| Welcome to the March issue of the Select Wealth Management Dashboard Newsletter. I've been writing this newsletter for 10 years now, and it is fair to say that I received more feedback and comments on last month's newsletter than any previous one. (If you didn't get a chance to read it, check it out here). I was really surprised by this as I didn't think that financial goal setting was a subject that people were interested in. Clearly it struck a nerve though. So this month, I thought I'd expand a bit on the concept of financial goal setting - and more importantly having realistic expectations in order to achieve these goals.
The challenge last month was to think about what wealth meant for you - what is your "funded contentment"? Once you have worked this out, you can (with the help of a good financial planner) put in place a financial plan to achieve this funded contentment. But the fact is that your financial plan is only as good as the information you put into it - and there are many variables that affect the outcome. One of the most important variables is the assumed rate of return. If you use an unrealistically high rate of return, there is a good chance you will fall short of your goals. So, using a realistic rate of return is really important. Typically, people look at historic returns and assume the same will happen in the future. This is a reasonable place to start, and can be accurate if you use extremely long time periods (think 50 to 100 years). But for many people, information dating back this far is unavailable (my wife tells me not everyone gets as excited as me about digging up the history of share market returns dating back 100 years...). As a result, shorter time periods are used - typically about 10 years. And therein lies the issue. Returns from all asset classes (shares, property, bonds and even cash) have been disproportionately high in the past 10 years. I hate to be the bearer of bad news, but it is unlikely that returns over the next 10 years will be as good as the past 10. Now I'll be the first to admit that I am no economic forecaster, and I have always believed that trying to second guess short term market behaviour is dangerous. But if you step far enough back and look at the last 30 or 40 years, it does tell a story. The decade from March 1999 to March 2009 was the worst decade in history for share markets - sometimes referred to as "the lost decade" because there was zero (in fact slightly negative) returns from global share markets over this decade. (It's the only time in recorded history that this has ever happened). It's no surprise then that the next decade (March 2009 to March 2019), has been one of the better performing decades as global share markets "reverted back to the mean". That's been great for investors over the last decade, but it is unrealistic to expect returns of this nature to continue indefinitely. I don't believe for a moment that share market returns will be terrible moving forward, but it seems more reasonable to expect returns to reflect longer term averages moving forward (typically around 9% per annum before tax and fees). Interest rates (and as such cash and fixed interest returns) were also a lot higher a decade ago. Back then, the Official Cash Rate (OCR) was about 8%, meaning you could get a 1 year term deposit for about 9%. Now the OCR is 1.75%. You'd be lucky to get 3.5% from your bank for a 1 year term deposit - and that doesn't look likely to change any time soon. It's reasonable to assume that these rates will slowly drift up over the next decade, but once again they should settle at longer term averages (about 4.5%) and are unlikely to get back to the heady heights of 8%. So once again, modest return expectations from cash and fixed interest moving forward. Then there is property. I recently saw Chris Tennent-Brown (ASB's chief economist) do an interesting presentation on the ASB's view of the world. As part of this he spoke a bit about property. He discussed how over the past 30 years, mortgage rates have come down significantly (think back to those heady days of 20% mortgage rates). Over the same time, house prices rose astronomically. This stands to reason - the lower the interest cost on a mortgage, the more you can borrow. The more you can borrow, the higher the house prices go. The view now is that this trend is likely to revert. Over the next decade or two, interest rates are likely to increase (albeit modestly). This means mortgages get more expensive and it becomes more difficult to service debt, so house prices are put under pressure. Throw in the potential of capital gains tax being introduced, and the outlook for property is less rosy than it has been in the past. He had a great quote which I thought summed it up beautifully. He bought his first home 20 years ago, and at the time the advice his father gave him was "bite off more than you can chew, and start chewing!". That's worked incredibly well for Chris as his mortgage got cheaper and easier to service, and at the same time his house increased in value. But now, as his own kids reach an age where a property purchase is becoming a reality, he says he will definitely not be giving his kids that same advice. He would be more likely to advise them to take a small bite, and chew cautiously. That's a telling statement. Once again, I'm not suggesting that property prices are going to fall. I'm simply pointing out that it is unlikely that they will continue to increase at the rate that they have in recent history. So add all of this up, and you have an environment where returns over the next decade are likely to be subdued relative to the past decade - more in keeping with longer term (50 year) averages. This is not a bad thing and does not necessarily mean you can't achieve your goals. It simply means that you have to account for this in your planning. Have realistic expectations, and you will not be disappointed. Plan for the worst, but hope for the best. A good financial planner will be able to help you through this planning process. They should be able to give you a realistic expectation on what return to expect given a certain level of risk. And how this return affects your goals - your "funded contentment". Thinking about your financial future and planning to achieve it is an empowering process - I highly recommend it. In terms of the markets, the past 30 days have been relatively subdued. Most share markets are up (the London Stock Exchange being the exception), but the gains are modest. The NZ$ is stronger against most currencies, but again by modest amounts. House values eked up slightly, and term deposit rates eked down slightly. All said and done, here are the numbers: |
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In terms of your Select Wealth Management portfolio, I met with researchers JMI Wealth last month. The message was that their position remains "neutral but cautious". To this end, there are some very small tweaks to some portfolios, but nothing material. On the whole we remain comfortable with our existing fund managers, the only exception being the Salt Long Short Fund which disappointed in the December quarter. We will continue to monitor this closely. Finally, a quick update on our Giving Back program for Loren Harvey. After a bumper start to the year, we've had a bit of a quiet month so progress on Loren's fund slowed a bit. I am still confident that we will reach our target of $2,500 for Loren though. You can learn a bit more at www.mifinancialplanning.co.nz/giving-back.html . As always, thank you so much for the referrals of your friends and family - keep them coming... Until next time, keep well and GO YOU NIX YOU GOOD THINGS!!!!! 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.