Sharesight Blog

Efficiency measures: how to boost portfolio share performance without relying on the market

Posted by Andrew Bird on January 31, 2012

Self-directed share investors are understandably primarily focused on maximising returns from their portfolios. However, what many do-it-yourself investors often don’t consider are the numerous costs associated with managing their portfolios, and the impact that these can have on their overall returns.

Because the fact is, that while investors can’t directly control the returns they are going to receive from the market, they can control how much they are going to spend on managing their share market investing. In other words, it clearly makes sense for investors to focus on factors they can control, with the aim of minimising cost and freeing up funds available for reinvestment.

There are three main areas where controllable costs are incurred. The first is seeking advice on which shares to buy and sell. Then there is the cost (brokerage) of actually doing the buying and selling. And finally there is the cost of portfolio administration. This includes the tedious – but essential – reporting associated with effectively managing a share portfolio.

To reduce these costs, an increasing number of D-I-Y investors are turning to online services. They use online advisory services for investment advice, trade online to reduce brokerage costs, and make use of smart technology platforms that automate much of the administration and generate all the data needed for taxation and accounting purposes. Utilising online services in this way provides all the functionality of a proprietary ‘wrap’ platform for a far lower price. The right kind of online investment portfolio management system can also help provide a full understanding of the true returns of a portfolio, in turn enabling investors to make more informed and cost-effective decisions. Features to look out for in an online platform include:

1. Comprehensive record keeping. Look for an online portfolio management system that provides all the information you require, leaving you free to utilise the services of any broker or investment advisor you like. This is in contrast with most wrap platforms, which bundle fees for advice and administration with brokerage, giving investors limited ability to see whether they are getting value from each component. The right online portfolio management system allows investors to disaggregate these services and select those which offer the best value for money.

2. Investment performance monitoring. Investors should look for an online portfolio management system that provides a transparent view about how each individual investment is performing. This compares with a traditional wrap platform, from which it is often difficult to determine which individual stocks are better performing.

3. Automated administration. Many D-I-Y investors become distracted by the administrative tasks associated with managing their portfolio. Many direct share owners cannot afford, or choose not to, use an accountant or financial planner to carry out this administration. This can include calculating dividends and franking credits, and capital gains. Look for an online system that can automate the recording of transactions and other relevant share investment activity, producing all the information required to complete a tax return in a few clicks.

4. Compliance. If you’re an investor managing your own super fund, aim for an online share management system that can automate the flow of data to your accountant. This will not only save considerable time, but also reduce bookkeeping and accounting fees.

Of course, the total cost efficiencies generated by using an online share portfolio management system will depend on the nature and size of the portfolio, and how actively it is traded. However, choosing an option that provides control, transparency, automated reporting and has the facility to link to other relevant software is certainly a great place to start.

Teaching your kids about the stock market: part two

Posted by Tony Ryburn on January 24, 2012

In my previous post I talked about the importance of giving kids a grounding in basic financial concepts to help them plan for the future effectively.

Users of Sharesight would agree that investing in the share market can be both financially rewarding and personally satisfying, and I know that many of us are keen to get our children involved in some way.

So, what do we need to teach young people about share market investing once we’ve helped them get a basic understanding of financial concepts?

Here are my top share market basics that any investor needs to understand before they get started.

1. Only invest what you won’t need to liquidate
I’ve said it before, but I’ll say it again. Unless you’re a professional trader, share investing is a long-term business. Over a period of many years, the share market will generally outperform other investments. But if you need to withdraw your money at short notice, you run the risk of having to sell when markets are low, which could cause you some serious losses.

2. Be prepared to ride the ups and downs
Short-term market turbulence can be disconcerting and many investors at the moment are nervous about their on-paper losses. However, numerous studies have shown that share markets do better over the long term, so sticking with it will usually be a better option. Nonetheless, if you’re not prepared to ride out the lows for the sake of longer term gains, then stock market investing probably isn’t right for you.

3. Diversify
Diversification is important for two reasons: it can potentially protect you against undue losses if investments in a particular company, sector or asset class fail, and it can actually improve the overall return of your portfolio.

To get your kids thinking about diversification, help them buy a small portfolio of 3-5 shares in different industries. The share market makes diversification easy because almost every industry is well represented. Don’t overdo the diversification though. It does not guarantee success and if it’s overdone it adds complexity and it can dilute returns if it results in investment in lower yielding assets. For more on diversification see Andrew Bird’s article here.

