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How retirement spending affects withdrawal rates
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. How does spending change over retirees' life cycles, and what are the implications for safe withdrawals rates? Joining me to discuss that topic is financial planning expert Michael Kitces.
Michael, thank you so much for being here.
Michael Kitces: Thanks, Christine. It's good to be here.
Benz: You and a colleague wrote a piece about retirees' spending patterns looking at how retirees spend over their own life cycles. So, I know there's a body of research in this area. Let's talk about what the data tell us and talk specifically about how when you look at the data you do tend to see spending trail off a little bit as people get older.
Kitces: Yeah. So, there has been a lot of interesting data that's starting to come forth over the past five and 10 years, some very good national data sets that look at spending behaviour patterns and even now some major financial institutions that can like literally look internally--how do all their bank customers behave. And we're learning some interesting stuff. The prevailing view has always been people want to live a stable standard of living in retirement. I mean, the whole essence of a pension is built around you're going to get the same check every year for life, hopefully, it's an inflation-adjusted check, like at least an inflation-adjusted standard of living is going to remain constant throughout retirement. And now, we're digging into the data and we're finding out it's not what people actually do.
So, your colleague actually here at Morningstar, David Blanchett, did a nice slice of this data a couple of years ago and found this effect where when we look at inflation-adjusted spending what we find is, as people get older, the spending trails off. It trails off by about 1 per cent a year through our 60s, 2 per cent a year through our 70s, and then another 1 per cent a year through our 80s. So, if you, kind of, draw that, it goes negative, more negative and then a little less negative. So, David called it like a smile, retirement spending smile.
Benz: Healthcare expenses at the end, right?
Kitces: Right. So, early on our spending slows down a little as our lifestyle slows down. In the middle, our lifestyle slows down a lot. We get kind of the slow-go years, much less traveling, discretionary expenses fall off. And then even in our 80s the spending still trails off. So, inflation-adjusted it starts slowing down by less, but even in our 80s the data is showing that the average household spending continues to decline in our 80s even with the uptick of healthcare because the other stuff, mostly kind of our discretionary buckets, slows down even more. So, yeah, I have more healthcare spending, but we only need one car now. Those kinds of trade-offs that start shifting in the household means the spending continues to slow down even in the later years.
Benz: OK. Let's take a look at the implications then for sustainable withdrawal rates, because a lot of the research there, sort of, assumes that, oh, yes, I'm going to need 4 per cent and then I'm going to inflation-adjust that dollar amount over time, and it assumes a fairly stable level of consumption when in fact the data don't necessarily support that.
Kitces: Yeah. The early safe withdrawals rate study--I mean, I've been guilty of this as someone that published to that literature as well--we were all essentially looking at replicating pension streams of income which were stable inflation-adjusting streams of income, and so we shot for the same thing in a lot of the research. Now we get all this data coming forth that says, well, actually people's behavior doesn't match that.
So, we actually re-ran some of the numbers and published a study a couple of weeks ago about what does it look like when you actually assume decreasing spending by something like maybe 1 per cent a year through retirement or 10 per cent a decade or like maybe we stay steady for the first decade but then we slowdown in the second and third. And what we found, I mean, no great surprise, your withdrawal rate gets a little higher when you assume spending decreases.
Now, the interesting effect is, it's actually not as much of a boost as maybe you would think. If you imagine spending going down by 1 per cent or 2 per cent a year for 30 years, like that cuts 30 per cent to 40 per cent off your inflation-adjusted spending by the end. So, it's a big number. But what we found is the safe withdrawal rate only goes up a little. It goes from 4 per cent to maybe something like 4.4 per cent to 4.8 per cent. So, we get maybe a 10 per cent or 20 per cent increase in safe withdrawal rate for what could actually be a 30 per cent or 40 per cent decrease in cumulative spending.
Benz: And what sort of asset allocation do you assume there?
Kitces: So, we look at over a range of asset allocations, what we generally find is balanced portfolios really do still work the best where we can rely on the interest and the dividends and the capital gains and tapping the principal when we need to. The good news of diversified portfolios is there's always something that we can tap from year to year to generate the cash flows and that still matters. Too conservative, inflation is damaging; too aggressive, market volatility is damaging. But when we get back to those balanced portfolios, generally in the 40-60 to 60-40 kind of range, we would find these effects where your initial safe withdrawal rate lifts up some, but not a huge amount, in part because even though your spending declines, it's only in the later years. So, kind of, cumulatively over a retirement, your spending does decrease quite as much. And the effect that we still have to deal with good old-fashioned sequence risk.
You might realize, hey, yeah, I'm not probably going to do as much world cruising when I'm 80, but unfortunately if you do lots when you're in your 60s and there's a bear market and you run out of money, it doesn't really matter that you're going to do less travel in your 80s because you might have no money left. And so, that need to have a little bit of conservatism in the early years to defend against sequence risk is part of--even if we assume spending goes down a bit, we don't quite get as much of an offsetting increase in the initial safe withdrawal rate, because we still have to hedge a little against that sequence risk.
Benz: OK. Fascinating research, Michael. Thank you so much for being here to discuss it with us.
Kitces: My pleasure. Thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.
28/06/2016 Understanding how your thought patterns drive investment decisions could amount to hundreds of thousands of dollars over your lifetime, explains behavioural finance expert Simon Russell. Behavioural finance and how it hits your bottom line Glenn Freeman 28/06/2016 http://video.morningstar.com/aus/video/240616_Simon_Russell_Behaviourial_Finance_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman for Morningstar Australia and I'm joined today by Simon Russell, founding director of Behavioral Finance Australia.
Simon, thanks for joining us.
Simon Russell: Pleasure to be with you.
Freeman: Now, Simon, how much do life experiences, upbringing and family impact our attitudes to money and to investing?
Russell: Well, how long have you got for an answer for that question, I guess. I mean, it's a very interesting and important question and has been looked at from the behavioural finance perspective.
One study, from memory, was looking at Sweden, for example, where you've got a lot of data that allows you to go and check whether your family circumstances then influence your financial decisions, or is it whether you're – you can check how you compare with your twin or how you compare with other people in your region.
So, when you can unpick some of those relationships, you can start to see, well, there is a role for genetics, for example.
Some of what I do will be similar to what my siblings do. There is a role for financial circumstance, so family circumstances, so that I will tend to do things that are similar to what my other siblings or other people who might have been adopted might have done, even if the genetics were different.
But certainly, then there's a big influence on our experiences, the individual circumstances, just the way information is framed, the choices that I'm given. So, it's quite complex.
I guess, there's a whole lot of different influences. And what we find is that it changes over time.
So, your family circumstances, as you might imagine, are more important to start with and your genetics, for example, might be more important for some of your early life financial choices.
But as you move further forward through your life your choices are more shaped by your subsequent experiences and other circumstances.
Freeman: And can different types of financial behaviour be learned and unlearned?
Russell: Well, I'd say yes, but with caveats and with difficulties.
So, some financial decision-making, what behavioral finance research and the underlying psychology and neuroscience shows, are often driven by subconscious effects or subconscious biases. So, in some ways, it's difficult to learn and unlearn aspects that are actually happening beyond our conscious awareness.
Having said that though, that's not everything.
We're not all obviously driven by subconscious sort of twitches and the like. Certainly, some things can be learned and the evidence shows that when you look at certain decision-making biases – so, for example, the disposition effect, which is the tendency of people to hold on to stocks that are falling and to sell the ones that have gone up – well, actually, that changes depending on the circumstances individually, it changes depending on, for example, their experience.
So, we do seem to be able to learn to overcome some things, but not perfectly, and not some things that perhaps we don't get the feedback for or perhaps our experience isn't allowing to overcome.
Freeman: Simon, one of the criticisms that is sometimes levelled at behavioural finance is that the approaches can sometimes be too broad to be directly actionable and measurable. What's your take on this?
Russell: Look, I would agree. That's what I tend to find in some of the popular sort of mainstream financial press.
And to be fair, I guess, if you're aiming at a broad audience and you want to get some punchy headlines out there, that's probably a good way to at least raise some awareness about the field.
But in another way, it's a bit disappointing, because a lot of the research is actually quite the reverse. It's not really actionable and unmeasurable.
It's actually based in controlled experiments or sort of systematic analysis of financial choices, which you can measure, you can connect it to the underlying psychology.
You connect it often to brain processes that can be measured through fMRI (functional magnetic resonance imaging) scans and the like. You can connect the psychology, the behaviour and then all the way through to financial outcomes.
So, if you can sort of empirically test and connect the dots, measure it along the way, and then think about, well, now we understand it, what can we do about influencing some of those things?
If you can measure and test it, well, really we should be able to actually move away from some of those sort of woolly concepts.
Freeman: In your new book Applying Behavioral Finance in Australia you outlined some examples of how overconfidence can lead to people trading too much and to some quite staggering results. Can you elaborate a bit on that for us?
Russell: Yes. We probably should start with overconfidence, and psychologists have defined overconfidence in a number of different ways. But one of the key ways is that we underestimate how much uncertainty there is in our decision making.
So, if I'm thinking about a stock, I'm thinking about what the possible range of outcomes might be in the future, well, I might have a valuation range, whether or not I make it explicit that I might have in my mind, there's a range of possible outcomes.
Now, if that's what I think of the possible outcomes, what the evidence shows is that actually my range is too narrow, often by a long way. So, what I think is, this actually might be a much broader range.
Now, if the range is broader, that changes my decisions. It means I'm less likely to trade on something if now there's a much broader range of possible outcomes, whether it might be high or low.
So, if we are less overconfident, we sort of see the real true nature of that uncertainty, we tend to trade less and that connects to financial outcomes.
So, it connects to tax outcomes for a start. If we're trading less frequently then we're less likely to incur capital gains tax if we're a tax-paying investor.
We're less likely to lose that 12-months capital gains tax discount. If we're holding on to – this disposition effect we just mentioned – if we're holding on to stocks that have gone down and selling our winners, we're less likely, if we're trading less, to be getting the capital gains tax impact from all those realised gains, but without offsetting losses and we're also less likely to be incurring the costs, the market impact costs, the buy/sell spreads which can be significant, particularly for larger investors.
