their August issue:

For some, the thought of investing in the share market is enough to make them go weak at the knees or worse. It conjures up thoughts of gambling and crippling losses. And it reminds them of the only two years in recorded history that they associate with a financial event: the share market crashes of 1929 and 1987. You would have to be nuts to even think about investing in shares.

Wouldn’t you?

Well, no actually. A better definition of nutty would be not thinking about investing in shares. Why? The answer is simple. Shares produce higher returns than other types of assets. Stock exchanges have been around for a very long time and innumerable studies have come up with the same result: over the long haul shares do best.

The phrase ‘over the long haul’ is important because occasionally there can be quite long periods when shares look as if they are not going to deliver the best long term performance.

A major reason that people lose money on shares is that when the market falls, as it inevitably will, they panic and bail out, usually after most of the damage has been done. When the market rises again, as it inevitably will, they are not there to reap the benefit.

When you commit to shares for the long haul you soon realise that it is not about share prices; it’s about companies. If you focus on the share prices you are likely to get caught up in financial ratios, trading strategies and a high-risk game of trying to predict (in reality, guess) whether prices are going to go up or down. And even if you are lucky enough to predict a price rise or fall, that will not help you much unless you can also figure out when. We all know it is going to rain sometime in future but unless you know when, you can’t be sure the washing won’t get wet.

We are not talking rocket science here folks. You DO NOT have to be a financial guru and you do not need a financial advisor to do well in the share market. All you have to do is focus on companies. Look for companies with a proven track record offering top quality products and services that you understand and that you think will be in strong demand well into the future.

Here are my 10 tips for DIY share market investing:

1. Plan to be in there for the long haul.
2. Only invest money that you are confident you are not going to need at a particular time in the future. Otherwise you might be forced to cash up your shares in a downturn before they have delivered the superior return you are looking for.
3. Start out small and increase your investment over the years as your knowledge and confidence grows. That way you also avoid the risk of investing all your money at a high point in the market.
4. Spread your investment over a number of different companies in different industries. For example, if you have $10,000 to invest consider spreading this over, say, 5 companies. Diversify further as your total investment grows. And remember it is as easy to buy Australian shares as those in NZ.
5. Read articles about companies of interest to you in news papers, magazines and online. You will be surprised how quickly your knowledge and confidence grows. You can use online tools such as Sharesight to check the historic performance of a company to help you with your investment decisions.
6. There are innumerable share purchase recommendations for free and there are many individuals and organisations that provide recommendations to paying subscribers. They can be a valuable source of guidance and information but don’t follow them blindly. Do your own homework and come to your own decisions.
7. Focus on companies not share prices when you make your investment decisions.
8. Don’t panic if share prices suffer a sudden fall. You know in advance that this is likely to happen from time to time just as you know that in the long run shares are likely to give you the best return.
9. Start using a good share portfolio management system such as Sharesight from day one. It’s important to keep a good record of the shares that you own because you will need this information to file your tax return. It’s also crucial that you can easily and accurately assess how well your shares are performing. Sharesight virtually eliminates the administrative work associated with owning shares. All the data you need for your tax return is provided automatically including your Foreign Investment Fund earnings if you are caught up in this nightmarish piece of legislation. And, best of all, Sharesight shows you the true, annualised financial return on your shares including capital gains, dividends and currency movements.
10. Have fun! Believe it or not, studies have shown that most DIY share market investors thoroughly enjoy managing their investments.

Australia’s Secret Economic Weapon

Posted by Tony Ryburn on August 13, 2008

Since 1990 Australia’s real economy has expanded by around 3.3% per annum. Few countries have been able to match this impressive performance.

Innumerable studies have examined the reasons for this remarkable growth. This is not surprising because other countries are eager to learn from Australia’s experience. And from Australia’s point of view it would be great to understand the reasons for this success to help ensure that it continues unabated.

Most of the studies talk about things like economic reform, increasing productivity, innovation and the increasing world demand for Australia’s extensive reserves of metals, minerals and fossil fuels. But all this stuff is pretty old-hat and you could be forgiven for wondering if there isn’t a bit more to it than that. Could it be that Australia has an economic weapon that is so secret that it is not mentioned in any of the economic studies? Either the answer is “yes” or else these studies have failed to uncover a key contributor to Australia’s economic success story.

You’ll think my coolabah tree has failed to keep the sun off my head if I say that Australia’s secret economic weapon is a romance. But it is true. It’s Australian’s love affair with their share market.

