A little bit of perspective on money

Financial Planning Perth : Sometimes you'd just rather be somewhere else

It’s been a good time to enjoy the non-financial aspects of living

There is a pointy-end of physics that studies the impact observations have on processes. One version is encompassed by the Heisenberg uncertainty principle. It is my thought that this principle should be applied to the world of money, as much as it is applied to quantum physics. Here’s why

It implies that it is impossible to simultaneously measure the present position while also determining the future motion of a particle, or of any system small enough to require quantum mechanical treatment.

Now we’ll consider Michael’s Uncertainty Principle, as it relates to the world of money and financial planning.

It’s hard to get perspective with your face pressed up against that which you want to measure.

The more i read the masses of data, analysis, commentary and research available today, the more i am reminded of this little conundrum and just how readily the quantum physics limitations can apply to the financial world.

Financial Planning Perspective

You see, the vast bulk of this material discusses very small changes in direction of [insert appropriate macro/micro economic variables such as interest rates/ share price movements/ GDP/ GNP/ gold price/ oil price/ house price], and then seeks to make a useful story out of that quantum level movement. Does anyone reading this really think that the direction the market takes today/this week/this month/ this year, will actually reflect the direction the market will take in the next 20 years? i very much doubt it.

Information Overload, and Observation Exhaustion (“IOOE”)

There was no such acronym in existence until i pubished it just then – at least, i don’t think there was. Anyway, my point is that the feedback i am receiving from clients, planners, institutions and the general public is neatly encapsulated by IOOE. So much so, that many clients have suggested they no longer pay attention to any commentary on markets and money, preferring to get on with the job of living, and limiting such things to any reviews that we may have from time to time. That works for a while but we are, alas, only human and eventually even the most stoical and patient of us will reach a point where we just want to throw up our hands and shout out “enough!”

So i thought it would be helpful to draw some pictures for those who feel that they have reached IOOE, to bring us all back a little from that which we want to measure, and to see if we can’t gain some perspective, and see just why so many folks are feeling this way.

RBA Releases its latest Chart Pack

Wonderful things these chart packs. Full of all sorts of pictures that help explain some of the more arcane corners of the financial world we live in. Here are a few pictures from the “Household Wealth & Liabilities” section. Let’s start with the nation’s household wealth, measured in relation to incomes.

Financial Planning Perth : RBA March 2012 chart on household wealth

Notice how the values have fallen while liabilities overall have not?

This is a good way to measure wealth, as our lifestyles tend to change with income, and if our income rises but our wealth does not change proportionately then this will bring about the feeling of “treading water”, working hard for a lot of years but not feeling like you are getting anywhere. Sound familiar? Now look at that chart again – see how the net worth has not changed, pretty much since 2000?

Financial Planning Perth : RBA household finances chart March 2012

Liabilities have risen dramatically – while the nation’s sovereign debt remains at globally low levels

You don’t have to be Einstein to work out that the average person is feeling a bit squeezed – while at the same time, our commodity-fed national finances are going just fine, thank you very much.

Financial Planning Perth : RBA savings rate chart March 2012

People are either repaying debt or putting more money into cash savings.

OK, so anyone with debt is trying very hard to pay it down. This means they aren’t spending as much in the shops (i won’t bore you with the rather negative retail trade charts). They are still spending – but more carefully, and on luxuries like cafes, restaurants and overseas travel or online purchases that take maximum advantage of the growth in the value of our national dollar.

And this actually makes a lot of sense – using the dollar while you can. Our currency is a global toy of choice at the moment, and as soon as a shiny new one turns up in the playground, we’ll be dropped like a hot potato (that’s neither cooking nor currency trading advice, by the way) and it seems that a lot of people hold that opinion.

So, more and more people are tightening their belts and getting by with less (while travelling overseas and eating out), paying down debt and saving more. Here is another reason why that feeling of “getting nowhere” can evolve – paying down debt does NOT make you feel wealthier! If you work very hard and scrimp and save and repay $50,000 off your mortgage, to find that a year later you now owe $550,000 – then you won’t feel all that much different. You know you’ve done a good thing but it certainly won’t feel like it! And what if your money is sitting in cash?

Financial Planning Perth : RBA cashrate chart March 2012

After inflation, that cash ain’t growin’ either. After tax, it’s pretty much doing nothin’

Global statistics suggest Australians enjoy one of the highest levels of wealth of any nation on the planet, yet most of the people on the street certainly do not feel that way.These charts help us to see why things don’t “feel” as good as they “are”. They show that the average household is probably treading water right now. Understanding this helps to explain some of the anecdotal “issues” that pervade the world of money right now:

  • An almost manic fervour for speculation. For choosing this over that, for trying to find the exactly perfect share to trade in, the home that will increase the most in value, and the strategy guaranteed to maximise every single dollar.
  • A distrust of institutions, financial planners, banks, superannuation funds, and anyone of authority. After all, these are the guys “in the know”, aren’t they? Surely that should be getting it right?
  • A distinct terror of making long term decisions. After all, the world is on a knife-edge, right?