So all that translates into dollars, whether there will be tax outcomes, or cost outcomes, or return outcomes in many cases.
In the book there is an example where an investor with $1 million, based on some simplifying assumptions and looking at different sort of trading frequencies actually over a period of 10 years, might be $200,000 worse off, just looking at the tax consequences.
That's a simplified example, but the evidence actually looks in quite some detail at broad scale studies of individual investors and looks at the high frequency traders tending to have lower returns than less frequent trading individuals.
And similarly, there's some evidence at an institutional fund manager level show that those that are trading less frequently and the lower turnover fund management products on average – this is not everything of course – but on average, tend to do better than the ones that have a higher trading frequency as well.
Freeman: Thanks very much for joining us, Simon.
Russell: Thank you very much for having me.
Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.
10/04/2017 Data shows that the withdrawal rate gets higher as spending decreases in retirement, says Michael Kitces, a US-based financial planning expert. How retirement spending affects withdrawal rates Christine Benz 10/04/2017 http://video.morningstar.com/aus/video/
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. How does spending change over retirees' life cycles, and what are the implications for safe withdrawals rates? Joining me to discuss that topic is financial planning expert Michael Kitces.
Michael, thank you so much for being here.
Michael Kitces: Thanks, Christine. It's good to be here.
Benz: You and a colleague wrote a piece about retirees' spending patterns looking at how retirees spend over their own life cycles. So, I know there's a body of research in this area. Let's talk about what the data tell us and talk specifically about how when you look at the data you do tend to see spending trail off a little bit as people get older.
Kitces: Yeah. So, there has been a lot of interesting data that's starting to come forth over the past five and 10 years, some very good national data sets that look at spending behaviour patterns and even now some major financial institutions that can like literally look internally--how do all their bank customers behave. And we're learning some interesting stuff. The prevailing view has always been people want to live a stable standard of living in retirement. I mean, the whole essence of a pension is built around you're going to get the same check every year for life, hopefully, it's an inflation-adjusted check, like at least an inflation-adjusted standard of living is going to remain constant throughout retirement. And now, we're digging into the data and we're finding out it's not what people actually do.
So, your colleague actually here at Morningstar, David Blanchett, did a nice slice of this data a couple of years ago and found this effect where when we look at inflation-adjusted spending what we find is, as people get older, the spending trails off. It trails off by about 1 per cent a year through our 60s, 2 per cent a year through our 70s, and then another 1 per cent a year through our 80s. So, if you, kind of, draw that, it goes negative, more negative and then a little less negative. So, David called it like a smile, retirement spending smile.
Benz: Healthcare expenses at the end, right?
Kitces: Right. So, early on our spending slows down a little as our lifestyle slows down. In the middle, our lifestyle slows down a lot. We get kind of the slow-go years, much less traveling, discretionary expenses fall off. And then even in our 80s the spending still trails off. So, inflation-adjusted it starts slowing down by less, but even in our 80s the data is showing that the average household spending continues to decline in our 80s even with the uptick of healthcare because the other stuff, mostly kind of our discretionary buckets, slows down even more. So, yeah, I have more healthcare spending, but we only need one car now. Those kinds of trade-offs that start shifting in the household means the spending continues to slow down even in the later years.
Benz: OK. Let's take a look at the implications then for sustainable withdrawal rates, because a lot of the research there, sort of, assumes that, oh, yes, I'm going to need 4 per cent and then I'm going to inflation-adjust that dollar amount over time, and it assumes a fairly stable level of consumption when in fact the data don't necessarily support that.
Kitces: Yeah. The early safe withdrawals rate study--I mean, I've been guilty of this as someone that published to that literature as well--we were all essentially looking at replicating pension streams of income which were stable inflation-adjusting streams of income, and so we shot for the same thing in a lot of the research. Now we get all this data coming forth that says, well, actually people's behavior doesn't match that.
So, we actually re-ran some of the numbers and published a study a couple of weeks ago about what does it look like when you actually assume decreasing spending by something like maybe 1 per cent a year through retirement or 10 per cent a decade or like maybe we stay steady for the first decade but then we slowdown in the second and third. And what we found, I mean, no great surprise, your withdrawal rate gets a little higher when you assume spending decreases.
Now, the interesting effect is, it's actually not as much of a boost as maybe you would think. If you imagine spending going down by 1 per cent or 2 per cent a year for 30 years, like that cuts 30 per cent to 40 per cent off your inflation-adjusted spending by the end. So, it's a big number. But what we found is the safe withdrawal rate only goes up a little. It goes from 4 per cent to maybe something like 4.4 per cent to 4.8 per cent. So, we get maybe a 10 per cent or 20 per cent increase in safe withdrawal rate for what could actually be a 30 per cent or 40 per cent decrease in cumulative spending.
Benz: And what sort of asset allocation do you assume there?
Kitces: So, we look at over a range of asset allocations, what we generally find is balanced portfolios really do still work the best where we can rely on the interest and the dividends and the capital gains and tapping the principal when we need to. The good news of diversified portfolios is there's always something that we can tap from year to year to generate the cash flows and that still matters. Too conservative, inflation is damaging; too aggressive, market volatility is damaging. But when we get back to those balanced portfolios, generally in the 40-60 to 60-40 kind of range, we would find these effects where your initial safe withdrawal rate lifts up some, but not a huge amount, in part because even though your spending declines, it's only in the later years. So, kind of, cumulatively over a retirement, your spending does decrease quite as much. And the effect that we still have to deal with good old-fashioned sequence risk.
You might realize, hey, yeah, I'm not probably going to do as much world cruising when I'm 80, but unfortunately if you do lots when you're in your 60s and there's a bear market and you run out of money, it doesn't really matter that you're going to do less travel in your 80s because you might have no money left. And so, that need to have a little bit of conservatism in the early years to defend against sequence risk is part of--even if we assume spending goes down a bit, we don't quite get as much of an offsetting increase in the initial safe withdrawal rate, because we still have to hedge a little against that sequence risk.
Benz: OK. Fascinating research, Michael. Thank you so much for being here to discuss it with us.
Kitces: My pleasure. Thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com./video/transcript/2694 mailto: ?subject=How retirement spending affects withdrawal rates&body=http://www.morningstar.com.au/video/story/2694 How Greek mythology can make you a better investor
07/12/2016 Don't be over confident or follow the herd, and like Odysseus, learn to have yourself "tied to the mast" when it comes to long-term investing. How Greek mythology can make you a better investor Nicholas Grove 07/12/2016 http://video.morningstar.com/aus/video/161201_Wendell_MIIC_Audio.mp4
Nicholas Grove: I'm Nick Grove at the Morningstar Individual Investor Conference in 2016 and I'm joined by Morningstar's Dr. Steven Wendel. Steven, what are some of the key behavioural biases that most afflict investors around the globe?
Steve Wendel: Absolutely. Unfortunately, there are many, but a few of them are particularly important. The one that we all struggle with and have the hardest time with often is overconfidence, the belief that we can beat the market. Of course, if you ask investors, all of them say that, which is impossible. And it takes us into risky positions, to risky sides of trades that we really shouldn't be getting into.
In addition to that we have a real challenge with what's seen as a recency bias that when we see the past performance of a fund, of a stock, et cetera, we believe that that is a natural predictor of the future. Because in everyday life, it's a great predictor. But in investing, of course, we know past performance does not predict future performance. The reason they have that is because we're hardwired to believe that it will continue in that way.
Now, in addition to that some of the other challenges that investors struggle with, what's known as descriptive norms or herding, which is, if you see a lot of people who get excited about a particular fund or stock, you naturally become so as well, which of course, in investing is a horrible idea. It means in many cases that the price has already been overbid and it's bad to enter. We see the same thing in reverse, when it's a terrible idea to exit when everyone else is as well.
Grove: And what are some of the strategies that investors can employ to overcome these biases? And I love the story and the concept of what you call the Ulysses contract. Can you just elaborate on that a bit?
Wendel: Sure. There are two main strategies. Ulysses contracts are about taking our moments of strength when we're planning out our investment strategy, when we're thinking through really what do we want to do in the future and then using that moment of strength to bridge us through to the moment of weakness, when we're likely to be tempted, when the markets are going crazy, et cetera.
And so, one example of the Ulysses contract is to, well, lock yourself in to a long-term investment and say, contractually, I cannot sell this for 10 years. Other ways of doing it are to create friction in your life to make it harder for you to make that foolish mistake. One would be to say if you're working with an advisor, for example, to have your advisor only honor your trades after three days or to require that your spouse be present. Added friction again makes it harder and you prepare by telling your advisor or telling yourself in some cases, all right, I can't do this without that extra time or extra person.
Grove: Steven, thanks for your time today.
Wendel: Absolutely. Happy to be here.
Grove: I'm Nick Grove with the Morningstar Individual Investor Conference in 2016./video/transcript/2663 mailto: ?subject=How Greek mythology can make you a better investor&body=http://www.morningstar.com.au/video/story/2663 What returns should you expect from markets?
01/12/2016 As market risks rise, investors must adjust their profit expectations--gone are the days of 8 per cent returns. But there are still growth opportunities out there if you know where to look. What returns should you expect from markets? Emma Wall 01/12/2016 http://video.morningstar.com/aus/video/
Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Freddie Lait, of Latitude Investment Management.
Hi, Freddie.
Freddie Lait: Hello.
Wall: So, I thought we could talk today about returns expectations and reality. We are facing incredibly challenging times at the moment, not least because of geopolitical risks, but also because market valuations are very high. And I think there's a bit of a disconnect between what investors should expect to get and what they would like to get.
Lait: Yes, I think, you are right. I think since cash rates have come down from sort of 5 per cent to nearly zero or less than that in some places in the world, investors haven't really recalibrated their expectations.
And so, a lot of businesses are still targeting returns that may have been achievable with a sort of 3 per cent, 4 per cent, 5 per cent carry underlying it with your risk premium on top, whereas now actually I think people will need to reset down their return expectations.
Sadly, I think, at the same sort of time when rates went down to zero, most markets seemed to have lost their investment compass. And so, you've seen increased volatility in FX markets and most markets around the world now including bond markets.
So, I think, you are into a lower return higher risk world and it's a very difficult one to navigate from here.
