| Welcome to the August issue of the Dashboard Newsletter - a month that will be remembered for the return of Covid in New Zealand. I'm really struggling to reconcile where this year has gone. You would have thought that with 7 weeks lock-down earlier in the year, time might have stood still for a while. But everyone I speak to seems to have found the opposite. The year has vanished, and suddenly we find ourselves having rounded the corner and on the home straight towards summer.
I think that part of the reason that the year has gone so quickly for me is the fact that it has been such an extraordinary year. The first case of Coronavirus globally was officially reported on 21 January 2020 (although there were unofficial cases as early as December 2019). That means that the world has been dealing with this issue for 8 months now. Everything about this is extraordinary - how long it's been going on (and possibly still has to go); how it's completely changed the focus and priorities of governments, companies and individuals; how it's changed our work and travel habits. This thing has had such a massive impact in such a short period of time. I've spent a lot of time thinking about this (probably too much time...). In particular thinking about how this affects your investments moving forward. Is it different this time? Has the world really changed forever? Throughout history, there have always been headlines that could easily convince you that "this time was different". However, despite world wars, financial crises, political turmoil, oil supply shocks, (add anything you want in here...), share markets have been remarkably consistent. Sure - from one year to the next they may be difficult to pick, but step back and look at longer periods of time and the picture is far more predictable. Markets go up a lot more than they go down - as evidenced by the 100 years of data of the S&P500 (a measure of the American share market) in the below chart. 
Furthermore, some of the world's greatest inventions were born from times of crises, as were some of the most successful global companies. The computer as we know it today was brought to life in world war 2 as a tool to help code breakers read encrypted German messages. Air B&B became a household name during the global financial crisis of 2008 as people tightened their budgets and looked for cheaper holiday options. Disney was founded by brothers Walt and Roy during the 1929 Great Depression in an effort to bring some joy to those suffering from the economic crises. It seems that a crisis is a really good way to get inventors and entrepreneurs lazer focused on finding solutions. So after much naval gazing, my conclusion is no - this time is not different. Markets will probably behave as markets always behave, and perhaps the new "computer" or "Air B&B" is being born as I write. However, there is a "but"... As part of my over-thinking process, I reflected on returns of the past 5 years. They've been pretty good - in fact, really good. Upon inspection, I realised that investment markets have added $15 million of wealth for our clients over the past 5 years. I'll say that again. In the past 5 years, investment markets have created $15 million worth of wealth for the clients of a small financial planning firm in Lower Hutt. That is an extraordinary number - particularly given that during this time we have had Brexit, a Trump election, a European debt crisis, and now Coronavirus. Add to this the fact that almost all our investors own property too, and these properties have also increased in value tremendously, and it becomes apparent that there has been a significant amount of wealth created over the past 5 years for those who have had capital to invest. Just to be clear, I am not trying to take any credit for the good returns on investments over the past 5 years. You could have had your money invested in almost anything over the past 5 years and done reasonably well. The point I'm trying to make is that investment markets have been very kind in recent times. And therein lies my "but"... Whilst I don't think that the world has changed and I don't foresee any unprecedented or weird market behaviour moving forward, I also believe that the next 5 years won't be as generous as the past 5 years were. I think we all need to re-calibrate our expectations in terms of the increase in value of our investments over the next 5 years - whether it's a property or an investment portfolio. This is particularly relevant to fixed interest investments. The table below outlines some differences between interest and inflation rates 5 years ago compared to now:
So the fixed interest portion of your investment portfolio is unlikely to add as much value in the next 5 years as it did in the past 5 years. In terms of the "growth" assets of your investment portfolio (shares and property), I would hope that these would fare much better than the fixed interest portion, but these also face headwinds. Governments the world over have borrowed inordinate amounts of money to see their respective nations through the Covid crisis, and this money has to be paid back at some point. This ultimately means higher taxes, either at a company level, an individual level, or a combination of both. More tax = less profit. Less profit = diluted returns. Please don't misinterpret this as "doom and gloom" - it's not that at all. It's just an observation that we should celebrate the past 5 years of good returns, and acknowledge that whilst the the next 5 years will in all probability still deliver returns that are superior to bank deposits, they are unlikely to be as good as the past 5 years. In terms of the markets over the past month, share markets around the world continue to perform well despite the Covid challenge. The US share market surged 7% over the past month, with most other major markets up by about 3%. The exception was Hong Kong's Hang Seng which was down 2%. The NZ$ weakened against several of its counterparts. Interestingly, house prices fell for the first time this year (although it was a modest fall of 0.20% nationally). Here are the numbers: |
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In terms of your Select Wealth Management portfolio, there is not a great deal to report at this stage. We remain comfortable with all investments, although we are reviewing Salt and RIT Capital as their performance has been disappointing in recent times. We meet with researchers JMI Wealth on the 2nd of September for the quarterly review, so will see if there are any material recommendations to come from this. I'll keep you posted. Finally, a quick update on our Giving Back program. Thanks to you generous referrals, we are now back on track to reach our target of $2,500 by the end of the year for Birthright Kapiti. Thank you for your continued support and the referrals of your friends, family and colleagues - they are greatly appreciated. You can follow progress of the campaign at https://mifinancialplanning.co.nz/giving-back.html Until next time, keep safe. Warm regards Dave and the team at Isaacs Financial Planning dave@mifinancialplanning.co.nz |
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This newsletter is intended for general distribution and does not constitute personal financial advice. Copy of my primary disclosure statement and secondary disclosure statement.