4. Do some easy homework
Start off buying into well-known companies that have been around for a long time. Look for companies that do things you understand and operate in areas that are likely to grow in future. Thinking about some basic questions will quickly highlight industries with good potential. What is the future of the Australian mining industry? What are the implications of our aging population? Will tourism remain a growth industry?

5. Keep an eye on performance
Share investing may be a long-term business, but that doesn’t mean you can take your eye off the ball. There may be times where you want to sell down some of your holdings, or reallocate some of your exposure to maintain diversity. Staying abreast of the performance of your shares is important, and you can do this by reading the financial press and specialist websites, and subscribing to a service that will give you an overall picture of your portfolio’s performance, such as Sharesight. But remember that you are in there for the long haul so resist the temptation to panic and sell if prices take a short term tumble. Make your decisions on what you believe are long term trends, not short term volatility.

6. Don’t fall prey to “shoebox syndrome”
As all share market investors know, the benefits of being in the market come with responsibilities to the tax office. If you’re not prepared to keep your paperwork in good order throughout the year, or use an online share portfolio management service such as Sharesight to do it for you, you most likely will end up in a last-minute scramble to get your affairs in order.

What other tips do you have for teaching your kids (or grandkids) about the share market?

Portfolio diversification: what does it mean to you?

Posted by Andrew Bird on November 9, 2011

Most DIY investors looking to grow their investment portfolios for the long-term will consider diversification in their investment strategy. Indeed, in some countries, including Australia, many DIY investors must by law consider diversification of their portfolios (see my recent article on the topic in The Australian here and more information on the regulations for Australian SMSF trustees here).

But, going back to basics, what is diversification, why does it matter – and how can you put the theory into practice?

For many of us, the old saying “don’t put all your eggs in one basket” springs to mind when we think of diversification. But this is only part of the picture.

In fact, I’d suggest that there are two main reasons why portfolio diversification is important.

The first and – most obvious – aspect is that by broadening your asset exposure (investing, for example, in shares, property and fixed income), you should be able to limit investment risk should any one of those investments underperform. Yes: the “eggs in a basket” bit.

But the other aspect, while perhaps more subtle, is very important. This is the concept pioneered by Nobel prize-winning economist Harry Markowitz in the1950s and 1960s that calls diversification the only ‘free lunch in investing.’

What this means is that by diversifying across uncorrelated asset classes – traditionally bonds and stocks – portfolio returns can be improved while at the same time lowering risk. This is because the two asset classes often move in different directions and can thus reduce the overall volatility of the portfolio.

So diversification isn’t simply a matter of protecting your portfolio in tough markets; rather, it can also be a means of generating greater returns over the long term.

It seems to me like some investors tend to overlook this second principle of diversification.

In practical terms most DIY investors articulate diversification by providing a target asset allocation for each of a number of asset classes and then the ranges within which they will accept variation. This is a simple way to monitor that the portfolio is staying within the overall guidelines of their investment strategy.

Sharesight members will know that the diversity report provides an easy way to analyse the diversification of their own share portfolios across investment type, industry sectors and markets.

What does diversification mean to you? And what tips and tools do you use for ensuring diversification of your own portfolio?

Investment Outlook by James Cornell

Posted by Tony Ryburn on June 16, 2010

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The following article is republished with the permission of James Cornell, author of the excellent Market Analysis newsletter. As a long time subscriber to Market Analysis I can recommend this monthly newsletter and share recommendation service to all share market investors from beginners to experts. Please visit www.stockmarket.co.nz for further details and subscription information.

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Just a year ago we were all being told (probably by people who have never owned a share in their life and with little or no financial net worth) that the Global Financial Crisis (GFC) would lead to another Great Depression worse than the real Great Depression of the 1930′s! Well, that didn’t quite work out as they expected, did it?

Now we have “GFC 2.0” which we are informed will lead to . . . you guessed it . . . another Great Depression! We won’t bring up inconvenient facts such as the global economy is actually growing (although not as fast as many people would like).

“GFC 2.0”? Who thinks up these names? It sounds like something that the marketing department of a news organisation would come up with to boost newspaper sales or Financial News TV subscriptions! But seriously, a sequel makes a lot of financial sense. You don’t need to waste money on journalists, just pull up last year’s script, cross out “Lehman Brothers” and “Sub-Prime Debt” and substitute “Greece” and “Sovereign Debt”.