Wall: And you are now running a long-only portfolio. You used to be a hedge fund manager. Multi-asset and hedge funds tend to work towards the sort of target of cash plus a certain amount. But as you say, I think, people are still thinking about, cash 4 per cent, plus 2 per cent, equals 6 per cent. But that's just not the case anymore?
Lait: I think that's right and you've seen a lot of more leveraged funds, a lot of hedge funds striving to take more risk, thinking that the risk-return curve continues to be linear and I think that's been the danger.
I think the right thing to do is to plan your portfolios accordingly to take a little bit less risk than you're used to now, because risks are broadly higher, try and think about real-time correlations within your portfolio rather than the long-standing 20-year relationships because correlations are breaking down a lot at the moment.
And seeking to eke out that kind of equity risk premium, sort of, 3 per cent, 4 per cent, 5 per cent above inflation or cash which are both near zero at the moment and aiming a little bit lower.
Wall: And it's not all doom and gloom, before people get too depressed watching this video. There are opportunities out there. You just have to be a bit more clever about where you find them?
Lait: I think so. I think one way to decrease volatility in your portfolio, which is very commonsensical, is to invest in the sectors that everyone isn't talking about.
And it doesn't necessarily mean being hugely contrarian or taking a deep value call. I think you need to take a long-term call on all of your equity investments in particular.
But I think one example is the commodity space where everyone seems to be piling into, sort of the Trump infrastructural bill, things like this. Actually, if you look at what's been driving the commodity markets is mostly Chinese financial demand as opposed to real production demand.
If you work through what Trump's policies are going to mean in terms of the demand side for copper or iron ore, it's a couple of percent a year incremental demand and I look at that industry and say, well, the supply side is still terrible.
People are still bringing new mines on. There's excess capital employed going in. Margins are falling.
To me, for the next five years, commodity producers will run for cash and prices will stay very low. So, that's not a sector where I think one should be going towards and it's incredibly volatile. So, you cut out a lot of volatility by not investing in spaces like that.
Wall: And where are you looking then? Where do you find the opportunities?
Lait: So, I think, a great place to be investing has been the US financials, the US large-cap banks. We've had a large number of those in our portfolio at Latitude and they continue to seem to be very good value to me.
The returns are increasing. The competition has been decreasing.
They are all earning their--sort of, their return on capital is equal to their cost of capital at the moment broadly across the space at a zero interest rate environment.
So, in the worst possible world of heavy regulation and low underlying carry for them. They are much better businesses, they are much more leveraged and I think in any kind of rate cycle, I think they will take advantage of the fintech in the market and I think they are going to grow very, very rapidly and should re-rate 1.5 to 2 times book value depending on who you are looking at with some growth. So, that's a great space.
And I think ultimately in the US, the consumer is still the place to be investing. That's the cyclical sector of choice for me, not the commodity and the primary producers.
But if we get a little bit of wage inflation, the market is quite tight in terms of the output gap. So, I think, you will get some wage inflation and those consumers will spend more on everyday goods. So, consumer discretionary at the lower end is probably a very attractive place to be.
Wall: Freddie, thank you very much.
Lait: Excellent. Thank you very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
14/11/2016 Steer clear of fads, maintain a disciplined approach and focus on company fundamentals in building and maintaining your investment portfolio, says Anton Tagliaferro, investment director, Investors Mutual Maintain discipline and stick to fundamentals when selecting stocks Glenn Freeman 14/11/2016 http://video.morningstar.com/aus/video/161111_Anton_MIIC2016_AUDIO.mp4
Freeman: I'm Glenn Freeman from Morningstar Australia on the sidelines of Individual Investor Conference 2016. I'm here with Anton Tagliaferro, Investment Director for Investors Mutual.
Anton, thanks for joining us today.
Anton Tagliaferro: Pleasure.
Freeman: Anton, how informative are investment cycles of the past to the investment market we're seeing of today with massive volatility, with low and even negative interest rates?
Tagliaferro: Look, I think, market cycles are an indication of the market is a volatile unpredictable asset class. But I think the one thing I've learnt over many, many years is you stick to good-quality stocks and what we define as quality companies with good competitive advantage, recurring earnings and not mining stocks, recurring earnings, run by capable management that can grow and if you can buy them at a reasonable price on a solid yield, you'll do reasonably well. So, there's never a time – as the whole stock market, markets go up and down, but I think we focus very much on those sort of companies and at times of weakness in the stock we're very happy to buy good quality companies at the right price.
Freeman: And you've also spoken about the tech boom and the tech wreck that coincided with that or followed that. How likely is something of that magnitude again? Is that something that's one-off or can we see these sorts of things take place again?
Tagliaferro: No, no. I mean, the market is full of excesses. People always chase some new fad, whether it's tech stocks or pharmaceutical penny dreadful stocks or gold stocks or lithium stocks and I guess, lithium today is very much chased by many investors. So, you will get those sort of fads happening all the time. People always seem to make the same mistakes. But as I said, you have to stay disciplined, buy the right sort of companies with a good recurring income stream that pay dividends and you don't have to worry too much about the market if you're in good quality stocks.
Freeman: And just lastly, you were talking about how retail investors can pick good companies. What sorts of things they can look for just on a general basis and there are some things there? Can you just expand on that a little for me?
Tagliaferro: Yeah. So, look, I think, we've always focused on particular types of companies for the long term, companies with strong competitive advantage. So, a number one or two or three in their industry. It helps. It gives that company scale and things like research and development, information technology expenses, procuring – I mean, they buy stuff in, they can often get a discount because they are big. So, size helps often. And again, when you're talking about a big company, it can be a small company, but number one in its industry, like Pact Group, which for example, is the largest flexible packaging company in Australia. So, competitive advantage is very important.
Number two, is recurring predictable earnings. So, it's nice to see the underlying business of the company, what it's achieved in the last two to three years and then hopefully you can more or less predict where those earnings are going to go in the next two to three years. Management is very important. Capable management. We like good solid companies with good people there, people who under-promise and hopefully over-deliver, honest people, people with a genuine logical plan on how to grow shareholder value.
Thirdly, companies that can grow and obviously, you want to buy them at a reasonable price. And often the time to buy at a reasonable price is when people are selling all their shares whether they are lithium, gold, technology, all the good companies out – throwing the baby out with the bathwater. Yeah, so, it's about buying companies with competitive advantage, recurring earnings, capable management that can grow at a reasonable price. That's what we stick to.
08/11/2016 Kate Howitt, portfolio manager at Fidelity International discusses some of the core phases in technological disruption and identifies software companies among those currently presenting opportunities. Software companies worth watching amid tech deployment phase Glenn Freeman 08/11/2016 http://video.morningstar.com/aus/video/161103_Kate_Howitt_MIIC_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman for Morningstar Australia and I'm joined here on the sidelines of the Individual Investor Conference 2016 by Kate Howitt, Portfolio Manager for Fidelity International.
Kate, thanks for joining us today.
Kate Howitt: Hi. Thanks for having me.
Freeman: Now, Kate, can you cover up for me some of the core stages in the technological cycle that you referred to in your discussion?
Howitt: Yeah. I've drawn from the work of Carlota Perez and she has looked at four historical cycles. And there's broadly a beginning phase, which is disruption, quite ugly, the new technology comes in, shakes everything up. Then in the middle there's a crisis phase, really ugly, stock market crashes. And then you follow that with deployment and deployment historically always comes to be seen as a golden age. There's new adoption of the technology widely across the community. There's new employment created and there's a wealth of investment opportunities there.
Freeman: And how can investors apply some of this thinking in building their own investment portfolios and maintaining those throughout some of these cycles?
Howitt: Well, firstly, from a cycle point of view, we might still have some disruption to go. But eventually at least we'll move into the deployment stage and I think there you want to be looking for companies that are at the heart of the technological revolutions, software businesses. These businesses are really changing the world and they can have enormous gains to their value as we've seen in previous cycles. But it's not only those straight technology companies. There are a lot of companies that are enabled by that that have businesses that can come to fruition. So, local manufacturers can actually now export to markets they couldn't previously because ecommerce has made that so much seamless and efficient. So, there's a couple of different angles that you can take.
08/06/2016 Active investing versus index investing isn't necessarily a prescriptive "one or the other" approach, explains Stephen van Eyk. Combining active and passive investment management Glenn Freeman 08/06/2016 http://video.morningstar.com/aus/video/160603_Steven Van Eyk_ActiveVpassive_AUDIO.mp4
Glenn Freeman: I'm Glenn Freeman for Morningstar and I'm joined here by Stephen Van Eyk, Managing Director of Stephen Van Eyk Consulting.
You've got some quite strong views about active investing versus index investing. Can you just talk me through just quickly your thoughts on that?
Stephen Van Eyk: A lot of people get the wrong idea that you're one or the other. Like for a start, you can use passive for a part of your portfolio and you can be active in other parts if you think that there's value to be added. But also, and I think this is a lot of people don't realise when they look at statistics saying, "oh, active doesn't add value over the long term," there are five to six-year periods where it's true; where there is no alpha to be added and that's usually when the markets really roaring along and I've noticed the active managers, the faster the market is going up, the closer they get to the index because if they take a stand and say these companies aren't worth that much money and I don't buy them, and then the market continues to rise strongly, they are going to underperform quite a lot. So, basically, in a market like that you're wasting your time with active management because they are not doing anything away from the index anyway.
However, in a market like what we've had over the last few years and like what we've got at the moment, where really market performance is 5 or 6 if you're lucky and pretty volatile as well, I've noticed that managers move a lot further away from the index and there have been some big opportunities for active management.
For a start, China was always going to slow, wasn't it? Economic theory says China was going to slow. So, what's going to happen to resources? They are going to go down. In the Australian market, if you're not holding resources, you really outperformed for the last few years. Banks, after 2008, obviously, the authorities were going to bring in a lot more regulation on banks which was going to cut off a lot of the areas that they could actually make money from.
So, they used to be utilities and then they went to be growth stocks and now they're going back to being utilities again. So, obviously, in the Australian market if you didn't go into banks and they went down, you're going to outperform the index by a mile. Internet stocks, selling pizzas et cetera, they were the big thing for a while. You go into those, you make money.