According to the ASX’s 2006 share ownership study, 46% of Australians own shares. Although international data is scarce, you can bet your last dividend that few countries, if any, can come close to matching this remarkable performance. When it comes to investing in their share market Australians leave the rest of the world in the shade.

History shows that in the long run shares provide the best return so this romance with the share market creates a win/win/win. The 7.3 million Aussies and their families who own shares win. Australian companies also win because the high level of share investment provides the equity that helps fund the rapid growth that many of them achieve. And through this growth the Australian economy wins as well.

An equally remarkable fact from the ASX study is the DIY attitude Australians take to share investment. An amazing 6.0 million invest directly in shares and of those, 38% invest through an online discount broker and further 15% through a discount phone broker. This is where Sharesight comes into the picture.

Direct, DIY share market investors who invest online deserve a decent, online, portfolio management system. And that is exactly what Sharesight provides. Sharesight is comprehensive, easy to use, and requires minimal data entry. It automatically produces the true, annualised share returns and tax reports that ensure you pay the minimum amount of tax.

But don’t take my word for it; take a free trial. It could be the start of a beautiful new relationship.

Calling all Investorweb Customers

Posted by Tony Ryburn on August 7, 2008

One of the adverse consequences arising from the closure of the Investorweb website following its sale to Commsec has been the loss of its excellent share portfolio manager.

An Investorweb customer drew this to our attention recently after discovering and logging onto Sharesight. He wrote to us saying “I was really surprised at the difficulty in finding a replacement, which was is why I was so pleased when I found you site”.

If you are an Investorweb client who is looking for a top-quality portfolio management service we suggest you check out Sharesight by taking advantage of our 30 day free trial offer. We are sure you will be impressed.

Sharesight focuses exclusively on providing a straightforward, affordable and independent online share portfolio manager for DIY investors.

Calculating Share Returns

Posted by Tony Ryburn on August 6, 2008

One of our most important objectives in setting up Sharesight was to give you the true return on your shares. One of the many shortcomings of the so called ‘free’ sites is that they fail miserably in this vital area.

One of the reasons they fail is that providing you with the true, annualised return on your shares is trickier than it sounds. For a start you need to have a large amount of data at your fingertips and you need to be able to account for corporate actions like dividends, share splits, amalgamations and bonus issues because these will make nonsense of return calculations if you don’t.

To further complicate matters, there are two common arithmetically correct ways to calculate returns and in some circumstances they can give radically different answers. The two methods are the compounding method and the simple or non-compounding method.

The easiest way to appreciate the difference between the two methods is to consider a deposit account at the bank. If the bank quotes you a 7% interest rate this is a compounding rate. This means that if you do not withdraw your interest it will remain in your account and you will receive interest on that interest. Under the simple or non-compounding method, interest is calculated only on the original amount invested.

It is clear from the table below that $1000 invested for 10 years at 10% using the simple method does not equal 10% using the compound method. The simple method results in the return of your initial investment of $1000 plus a further $1000 of interest at the end of 10 years, whereas the compounding method results in the return your original investment of $1000 plus $1593.74 of interest. In fact an investment of $1000 that results in a return of that investment plus a further $1000 of interest over 10 years, equates to a compound return of approximately 7%.

To compare apples with apples a compound return calculation must be applied to your share portfolio if you want to compare its returns with a bank deposit. In the example above the correct return to compare to a bank deposit is 7% compound not 10% simple.

So what does Sharesight do?
Until now Sharesight has used a simple return calculation. This method is widely used to calculate share returns. Although it is arithmetically correct, it produces figures that overstate share returns in comparison to a compound return on a bank deposit.

This is why we have introduced a compound return calculation that you can select and apply to all tables in Sharesight that display return information. We use a daily compounding formula as this is standard practice among banks. Although simple interest will remain as the default setting you can choose to switch to compounding returns on a per portfolio basis by editing the portfolio settings (found under the settings link at the top right of the screen). There is also a link to change the percentage return method at the bottom of each page for which compounding return figures are available.

So which is correct and what should you do?
Both methods are arithmetically correct. We at Sharesight do not wish to get embroiled in a debate concerning the merits of one method over the other. You are free to choose which ever method you prefer.

Some more technical information about the formulas that Sharesight uses to calculate returns can be found here.

We also answer some common questions about compounding interest (and a variety of other questions) in the frequently asked questions section of the help documentation, which can be found here.