A Banking crisis or a Sovereign Debt crisis have historically happened about five times per decade – about every couple of years – so there is nothing new here. The current problem is just a little more widespread and a bit closer to home. Banks in emerging economies have largely avoided these problems and most emerging economies do not have large government debts or unfunded pension liabilities.

So, is it safe to venture out onto world stockmarkets? Perhaps we should ask: Is it ever safe . . . ? There are two important answers to that question:

Firstly, if you have some money or can save some money – and you want to build your investment wealth – then you have no choice! You won’t get rich stuffing cash under your mattress or lending it at low interest rates – where its value will be eroded by income taxes and inflation. And are fixed interest investments with Finance Companies, Banks or Governments safe? If you want to build your wealth then you need to invest in shares. Shares are also the only real hedge against future economic uncertainty and technological or political change. Companies are best suited to adapt to the ever changing environment.

Of course, you need to avoid stupid mistakes: You need to diversify over many companies because some will fail along the way! That has always been the case . . . and always will be. You also need to avoid leverage or margin or using borrowed money which makes you vulnerable and can result in forced sales in a crisis when prices are at their lowest.

So you will need to work out a medium term strategy for saving and investing and making your first $100,000 – knowing that you may temporarily lose $30,000 of that in some future crisis (GFC 10.0?). Then turn that remaining $70,000 into your first $1,000,000 – and expect to lose perhaps $300,000 in another unexpected stockmarket crisis. Stick at this long enough and you might make $10 million – which means you will be wealthy enough to perhaps lose $3 million in some future crisis! Of course, you can avoid all of those losses by remaining poor . . . but you will be better off having a share portfolio large enough to fluctuate in value by millions of dollars!

Secondly, forecasting the future of share prices is particularly difficult. In fact, a major financial crisis, when everyone is pessimistic and the outlook is the darkest is usually the very best time to be buying shares!!! So if you buy shares in periods of economic prosperity and growth, and sell when there is talk of crisis and depression, then you will almost certainly be buying near the market high and selling near the market low! The media is the worst forecaster of the economy and stockmarket.

A little bit of common sense can help too! You are not buying an economy but individual shares, so have a look at whether those individual shares offer investment value. During the Technology boom, the shares of many unprofitable companies sold at 10 or 100 times revenues. Frankly, common sense should have told people that even if the economy grew strongly and these companies were extremely successful, shares bought at 10 or 100 times revenues would probably never produce a reasonable return on their initial cost. In fact, few of those companies were even moderately successful. Most failed! (Of course, those of us who expressed such views at the time were ridiculed for “not understanding internet economics” – while perhaps understanding it only too well!)

Today we would suggest that investors look at a company like Integrated Research (and others). At 39½ cents this debt-free company’s shares trade on a Price/ Earnings ratio of 8½ and offer a Dividend Yield of 10.1%. The company has cash in the bank of $10.1 million (6.0 cents per share) and good growth potential for its software. Whatever might happen to the global economy or Sovereign debt or the US dollar, doesn’t that seem like a good share in which to invest a small part of your wealth?

Why lend your money to a government with negative cashflows (i.e. operating at a deficit) and probably a negative net worth (i.e. if future pension liabilities are included)? It is no surprise that there is a Sovereign debt crisis! Surely it will be better to invest in a range of profitable companies like Integrated Research which have strong cashflows from their business, intellectual property and cash in the bank?

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.

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.

Diversify or Bust?

Posted by Tony Ryburn on February 11, 2008

In my last blog I suggested that a lot is made of the merits of diversification without any real analysis of the costs and benefits. There often seems to be an assumption that more is better when it comes to diversification. I suggested that beyond a certain point, diversification is likely to impede, rather than contribute to, superior returns.

Investors who place a significant proportion of their savings in shares are often more diversified than they think. They should not allow themselves to be railroaded or frightened into diluting their returns by diversifying further into lower yielding assets.

For one thing, if they have followed the old adage of getting rid of their mortgage before they start saving seriously, they are likely to already have a significant investment in residential real estate.

Secondly, shares in themselves are an excellent way of diversifying across a range of different companies operating in widely varying sectors such as infrastructure, manufacturing, retail, tourism, mining, telecommunications etc. It is easy to invest in Australian as well as NZ shares so you get some country diversification too.

As an aside, many people have lost money in several different finance companies recently. No doubt they were heeding the call to diversify when, in reality, they were doing the opposite – investing in similar companies all in the same sector.