In other words, there's been tremendous opportunities to actually outperform the index in active management in Australian stocks. So, it goes in periods. If you take two periods end-on-end for say over 10 years, well, one cancels out the other and it probably says active management doesn't add much value.
But if you get the periods right – and the point is, there are signals that can tell you when it's time, like dispersion of stocks, price dispersion, the highest value from the lowest value is telling you whether there is a bang for your buck in actually getting out of some stocks and into the others.
So, there are signals and if you see them coming about and you start putting more in active management if you've been indexing or vice versa, you can make more money for the same risk.
04/05/2016 Dribbling money in over time can effectively minimise risk, but it's not a wealth-creating process, according to US-based financial planning expert Michael Kitces. Does dollar-cost averaging improve returns? Jeremy Glaser 04/05/2016 http://video.morningstar.com/aus/video/
Jeremy Glaser: For Morningstar I'm Jeremy Glaser. I'm joined today by Michael Kitces, he's a financial planning expert. We are going to talk about dollar-cost averaging and if it really helps improve either the risk or return to investors' portfolios.
Michael, thanks for joining me.
Michael Kitces: Great to be here; thanks, Jeremy.
Glaser: So I know a lot of people are probably familiar with dollar-cost averaging, but can you give us kind of the elevator pitch on what it means?
Kitces: So the basic idea of dollar-cost averaging says, I've got some money to invest and rather than putting it all in at once and taking the risk of what happens with the market immediately, I'm going to put it in systematically over time. I'm going to break it up and invest systematically over time. And as kind of the label of dollar-cost averaging implies, I'm going to do it with fixed dollar amounts. So, say I have got $10,000 to put in, instead of putting in $10,000 all at once, I'm going to put in $2,000 a month over the next five months.
Now by doing that, the mathematics start to work in your favour. If that investment goes up while you are waiting you end up buying fewer shares, because it costs a little bit more for your fixed $2,000 amount. If the investment goes down, you end up buying more shares because it was a little bit cheaper, so your $2,000 goes further. And what you end up with over the span of several months is often we find that the average cost of the shares ends up lower than they would have been buying all at once, simply because of the random market volatility and noise that happens along the way. So the idea of this is we're getting in systematically over time. We're buying fewer shares when they are up, we're buying more shares when they are down, that lets us get a lower average weighted cost. Ultimately that gets us a better upside potential in the long run for the investment.
Glaser: So if you have that lower cost, do you not actually get that higher upside, though? Why are you skeptical that this actually improves returns?
Kitces: So, there are problems with this from the return perspective. It's kind of a nice theory of, all right well if things go up then I buy fewer shares, and if things go down I buy more shares, and mathematically that's true. But the challenge for dollar-cost averaging and some of the research they publish on this--the one big challenge is: Markets go up more than they go down. So we have to kind of figure out what's the odds-on bet. The odds-on bet is markets are going to go up. Which means if we wait--if we say dribble in the money evenly $2,000 a month over five months, the odds are actually good that we're going to end up doing more purchases when the stock was up and just get fewer shares than we would have by just buying it at the beginning.
So I did some analysis on this, looking at how markets behaved for the past 20 years and found this exact effect. When you actually look at, say, what's the benefit of dollar-cost averaging in over six or 12 months? What we ultimately find is about a quarter of the time dollar-cost averaging wins and the other three quarters of the time it loses. And when we look at what are that years that it actually wins, it turns out it's not entirely surprising in retrospect. It's years like 2000, 2001, 2002, 2008. Basically, if markets go down significantly for the year, no great surprise dollar-cost averaging looks great because you dribbled your dollars in more slowly, which means you got a bunch of your investment in at the end of the year after the investment had already fallen. But if we don't actually know what year it's going go down in advance, we're still stuck with this is a losing bet by about 3-to-1 ratio simply because markets go up more often than they go down.
Glaser: A lot of investors do worry a lot about that downside risk. You don't want to be exposed when there are these big down years. Does this make sense as a risk-mitigation strategy then, to kind of protect yourself during these bad years?
Kitces: It does; it works a little bit better as a risk-mitigation strategy. If you want to view it that way, you can say look, dollar-cost averaging in over the next year is basically like saying I'm going to hold an elevated cash or bond position, whatever it is I'm dollar cost averaging out from, to get into wherever I'm going. If I hold more of something else in the meantime that's something that's maybe a cash or a bond that's lower-volatility. I'm certainly ratcheting down my risk levels and so if my primary concern is, well I am just really worried about the risk of the markets and I want to come in more slowly. Dollar-cost averaging does work from the risk management perspective you will find over that year, you will have less volatility, you will have less downside exposure, simply because you didn't own as much of the stuff. It does work from that perspective.
Now of course there is still kind of a double-edged sword here. If you are that convinced that the market is likely to go down for the year, of course, the best strategy isn't to dollar-cost average in through the year, the best strategy is to just not put your money in for that year. If you are that convinced that markets are going to go down. But if you are at least concerned about there is an elevated risk of it. I don't really want to wait, but I am concerned about the potential. Dollar-cost averaging does kind of work as a midpoint on that scale and I think actually the best way to frame it--it's not even necessarily a great thing from a risk management perspective, but it's a highly effective tool from a regret minimisation perspective. So if your driving concern is not, hey I want to maximise my dollars no matter what; my concern is, I just really don't want to put dollars in and then go nuts a month or two from now if it turns out that markets just happen at an unlucky time to tank right after I put the money in. You can certainly manage your regret and minimise your regret by dripping dollars in over time. But just be cognisant that essentially you are paying with some upside, by choosing that risk minimisation or regret minimisation process of dollar-cost averaging in.
Glaser: Do you see signs investors are more likely to stick with their plan with the dollar-cost averaging program versus trying to just do lump sums when they have money available to them?
Kitces: It's been interesting how we see this play out in practice, and it's almost entirely driven by all these behavioural games, behavioural tricks that we have to sometimes play on ourselves to stay comfortable with markets and investing. We find that using dollar-cost averaging to help manage some of that regret concern works best when we really do get the lump sums that come in. Maybe that's an inheritance, sadly a life insurance settlement if someone passed away. Maybe that liquidation of some business or investment. We got a whole bunch of money in cash, we do want to invest it, we're really concerned about the timing. It just helps us sleep a little better at night and reduce the regret concern by dollar-cost averaging in over time. You won't necessarily make more money in the long run most likely, but it comforts.
When we are going directly from one thing to something else. So I'm rolling money out of my 401(k) plan but over to my investment portfolio, but the reality is I was actually invested over here in my 401(k) plan. The 401(k) provider just has to liquidate and send me a check because 401(k)s can't move the dollars directly. We really encourage people, say look you were fully invested before, stay fully invested here. I realise you have to go to cash for a couple of days for the transition, but stay where you were, which means fully invested. And beware pulling out of dollar-cost averaging, which basically just arbitrarily takes your portfolio way more conservative for a period of time, that you didn't necessarily need to.
Glaser: There could be some situations where DCA still makes sense, but you should be aware of the costs.
Kitces: Yeah. But you need to be aware that you are doing it more to manage your regret than anything else and then that's fine I don't want to second guess anyone. If your choices are I can go all in if the market crashes I am going to freak out and sell everything when it's down, or I can dollar-cost average in and sleep better at night. Sleep well at night--you only get one life. So I don't mean to knock it from that perspective, but just be cognisant that on average over time, it's really not actually a wealth-creating process. Now if you are investing systematically anyways because you earn X dollars and you are saving a certain amount every month. You will just get the benefit of the math of dollar-cost averaging along the way and it is what it is, because you are just investing the dollars that you have available. But in these scenarios where I've got a lump sum and I'm deliberately choosing not to put it all in at once, I'm going stretch it out over time, just be cognisant--it may be great to minimise some of your regret, and it does work from that perspective, but the odds-on bet is you are probably going to end up leaving money on the table.
Glaser: Michael, thanks for joining me today.
Kitces: My pleasure. Thanks.
Glaser: For Morningstar I'm Jeremy Glaser. Thanks for watching./video/transcript/2605 mailto: ?subject=Does dollar-cost averaging improve returns?&body=http://www.morningstar.com.au/video/story/2605 The Morningstar Economic Moat Rating
01/04/2016 The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company with an economic moat can fend off competition and earn high returns on capital for many years to come. The Morningstar Economic Moat Rating Morningstar US 01/04/2016 http://video.morningstar.com/aus/video/
The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company with an economic moat can fend off competition and earn high returns on capital for many years to come.
Morningstar has identified five sources of moat. Switching costs are those obstacles that keep customers from changing from one product to another. The network effect occurs when the value of a good or service increases for both new and existing users as more people use that good or service. Intangible assets are things such as patents, government licenses, and brand identity that keep competitors at bay. A company with a cost advantage can produce goods or services at a lower cost, allowing them to undercut their competitors or achieve higher profitability. Efficient scale benefits companies operating in a market that only supports one or a few competitors, limiting rivalry.
A company whose competitive advantages we expect to last more than 20 years has a wide moat; one that can fend off their rivals for 10 years has a narrow moat; while a firm with either no advantage or one that we think will quickly dissipate has no moat.
The Morningstar Economic Moat Rating can help you uncover companies that will provide superior long-term returns./video/transcript/2593 mailto: ?subject=The Morningstar Economic Moat Rating&body=http://www.morningstar.com.au/video/story/2593 Introducing New Stock Screener
06/07/2015 -- Introducing New Stock Screener Morningstar 06/07/2015 http://video.morningstar.com/aus/video/
Here at Morningstar, we're excited to be rolling out a number of new features for you. One of the new tools we're most excited about is our new Stock Screener.
To access it, first click on the Tools tab. Scroll down and you'll see the Stock Screener link. Click the link now. This opens the Screener. Left-hand column is where you'll find the tools needed to filter the results that appear in the centre column. While most of these filters will be available to all members, premium subscribers have exclusive access to our analyst ratings, including recommendation, economic moat, stewardship, and fair value uncertainty ratings. For non-premium members these features are marked with a purple arrow.
As you can see, we now have the ability to sift through extensive data on more than 2,000 Australian and New Zealand-listed equities. Let's take a look at just how powerful this new tool is.