Financial Planning in Perth – Houses

Here’s a chart showing housing in Perth and nationally, compared to the Australian sharemarket, as measured by the All Ordinaries Index. It ignores rent from housing or dividends from shares, and just looks at the value of your holding if you took all of that income each year.

Financial Planning Perth : A look at house prices in Perth and Australia, compared to the Australian sharemarket

The share market was hit quickly by the GFC but the housing market has eventually followed suit.

I’ve been keeping this chart for some time now, and you can see how housing was a bright spark in a failed investment world for a little while there – but even that light is looking pretty dim right now. It seems the value attributed to a given dollar of income between different assets has widened of late. It’s likely that these lines will converge again eventually – it’s just highly unlikely that it will happen tomorrow. Or the day after. In fact, we have to peel our faces off the glass to gain a little perspective of just when that may be. But first, let’s look at superannuation.

Financial Planning – Superannuation

Ok, this is the big killer. Forget all of those advertisements you see on the telly or read in the paper or view online. The average superannuation fund has gone nowhere for around 5 years. Simple as that. Now i’m going to show you the last 5 years for one of the major superannuation funds, MLC – and it’s “balanced” option. That’s pretty much what most Australian’s have in their superannuation, whether by choice, ignorance or indolence. This is not a recommendation of MLC nor is it a critique – but i’ve got to have at least some starting point for our discussion, and MLC’s Balanced option is a “manage the manager” approach that has enormous academic and practical robustness in its design and operation, so i think it’s as good a starting point as any.

Financial Planning Perth : A look at a super fund return over 5 years

Not so good if you only made the one investment 5 years ago – but if you’ve been contributing all the way through then you have been making “low cost” purchases of asset when prices have been below the dotted red line.

Please keep in mind that this is just one of MLC’s massive stable of super products. I’ve simply chosen it as a reflection of “standard” retail super returns. You can see the large fall over the GFC, and the subsequent recovery. It’s a good recovery but that doesn’t really make anyone feel so great when they look back over the last 5 years, does it? However, remember the idea of super – you are accumulating assets over your entire working lifetime, and possibly even into part of your retirement, for the eventual nibbling away at that pool of money as you support yourself with an income when you stop work. In that context, this has been a reasonable time to accumulate assets.

Now before a horde of Very Clever People inundate my inbox with examples of much better returns, let’s just look for a moment at MLC’s ” Bond” super fund option, traditionally used by more conservative investors.

Financial Planning Perth : A look at bond returns in a super fund over the last 5 years

Looks like a great time to have zero exposure to so-called “Growth” assets, doesn’t it?

See that – this has been one of those time where being super conservative has been handsomely rewarded. This is not always the case, and in fact, over time it is not usually the case, so extreme care should be used when looking at how past returns and market cycles could or would impact on future directions… Remember Michael’s Uncertainty Principle? Some would argue that bonds are currently in a “bubble” environment [i don’t have an opinion on this one, at least not one for a public website], so there is a lot more to this chart than meets the eye. However, anyone in a bond fund over this time period would most likely be feeling pretty good right now, and feel that their conservatism has been vindicated.

But what if we peel our faces right off those screens, and step back twenty years. What do we find?

Financial Planning Perth : A look at 20 year returns for Australian shares in a super fund

The moves are big but in the end $1,200 has grown quite respectably.

That was a chart of the MLC Australian Share Index option. Again, i’ve simply chosen it because it’s there. Because long term returns tend to reflect asset returns rather than tactical positions, most broadly invested Australian share funds would have shown similar returns.

So a lot of how people feel of late has to do with where the bulk of Australian’s hold their wealth – in housing and in sharemarkets, neither of which has gone very far in the last few years. For a little while, some people thought they could do better than these failed institutions and advisors – and for a little while they did. But the big mining and energy companies share prices have been hit very hard recently, and returns that looked so simple to obtain are looking like much rarer fish. Again, this is a cyclical thing and one that i have watched repeat itself again and again over the last few decades.

Financial Planning – Remember “This too, shall pass”

Montaign’s famous quote on illness, tragedy and trauma can just as easily be applied to our markets of recent years. It doesn’t mean that we should lay back in a hammock and do nothing until “things get better” but it also doesn’t mean that we should be running around in circles, just so it looks like we are getting somewhere.

This is a time for prudent strategies, for making sure that what we are doing today has some chance of meeting the requirements for what we want to happen tomorrow. Nothing more, nothing less. But getting to that point involves a good hard ponder of Michael’s Uncertainty Principle.




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