So my contention is that people with a freehold home who invest a significant proportion of their savings in NZ & Australian shares can be adequately diversified. And they are likely to end up with a significantly larger retirement nest egg than if they had diversified into other, historically lower-yielding, assets. The only major rider is to only invest funds in shares that you are confident you will not need in the short or medium term – say within 7-10 years. That way you minimise the risk that you will have to sell your shares before they have been able to generate the higher returns you want.

As a final word on diversification let’s say that 10 years ago you decided to diversify away from shares by placing some funds in an ANZ term deposit (unsecured). I’m not sure what your average interest rate over the last 10 years would have been – let’s be generous and say 7% p.a. What I can tell you (by checking it out on Sharesight) is that if you had bought ANZ shares 10 years ago instead of making that term deposit, your return would have been 25.23% p.a!

Makes you think doesn’t it?
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Do you need to diversify your investments?

Posted by Tony Ryburn on February 1, 2008

An article in the Dominion Post on 29 January said “Diversify and beat the retirement cash blues”. It went on to advise that “an effective portfolio is well diversified across different asset classes – cash, fixed interest, property and shares – and countries”.

In my view diversification to that extent is more likely to create retirement cash blues than beat them and would not result in a very effective portfolio. For one thing it is not practical for most investors to diversify to the extent recommended unless they invest in managed funds. And the long-term performance of almost all managed funds leaves a lot to be desired. Even a portfolio of randomly selected NZ and Australian shares is likely to out-perform most managed funds, particularly when their fees are taken into account.

Shares and property consistently outperform cash or fixed interest on a long-term basis (and retirement saving is a long-term project) so why would you want to erode your higher-earning share portfolio by diversifying into fixed interest? There are three main reasons often put forward.

First, diversification allows you to spread risk. The hope is that any poor performance will be confined to a small part of your portfolio.

The second reason has to do with liquidity risk. If you need your money urgently, will it be available when you want it and without suffering a loss or an early repayment penalty?

And finally, diversification reduces volatility.

These sound like good reasons to diversify. But are they? The problem with diversification is that while it can limit your losses, it can have a far greater limiting effect on your gains. It dumbs down your investment performance to a low average. As DIY investors we can do much better than that. Remember, the worst you can do is lose 100% your money, but on the other hand the share market gives you plenty of opportunities to earn far more than 100%.

Many people lose sight of the fact that the primary objective of a long-term savings plan should not be to reduce volatility or the risk of loss, but rather, to maximise returns.

There is another problem with diversification. It works on the premise that if one asset class is doing poorly this will be offset by others in your portfolio doing well. Unfortunately the opposite is more likely to be the case. In the last 12 months people have lost money from fixed interest debentures in finance companies and a decline in the share market and property prices are widely tipped to take a tumble as well.

So here’s the big question: Is there a way for the average DIY Kiwi investor to deal with diversification and maximise returns? Can you have your cake and eat it too? I believe you can. I’ll explain how in my next blog post.

Should I Sell My Shares?

Posted by Tony Ryburn on January 28, 2008

There are good reasons for some overseas Banks and others to sell out of the share market at present. It’s not because they fear a US recession – they need the money! But that is no reason for private investors to follow suit.

I have had a number of friends ask me recently whether they should bail out of their NZ and Australian shares. Today I received an email that said “Gawd, what do you think of the share market?”

My response is that I think the same about the share market as I always have. It goes up and down – sometimes fast! I don’t really care because I know big falls will occur from time to time and that growth the rest of the time will more than offset them.

I’m in there for the long haul. There are two reasons for this. Firstly, history shows that in the long run, shares give the best returns. Secondly, trying to make money on a consistent basis by buying low and selling high is a recipe for disaster for all but a few skilled (lucky?) operators.

For we lesser mortals this is what usually happens if we don’t take a long term perspective: The market falls, we panic and bail out, usually after most of the damage has been done. The market rises, and we are not there to reap the benefit. Nice one!

The trick is not to invest money in the share market that you know you will need for another purpose at a specific future date. If that date coincides with a sharp drop in the market you will be in trouble.

Many people have only a hazy idea of the return on their shares and this leaves them vulnerable to being panicked by media hype about falls in the market. You need to factor in the impact of dividends and calculate the result on an annualised basis. If this sounds daunting help is at hand. It is easily done in Sharesight and you will get a wealth of other useful information as well.

If you don’t already have a Sharesight account, sign up today for a free trial, or check out the video tour to find out more.