First, click on the Snapshot category. You'll notice that each screening category has a number of subcategories within it. These allow for an even more specific filtering. To start with, let's take a look at the Equity Style Box. The Equity Style Box is unique to Morningstar and provides powerful means of refining your search.
Say, you're looking specifically for a large- or mid-sized growth equity. In order to view equities in that category, simply select the upper-right and middle-right squares. You'll notice the results in the right have automatically updated to reflect your applied filter. Now, the real power of this new Stock Screener is the ability to layer filters.
In order to demonstrate, click on analyst recommendations to open the drop down menu. If you are a premium subscriber, you'll see that the option to filter by recommendation is available. Now, let's assume we are looking for undervalued equities. Select buy and accumulate. There you go. With two simple filters we've gone from thousands of equities to just 15. From here, you can select the equity to view its profile. You can even add it to your portfolio.
To clear a single filter, simply click on the tab for the filter you wish to remove. In our case, let's remove the Equity Style Box. To remove all filters, simply click the Reset Filters button.
Filters can also be applied across the other screening options. Select Valuation; then select Dividend Yield. This will reveal a slider that allows you to filter between a set of minimum and maximum values. If you move the Dividend Yield slider to the right, you will see the results narrowing down. Remember, we still have our large and mid-sized growth filters applied. We now have layered that Equity Style Box filter with a Dividend Yield filter. Once again, we've trimmed thousands of equities down to just a handful that meet our desired criteria.
This is the true power of our new Stock Screener tool. As a premium member, you are now able to screen data in a way that was never before possible. If you are not currently a premium member, take a free trial.
Any questions? Please contact our customer service team./video/transcript/2510 mailto: ?subject=Introducing New Stock Screener&body=http://www.morningstar.com.au/video/story/2510 Introducing Portfolio X-Ray
08/07/2015 Even a well-diversified portfolio can reveal surprises. Find out if your portfolio is too concentrated in a sector, asset class or even a stock. Introducing Portfolio X-Ray Morningstar 08/07/2015 http://video.morningstar.com/aus/video/
In a matter of seconds X-Ray can reveal if your portfolio is well diversified or overly concentrated in a particular security or investment area, helping you reduce your exposure to risk.
Let's see an example. Mr. Jones thought he constructed a well-diversified portfolio of investments tailored to produce income and growth. But look at this two of Mr. Jones top 10 underlying holdings are resource stocks and BHP accounts for more than 8 per cent of his total assets.
Mr. Jones thought he's diverse sounding portfolio would expose him to all sectors. In fact 23 per cent of his portfolio is concentrated in basic materials companies. He also assumed his portfolio was invested in Australian assets, but X-Ray shows more than 20 per cent is invested outside Australia.
Even a portfolio containing diverse sounding investments can reveal surprises when x-rayed. X-Ray your portfolio now. Portfolio X-Ray is a benefit of premium membership. If you are not a premium member you can get access to the tool instantly when you take a 4-week free trial.
01/07/2015 Get an in-depth analysis of a stock using Morningstar's new powerful chart tool including company and benchmark comparisons. Introducing new stock charts Morningstar 01/07/2015 http://video.morningstar.com/aus/video/
Welcome back at Morningstar we are constantly looking for innovative ways to examine data. Sometimes this means searching for new data and sometimes it means looking at the old data in a new way.
Let's try it now. To begin let's search for an ASX listed equity for this example we're going to use BHP Billiton. Type the ASX code BHP in the search box then click Go. This will open an in-depth analysis of the security including Morningstar's powerful charting tool. We've probably seen similar layouts to this in the past across the top we have noticed the various time intervals available. Let's select 3 years.
Notice how the chart updates to reflect the market price for the past 3 years. Moving across the chart will display additional information for any given date within that time period. You can also manually enter any time frame you wish or use the slider to define the time interval to be displayed on the X axis. Increasing the interval can make it easier to distinguish trends over time while decreasing the interval provides additional detail.
Now let's examine some of the more advanced features of this tool. Say we want to compare two different securities it's easier than ever with the Morningstar Charting Tool. Simply click compare and enter the ASX code of the comparative security. For this example let's compare BHP to Rio Tinto.
Notice how second line appears on our chart. However it seems rather cluttered and it's difficult to make out exactly what's going on here. To better distinguish some of the trends between these two let's change the interval to weekly we can now analyze these two securities much more easily.
Another powerful indicator of performance is a benchmark comparison. Let's see how our two securities compare to the benchmark like the S&P ASX 200. To compare simply enter the ASX index code for the benchmark you wish to compare. As you can see a dropdown appears with suggestions. Since we were looking for the S&P ASX 200 you can just click away. As you can see the chart is automatically being updated with our most recent selection.
To remove a comparison simply click the X in the column of any given security or benchmark. With Morningstar's charting tool you can also look at some very useful indicators. One of the most helpful is dividends. To see past disbursements, simply select dividends from the events menu.
You can also apply more complex indicators such as the Simple Moving Average, Bollinger Bands and Direction of Moving Index. To do so simply select an indicator from the menu and set the period than click add. Removing events and indicators is simple either do it one by one or select reset to return to the default view.
Finally we can adjust the charts basic properties with a display tab. The chart cursor menu will change how the cursor is tracked on the chart. Adjusting chart type allows us to examine the same data from a new perspective. Some useful types include Above/Below, Candle Stick and percent growth. Combined with comparison functionality and indicators discussed earlier the Morningstar Stock Chart features powerful and innovative way to examine old data.
We hope you found this tutorial informative and useful. Thanks for watching.
04/04/2014 An economic moat provides a gauge of a company's competitive advantages and overall strength, and it is a highly valuable tool for investors of all levels. Why moats matter Morningstar US 04/04/2014 http://video.morningstar.com/aus/video/
No transcript is available for this video./video/transcript/2396 mailto: ?subject=Why moats matter&body=http://www.morningstar.com.au/video/story/2396 The 5 sources of moat
21/06/2012 Morningstar US' Paul Larson breaks down the five ways firms can keep competitors at bay and which ways are more durable over time. The 5 sources of moat Jeremy Glaser 21/06/2012 http://video.morningstar.com/aus/video/120612_moat_mstar_audio.mp4
Jeremy Glaser: For Morningstar, I am Jeremy Glaser. Finding long-term competitive advantages, or economic moats, has long been a cornerstone of our equity research process. I'm here today with chief equity strategist Paul Larson to see what the sources of these moats are and to hear some new insights that he has on them.
Paul, thanks for joining me today.
Paul Larson: Glad to be here again.
Glaser: Let's start with the source of that economic moat, those competitive advantages. What are some ways that businesses can really put some distance between themselves and their would-be competitors?
Larson: We found five major sources of moats, and those sources are one, the network effect, and this is an effect where when you have customers that start using a network, that network suddenly becomes more valuable for all the other users of the network. Some examples here like eBay. It has the most buyers, and therefore it has the most sellers. And it has the most sellers because it has the most buyers. It's a virtuous circle. A more recent example would be a company like Facebook. When you or I join Facebook, Facebook suddenly becomes more valuable for all of our friends and as more of our friends join Facebook, it's more valuable for us. So, that's a network effect.
Another source of economic moat is customer switching costs, and these are the inconveniences that customers would have when they switch from one product to another. As they say time is money and money is time. It may not cost money to switch from one service provider to another, but if it costs time that's the same thing.
Another source is intangible assets. These are things like patents, basically an explicit monopoly, government licenses that explicitly block competition. Or [this can be a source] if a company has a strong brand that allows it some pricing power for that particular brand.
Another competitive advantage is something that we call efficient scale, and this is a dynamic where you have a limited market that is being efficiently served by one or a very small number of competitors, and some markets are just natural monopolies or natural oligopolies. A great example here are the airport companies like the Mexican airports. Most cities can't support just one major commercial airport, so it doesn't make economic sense to have more than one. If you have it, you benefit.
And the final source of moat is cost advantage, and this is simply when you have a company that can provide a better service at a lower cost than the competition that allows the company to either have a fatter profit margin or the same profit margin as the competitors, but in theory higher volume and higher asset turnover.
Glaser: I know you've done a lot of research into how sustainable some of these sources of advantage are. When you take a look across different types of moats, do some stand out to you as really being kind of a better moat, one that's going to last longer than some of the other reasons?
Larson: Yes. One of the things I recently did is categorize each and every company that has a wide- and narrow-moat rating by their source or sources of economic moat. And what we found is companies that benefit from the intangible assets actually have the best returns on capital by a fairly wide margin relative to the other sources of moat. And digging into why that might potentially be, you have a large exposure to the health-care sector, which basically patents [make up] the moat there. Also you have a larger exposure to the consumer sectors where you have these large relatively stable companies that benefit from brands. The health-care and the consumer companies certainly have high returns on capital, and that contributes to the intangible assets cohort having the absolute highest returns on capital.
Conversely, the source of moat that has the lowest fundamental performance [is found with] the efficient-scale companies, and this makes sense if you think about it intuitively. The efficient-scale dynamic is based on companies having an attractive niche that they have positive economic profits, that they have a moat, but not so profitable and so attractive that they are going to attract new competition into the market. So, it makes sense that the efficient-scale companies would have the lowest returns on capital.
Glaser: Now, when you looked at individual companies and were just looking if they are wide- or narrow-moat, what were some of the differences between wide and narrow? What were some the sources that would have contributed to being one or the other?
Larson: Well, we found that the wide-moat firms are more profitable than the narrow-moat firms. I think, there is zero surprise here because the factors that we're looking at, such as return on invested capital, return on equity, return of assets, so on and so forth, are the things that we look at when we're actually assigning the economic moat.
Now, it's not the absolute level of return on invested capital that we care about when we're assigning the economic moat rating, it's actually the duration of the excess profit over the company's cost of capital. I'll give you an example, if you have a random fashion retailer that happens to get lucky, hit some fashion trend and has a 50% return on capital for a year or two, we're not automatically going to say, "Well, gee, that's a wide-moat firm. They have huge returns on invested capital." They just got lucky.
But if you look at a company like a railroad or a pipeline, these are companies that don't have high returns on invested capital. They are actually quite low, around 10%. But the sustainability of that return is exceptionally long, and that's what we look at when we're assigning our economic moat rating, the sustainability and not the absolute level.
Glaser: The more of those sources that you have, it seems like it's easier to kind of extend your benefit over the decades.
Larson: Also, when you have a higher return, if you're going to have a given variability of earnings over time, if you have a higher return on invested capital to begin with, you have a little bit more of a buffer before you hit that cost of capital than if you have a lower return.
Glaser: You mentioned that some of the wide-moat companies might not have a huge return on capital, but are going to earn that over a long period of time. What about the stability of earnings? How important is that then in determining the moat rating?
Larson: It is relatively important. One of the interesting things that I found in the study looking at the sources of economic moat is that the network-effect companies actually have the least stability in terms of their earnings. What I did is I took a 10-year history of all these network-effect companies and looked at the time series and how the earnings changed over time, and network effect by far had the least stability. Meanwhile, the cost-advantage and also the intangible-asset firms did relatively well.
Glaser: Paul, once investors are kind of armed with these economic moat ratings, what's the best way to actually invest in them? What's the best way to really think about actually putting your money behind some of these names?
Larson: Well, I think one of the bottom lines here is that wide-moat firms are fundamentally are better companies than narrow moat firms. Surprise, surprise there. Also companies that have more competitive advantages had better fundamental performance returns on capital than companies that only had a single competitive advantage, all else equal. Also I'd say that for intangible-asset companies, while the moat might not be as identifiable as some of the other sources, the intangible-assets source is relatively attractive. So don't downplay brands and patents and such.
Glaser: Paul thanks for your thoughts on moats today.
Larson: Thanks for having me.
Glaser: From Morningstar, I'm Jeremy Glaser./video/transcript/2152 mailto: ?subject=The 5 sources of moat&body=http://www.morningstar.com.au/video/story/2152 Basics of stock evaluation
02/05/2012 We take a look at some of the qualities Morningstar looks for when it comes to share investing, as well as some of the warnings signs. Basics of stock evaluation Nicholas Grove 02/05/2012 http://video.morningstar.com/aus/video/120502_investing101_audio.mp4
Nicholas Grove: Well, it's generally accepted that shares can rise more strongly than fixed interest investments over long periods of time, the question still stands: what quality should you look for when it comes to a stock? Here to give us a few ideas, I am joined by Morningstar's Michael Wu.
Michael, thanks very much for joining us.
Michael Wu: It's nice to be here.
Grove: First of all Michael, what are some of the qualities you look for when it comes to a stock and can you also expand upon the Morningstar concept of a moat?
Wu: Well, Nick, let's start with the definition of a moat. A moat is basically the water around a castle. The water basically protects a castle from attackers. So, the same concept can be applied to a business. A very good industry will attract quite - plenty of competition and what economic moat is what kind of competitive advantage a company has in sustaining that return on capital that exceeds the weighted average cost of capital.
We basically assign a moat rating based on how long they can sustain it, a company that can sustain over 10 years will have a narrow moat, and a wide moat for 20 years. Obviously, a company with no competitive advantage will have no moat rating.
Grove: Michael, what kind of criteria are required for a moat rating?
Wu: Nick, there's a number of criterias in Morningstar that we look for. The first one is an intangible asset. What intangible asset is, an asset that's quite unique to the firm and that can come in the form of a patent, a brand or regulatory license. An example could be SP AusNet, where they have a perpetual license in operating a transmission line, an electricity distribution network in Victoria.
Another criteria that we have is cost advantage. A cost advantage is where a player has a sustainable lower cost structure over their competitors, an example - a prime example is Woolworths, where they have a wide economic moat rating. Basically, Woolworths has a significant footprint right across Australia, they've got a large efficient supply chain and that allows them to operate at a very low cost and in turn they can pass on those prices, low prices to consumers.
Another criteria we look at is switching cost, where a firm's product makes it very difficult and costly in the form of time and both time and money for them to switch to another provider. So, a prime example is the banks where the products that's offered by banks are quite common, but it makes it very time consuming for depositors and borrowers to switch between service providers.
The fourth criteria we look at is network effect. Basically, what a network effect is when additional users take up this product or service it enhances the value of that particular product. An example is Trade Me, which is an eBay online auction site in New Zealand, who got a wide moat rating on it. Basically, when more users use that website it enhances the value. It has more people looking at listings and making bids, so it attracts both buyers and sellers on to the site.
The last criteria we look at is efficient scale. Efficient scale is where a market is dominated by two players and this market tends to be quite small. An example is the telecommunication market in New Zealand, where the industry is served by Telecom and Vodafone, they dominate the market and basically they have economies of scale, which limits competitors from entering the market.
Grove: On the flipside Michael, what are some of the warning signs to look for when it comes to evaluating a company?
Wu: It should be constantly looking at companies and industry how that changes the company's competitive advantage. These factors can come from both external and internal. Externally, we look at how new entrants would enter the market, how it would shake up the competitors of the company. An example, if we go back to the early example is Woolworths, obviously, there are new entrants coming in with Aldi and international players like Costco. So that's going to increase the competitiveness of the industry and investors should be mindful of that.
Grove: Finally Michael should an investor only look at buying stocks that pay dividends and if not, why not? We know that diversification across asset classes is important, but is this also important when it comes to the equity market?
Wu: Well Nick, I think an investor should look at diversification in the context of their entire portfolio. Whether a company pays a dividend now or in the future, it really depends on the company itself and the investor individually. So from a company standpoint, it depends on where they are in their business cycle in the industry cycle, what kind of projects they have in hand at the moment. If a company for example, an emerging company in a fast-growing market, perfectly they have quite a number of projects that increases the value of the company.
From a company standpoint, it depends on the capital management strategy where they are in the business cycle and in the industry cycle. A fast-growing firm in an emerging market, there should be quite a number of projects that could increase the shareholder value. From that standpoint we see those companies - it's just better for them to reinvest in the business, instead of paying out dividends. Comparatively, in a company in a very mature market with limited projects, obviously we do want to see the company return dividends to shareholders, as well as maybe perhaps a share buyback program.
From an investor perspective, really it depends on the individual circumstance. This includes the dependence on the cash flow in the form of dividends or for example what the tax status is. For example, a person on a high tax bracket would not prefer dividend being paid out now, which could lift tax payable in this period. To wrap up, it really depends on the investor themselves, so what they should do is, look at the investments - individual investments in the context of the entire portfolio, and remember to consider both risk and return.
Grove: Michael, thanks very much for joining us.
Wu: It's good to be here, Nick.
Grove: To read more on the basics of stock evaluation, please visit the Morningstar.com.au Learn tab and click on the link below.
19/04/2012 Morningstar's Christine Benz offers guidelines for prioritizing investment savings with paying down mortgage, credit card, and student loan debt. From Morningstar US Pay off debt or invest? Rachel Haig 19/04/2012 http://video.morningstar.com/aus/video/120419_debt_us_audio.mp4
Rachel Haig: I'm Rachel Haig from Morningstar.com. A big question for a lot of investors is what is the best way to use their money? If they don't have enough to do both, does it make more sense to invest or to pay off debt? Here with me to address some of these issues is Morningstar's director of personal finance, Christine Benz. Thanks for joining me, Christine.
Christine Benz: Rachel, nice to be here.
Haig: So, where should someone start if they're grappling with this decision?
Benz: One obvious starting point is if you have high-interest credit card debt. In that case, it's very unlikely that you'll earn 18% or 20% by investing in the market, so paying off that credit card debt is going to be, by far, the best return on your capital.
One other area would be setting up an emergency fund, because the worst thing would be to find yourself digging an even bigger hole by layering on more credit card debt while you're paying off additional credit card debt. So you want to carve out that emergency fund, usually three to six months worth of living expenses.
And finally, if you're earning a 401(k) match, not investing in the 401K plan is the equivalent of turning away free money.
So those should be three starting points for anyone who's wrestling with the question of whether to pay off debt or invest.
Haig: When you're looking at which type of debt you should pay off first, obviously high-interest credit card debt, where you're paying a lot and not getting anything for that, is one of the first things you should eliminate. But how should you calculate it, generally? Which sort of debt is worth carrying?
Benz: Other types of debt, like mortgage debt and student loans, sometimes are characterized as good debt. But realistically, I think you have to think about whether you could earn the rate of return by investing in the market that you're paying to service your mortgage loan, or even your student loan. So even though those rates might seem nice and low on paper, paying them off or prepaying them is a sure return on your money.
Another consideration to bear in mind is whether you're earning any sort of tax deduction on your interest. If you are earning a tax reduction on your mortgage interest or on your student loan interest, that may push them down a little further on the priority scale versus investing.
Haig: OK. And what impact would it have if someone's carrying private mortgage insurance? Does that play into this at all?
Benz: It's definitely a consideration. Typically, you have to pay private mortgage insurance if you have less than 20% equity in your property. So if you are someone who's on the hook for PMI, that would encourage you to prepay the mortgage on a more aggressive schedule than perhaps your mortgage lender requires you to do. That would be another argument for definitely paying an extra $100, $200 a month to get rid of that PMI as soon as you possibly can.
Haig: All right. And what about for people who are younger or people who are further along in their investing careers? How does that factor into their decision?
Benz: Your portfolio's stock-bond mix should definitely figure into the decision. One way to think about it is, what return am I likely to earn on this portfolio? If I'm someone who's later in life and my portfolio is consisting mainly of bonds and cash, realistically, my return on that portfolio may not be that high, and I may well be better off paying down my mortgage or paying whatever debt I have off versus investing additionally in that investment portfolio.
So asset allocation is definitely a consideration. Someone who is earlier in life, and maybe their portfolio is predominantly stocks, that's a greater argument for investing in the portfolio versus paying down, say, mortgage debt.
Haig: Well, those sound like great guidelines. Thanks for joining us today.
Benz: Thanks, Rachel.
Haig: For Morningstar.com, I'm Rachel Haig.
16/04/2012 Investment frauds tend to be perpetrated on men who are in their mid-50s and who may actually be experienced investors, says UCLA professor Dr. Shelley Taylor. Who's most vulnerable to financial fraud? Christine Benz 16/04/2012 http://video.morningstar.com/aus/video/120314_taylor_mstar_audio.mp4
Christine Benz: Hi, I'm Christine Benz for Morningstar.
The Madoff case was perhaps the best known instance of financial fraud, but incidences of financial fraud go on every day.
Here to discuss how seniors are often the targets of financial fraud, as well as what they can do to protect themselves, is Dr. Shelley Taylor. She's is a professor at UCLA.
Dr. Taylor, thank you so much for being here.
Shelley Taylor: You're very welcome.
Benz: I'd like to start with the general way of the land in terms of financial fraud. Can you share any statistics about whether it has increased, decreased in recent years?
Taylor: Yes. Financial fraud is going up tremendously quickly. There are over 30 million complaints a year, and those are just the reported ones. We know there are a lot that go unreported. And of interest, more than half of these complaints are filed by adults, who are age 55 and up, so it's true that older adults are disproportionately the victims of financial fraud.
Benz: So, can you make any generalities about the types of financial fraud that are growing in number over the past few years?
Taylor: Well, the most common ones are foreign lotteries, unauthorized billings to credit cards, weight loss scams, but the most expensive typically are the investment frauds.
Benz: You are a professor of psychology, and you've been looking at the intersection between psychological aspects that tend to make people more vulnerable to financial fraud. Can you share any of those commonalties?
Taylor: Yes. There are some interesting simple pictures you can draw of who is most vulnerable to different kinds of fraud. So, for example, lottery or charitable giving scams are more likely to be perpetrated on older women who live alone--typically women in their 70s.
On the other hand, investment frauds, which are the most expensive, tend to be perpetrated on men who are in their mid-50s, who are actually experienced investors, who have taken risks before, and who are pretty knowledgeable about investments.
Benz: Can you conjecture about what would make that particular demographic vulnerable? Is it simply that men are out there investing more than women--I'm sure that's a piece of it.
Taylor: A piece of it is that fact. There are several reasons. One is that from age 55 on, people are coming into more of their funds. ... They have more capital to begin with. They may be transferring money from a 401(k) to an IRA, and so the money is moving, and when the money is moving, people tend to be targeted. They get phone calls. They get free dinner offers. They get mail solicitations, and experienced investors are often under the impression that they are good at this, and so they can pick the good ones out of these many opportunities, and they are just often wrong.
Benz: So, I know that there has been a lot of research about decline in cognitive functioning once folks reach a certain age, and of course, it certainly would vary by the individual. But can you talk about the intersection there, that if someone is experiencing some cognitive decline they might tend to be more vulnerable?
Taylor: Yes. That's clearly a factor. Particularly frauds among much older adults, and one of the things that offspring of aging parents need to do is keep a general eye on cognitive functioning, because as cognitive functioning declines, obviously money management skills aren't going up, and so that's when they may need to actually take a closer look at where the money is going, how it's being managed, and so on.
Benz: Now, what about [the fact that] the brain is different as we age? Is there anything that people should be aware of in terms of actual physical changes in the brain?
Taylor: Yes, it does appear that the way in which information is processed in older adults' brains is somewhat different from younger adults in ways that may make them more vulnerable. There is a region of the brain called the amygdala. The amygdala is one area that sends warning signals to people. It's what makes you think, "this doesn't feel right." It leads to stress hormones.
Older adults' amygdalas are less active. In some cases, there is actual shrinkage. It looks as though different parts of the brain, the insula being one, picks up some of those functions, but not with the same degree of alarm or concern.
So, on the one hand, this is great for older adults, because it means they don't experience scary things to the same degree as younger adults do. They are not as often on edge. But if there are environmental cues that they should be paying attention to, the brain may not be processing those particularly well, and so that's something for which our studies have tried to provide and have provided evidence.
Benz: This is just a normal part of the aging process. This is setting aside issues that might be going on in terms of dementia or Alzheimer's?
Taylor: Exactly, this is a normal part of aging. Older adults are less easily distressed by negative events. They look for a more positive outlook on life. It's a natural part of aging. It doesn't have anything to do with cognitive decline, but it may nonetheless make people vulnerable.
Benz: So, if you are an adult child of an aging parent, what are some things that should set off alarm bells or make you pay even closer attention to your parents' finances than you otherwise would?
Taylor: Well, I would say first general cognitive decline as we've already discussed. Second, if the parent is starting to be evasive or secretive about where money is going. And a third factor is new best friends. What you sometimes find is just preceding a major fraudulent event, there will be someone who has made their way into the older adult's life and gained that person's trust. Our work actually has focused especially on the fact that older adults don't seem to process cues to deception or untrustworthiness terribly well.
Benz: So what kinds of cues might those be?
Taylor: Well, let me give you an example. I talked to the high school teacher, who had spent his whole career helping kids find the right college and giving them advice, and he loaned $15,000, or believed he had loaned $15,000, to a nice young man as he referred to him, and all reports were that this was someone who was pretty unkempt, who was probably a drug addict, who had broken teeth, dirty clothes, and smelled bad. Now those are all cues that should tell you very quickly, this is not somebody to whom you want to give $15,000, but these cues had not had the effect that they would have at a younger age. So, it's that kind of thing. It's the inability both visually and also on the part of the brain to recognize factors that should be warning signs.
Benz: Now, how about for seniors themselves? Do you have any tips on how they can protect themselves against being victimized by financial frauds?
Taylor: Well, I think there are several things. One is the "just hang-up rule." When people call with solicitations over the phone, just hang up. It's hard to do, when people have been trained to be polite and nice, but that's important. Ripping up solicitations that come in the mail. Not going to free lunches and dinners. Those can often be a source of fraudulent extraction of funds. Not accepting hot tips from anyone, that's a general investment rule. It applies especially to seniors. And not going after a big score. One of the temptations that people experience, seniors especially that are close to retirement or in retirement, is that they need to make up money, or they feel they do, from the financial downturn, and so they're watching for a big score. Money isn't typically made on big scores, and so being wary of those kinds of potential opportunities would be another cue.
Benz: One thing that I've read is that, there may be some generational aspects to this as well. So, perhaps the folks who are in retirement, in late retirement, right now may be especially polite versus the folks younger than them. Would you say that that might be an aspect here as well?
Taylor: It's exactly right. One of the things we find is that our older adults are typically more trusting. So, if we ask questions about can people generally be trusted, the older adults are much more likely to say yes than the younger adults do. So, I think that we've become a less-trusting culture over time, but we've left a quite vulnerable older adult group.
Benz: Dr. Taylor, this is terrific insight, and we very much appreciate you sharing it with us. This is a very important area, and I look forward to what you and your group are working on in the future. Thank you for being here.
Taylor: Well, thank you very much.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com./video/transcript/2110 mailto: ?subject=Who's most vulnerable to financial fraud?&body=http://www.morningstar.com.au/video/story/2110 Creating a goof-proof plan for your spouse
20/03/2012 Regular communication and a simple investment strategy will help your surviving spouse thrive, says advisor Stacy Francis. Creating a goof-proof plan for your spouse Christine Benz 20/03/2012 http://video.morningstar.com/aus/video/120229_francis2_mstar_audio.mp4
Christine Benz: Hi. I'm Christine Benz for Morningstar. Many financially savvy individuals would like to create financial plans that are goof proof, in case they should predecease their spouses. Here to share some tips for doing that is Stacy Francis. She is president of Francis Financial in New York City.
Stacy, thank you so much for joining us.
Stacy Francis: Thank you. I'm excited to be here.
Benz: One topic I'd like to cover with you Stacy is, how financially savvy spouses, the one who is hands-on in the household with the money, can help leave the nonfinancially savvy spouse in good shape. So if the first spouse predeceases the other one, how can they make sure that the nonfinancially savvy spouse has kind of a plan and the ability to navigate? What are your tips?
Francis: The biggest tip is to make sure that you understand what's going on, and we all have busy lives. Often you just don't find the time to really sit down and review everything. So instead, what you should be doing is making a financial date. This is a financial date once a month, and on that financial date, you bring the papers, you bring everything. You spend the first half hour really talking about your finances with regard to investments, life insurance, disability, and even just those normal household bills that seem to always be coming in the door.
If you do that on a monthly basis, even if that nonfinancially astute spouse doesn't play as much of role on the day-to-day duties, they will understand the overall picture. And if unfortunately you are not there to help them in the future, they are going to be able to survive and actually really thrive going forward.
Benz: So do you have any tips, Stacy, for organizing documents, to make sure that your spouse could readily put his or her hands on the right information if he or she needed to?
Francis: There are two different file systems that you can have. You can have a file system that's actually a physical file system in your home with tabs listed for insurance, investments, taxes, budgeting, wills, and estate planning.
You can also have it online on your computer with a similar filing system. Both work very well, and which one is going to be right for you is really about your personal situation and your spouse's. Some spouses really don't feel comfortable using the computer and so in that case maybe it's that physical-document program that you would be using.
Others feel very comfortable using that online, but no matter what it is, you need to have that very clear filing system and also keep it up to date. And guess what? The benefits are not necessarily just going to be filed if for some reason you are not here and unfortunately pass away in the future. Having an organized filing system is going to save you hours a year, especially when it comes to tax time, and we know how complicated and frustrating tax time can be.
Benz: So, assuming that a couple doesn't have the time to maybe do that monthly date where they talk about finances, what would you say are sort of the bare-minimum details that one should be sharing with one's spouse about the household financial picture?
Francis: Definitely having a balance sheet would be wonderful. If you could update that once a year to show all of your assets and all of the liabilities. If that's all you can do that's still going to put you light years ahead of unfortunately where most couples are at. And it's going to also help that other person know how you are doing financially, so that they are never, ever in the dark. Part of adding to that balance sheet, I would ask only one more document. So, again, it's not a whole lot of homework here, but also ideal to have a list of all your insurances. So, this list would include what you have for disability, life insurance, long-term care, and any other information on that so that the surviving spouses are not in the dark and know exactly what to do to protect themselves.
Benz: How common is it in your experience that couples are really disparate where you've got one part of the couple who is very hands-on and engaged with financial matters and the other one kind of tunes out?
Francis: It's interesting because you would think that that is actually something of the past, but unfortunately what we see is that we do very much, even in this day and age, find one key person in the relationship not having an active role and sometimes not even wanting to have any role. They've actually made that decision that they don't want to be involved.
And unfortunately--and I don't want to make stereotypes--but typically when we find this, it's the woman. And the biggest thing we could say is: "A man is not a financial plan, and you need to know where this money is. You need to know what type of insurance you have." This is because at some time women will find themselves alone, and according to the Institute for a Secure Retirement, the average age of widowhood for woman is age 56, so you need to know this sooner than later.
Benz: It's a really young age. One discussion that we had with some users on our website was how to widow- or widower-proof a portfolio. I was talking with some of our readers, and they were very interested in streamlining their portfolios, getting them more heavily invested in kind of goof-proof investments that don't need a lot of hands-on monitoring. Index funds were increasingly popular among these readers. Is that a strategy you would recommend, so as you age that maybe you position your investments to be a little more hands-off in case your spouse needs to take over for you?
Francis: It is. It's the right thing to do, and you don't have to have an elaborate portfolio to do well in the market. You should have a diversified portfolio, maybe you're using index funds as well, to give you that broad exposure to the market. If you are investing in certain areas that are more sophisticated, maybe even using hedge funds or other types of private equity, that type of portfolio is going to need a lot of maintenance. And if you feel like your spouse is not up to that or does not necessarily have the sophistication, then most likely you have the wrong investment portfolio.
Benz: Stacy, thanks so much for sharing these tips for couples attempting to navigate their financial matters. It was very helpful stuff here, so thank you.
Francis: Thank you. It was great to be part of this.
Benz: I'm Christine Benz for Morningstar. Thanks so much for watching.
19/03/2012 After a recent spate of hybrid issues by some big-name companies over the past few months, Morningstar goes back to basics and gives investors the essentials about these securities. Investing in hybrids 101 Nicholas Grove 19/03/2012 http://video.morningstar.com/aus/video/120319_hybrids_audio.mp4
Nicholas Grove: Investors may have noticed the recent surge in hybrid issues over the past several months from big names such as Woolworths, Origin Energy, Westpac, just to name a few. You may have also heard terms bandied about such as perpetual notes, subordinated notes, and convertible notes, but what are all these instruments, how do they work, and what does it all mean?
Here to teach us a bit about them, I'm joined by Morningstar Equities Analyst, Ravi Reddy.
Ravi, thanks very much for joining us.
Ravi Reddy: Thanks, Nick.
Grove: First of all Ravi, broadly speaking what is meant by the term hybrid?
Reddy: Well, these have certainly been the flavor of the month. If we go back to the Woolworths' notes issue last year, then raisings have been more than A$6 billion. There's been a lot of interest. A hybrid is a security which has both debt and equity characteristics, but it's also being commonly used to describe a pure debt securities, such as subordinated notes and retail bonds. The more correct term for this is interest rate security.
It's important to note, there's not one generic type of security on the issue. Whilst some of the securities only show similarities, each has its own unique terms and conditions. You only have to look at some of the prospectuses, which are more than 100 pages to realize that there are a lot of differences, and each has its own specific terms and conditions.
Grove: What sort of risks do these securities carry, and conversely what are their benefits, particularly when it comes to retail investors?
Reddy: There are quite a number of risks. There is credit risk, interest rate risk, spread risk, liquidity risk, conversion risk, term risk. We discuss these in more detail in the report we've recently published, but I think what investors need to understand is that these aren't bank deposits with a government guarantee. They offer a higher return, which means there is a higher risk. Also, typically these securities are unsecured, and they rank just above ordinary equity. So, what does that mean, in a wind up scenario, you could end up losing all your capital, and this has happened in the past with some previous issues by like Allco Finance, and some of the Babcock & Brown issues, so I think that's what investors need to realize.
Yes, but there are benefits, because it allows investors to invest in a security where they can get a higher rate of return than say a bank deposit, and it also allows investors to - you can trade them, so it means you can - if you do need access to capital you can sell them on market. While they rank above ordinary equity, they tend to be less - the prices tend to be less volatile than ordinary shares, and the other thing is you can get regular distributions. They typically pay distributions quarterly, or - and some pay semi-annually, so there are benefits as long as people understand the risks of what they're getting into.
Grove: Ravi, what sort of qualities do you look for, and should an investor look for, when it comes to these types of securities?
Reddy: We look for a high degree of certainty of getting your capital back, certainty that you'll get distributions, and of course, we look at the yield. The question we ask is, to what degree can the underlying business support the commitments required by the security, and what yield does that justify? So, our preferred exposures in the income securities space are those securities issued by the major banks and the high quality industrials.
Grove: What sort of factors can impact the prices of these securities?
Reddy: There are quite a lot of factors; there's changes in credit spread, changes in the financial position of the issuer or P/Es, changes in regulation or legislation, corporate activity, returns you can get on alternative investments. I'll touch on, probably credit spread is a good one. A credit spread is the interest rate differential between the benchmark rates such as a government bond and a non-government security. Now credit spreads change as there's changes in actual or perceived risks. So, if a credit spread widens, it implies there is a higher risk.
Let's say with a lot of concerns about the financial stability of banks, in such a scenario we'd expect credit spreads to widen on securities issued by banks. Another way of saying that is that we'd expect prices to fall, or the yield to increase.
Grove: Finally, Ravi, where do these sorts of investments fit within a well-diversified conservative long-term portfolio?
Reddy: There are opportunities for capital gain, but the main purpose of investing in these is to get a regular income distribution stream. We suggest that they should be part of a diversified portfolio, and we also suggest that investors should seek profession investment advice before making investment in one of these securities, because they need to be aware of the risks, as we discussed before. They are not like bank deposits, they are riskier, so with a higher return you're going to have a higher risk.
Grove: Ravi, thanks very much for joining us.
Reddy: Thanks, Nick.
Grove: To learn more about investing in hybrids, Morningstar.com.au premium subscribers, can go to our website, click on the 'Hybrids' tab, and click on the link below.
22/02/2011 Morningstar's Heather Brilliant says cash flows, solvency scores and other credit measures can tell us a lot about a company's future. What's in a corporate credit rating? Victoria Tait 22/02/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1793 mailto: ?subject=What's in a corporate credit rating?&body=http://www.morningstar.com.au/video/story/1793 Basic principles of dividend investing
08/03/2011 Morningstar's James Cooper helps those investors new to the sharemarket understand the concept of income stocks. Basic principles of dividend investing Nicholas Grove 08/03/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1804 mailto: ?subject=Basic principles of dividend investing&body=http://www.morningstar.com.au/video/story/1804 Getting the good oil
03/06/2011 Morningstar's Mark Taylor helps investors get a better understanding of what makes a good oil and gas company. Getting the good oil Nicholas Grove 03/06/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1875 mailto: ?subject=Getting the good oil&body=http://www.morningstar.com.au/video/story/1875 Get financially fit for 2012
18/01/2012 Put last year's woes behind you by capitalizing on new opportunities for 2012. Get financially fit for 2012 Jeffrey Hutton 18/01/2012 http://video.morningstar.com/aus/video/120118_fit_audio.mp4
Jeffrey Hutton: 2011 was a tough year for a lot of investors, but 2012 could be different. Lower interest rates, cheaper blue-chip stocks could mean that this is your year to get financially fit. So, joining us to discuss how to do that is Viviane Parsons from the NAB.
Viviane, thanks for joining us.
Viviane Parsons: Thanks, Jeff.
Hutton: Viviane, is 2012 a golden opportunity to get financially fit?
Parsons: I believe so in terms of -- I guess there's two ways to look at it. From an economic point of view, obviously, interest rates are expected to drop, so that means for the Australian mum and dads with a mortgage that they'd obviously be able to pay-off more of their principal debt, if they accelerate their repayments. A good opportunity, I guess, in that sense. For those that actually derive an income from their savings, it's quite the opposite. Their income is going to be reduced, and they may want to look at other avenues to derive an income over the next 12 months.
Hutton: Are we actually being more frugal?
Parsons: I think since the GFC, we've certainly seen a point where people are trying to reduce their debt, or perhaps also liquidate assets to then reduce their overall commitment. But I think 2012 will really see that go a little bit further. People are a little bit more cautious and certainly will try and move ahead without making the same mistakes that they may have done before the GFC.
Hutton: Budget can be pretty daunting, how do you go about making one?
Parsons: Thing you never want to do really, but I guess my advice would be to really make that your new year's resolution. There are some great online tools, moneysmart.gov.au, which is an ASIC sponsored website is a fantastic tool to really prompt you on where you spend your money, help you plan to prioritize, and perhaps also look at what you can save on.
Hutton: Is there a checklist that people should keep in mind?
Parsons: Well, surely, those online tools are a good way to start, but then again look at areas such as what you spend on insurance, what investment products you're invested in, areas where you can perhaps save and as I said earlier, prioritize, really try and spend what you can afford, and don't make the mistake of overspending, get credit card debt accumulated because that obviously is quite clearly not the way to run a budget.
Hutton: Apart from the obvious benefits of getting financially fit; paying off credit card debt, what are the opportunity costs involved? Say, if I have a credit card debt of about $10,000, what could I have used that for?
Parsons: Yes, certainly. 2012 from a market outlook as well, may bring an opportunity, where we see perhaps a comeback in equities. So, that could be certainly the case that people may be too focused on paying debt back and, instead perhaps, should look at avenues to seek some capital growth. I mean, we have been through some very volatile times, and it's likely to perhaps continue. But these times also in history are an opportune time to invest, and yet get some capital growth over the long-term.
Hutton: Lower interest rates are a double edged sword. If term deposits aren't yielding as much as they used to, how do you make up the difference?
Parsons: Yeah. Look, I always try and explain to people that even in retirement, they are most likely not to spend their whole savings in the next couple of years. So certainly there is an incentive to protect the capital from inflation, as well as still seek some capital growth in retirement.
And at the moment, we see for example in Australia, the dividend yields from blue-chip Australian share much higher than what interest rates are doing, plus there's lots of tax incentives that come with that. So, I do believe that anyone approaching retirement certainly should have received advice by now.
For those that are over 50, there's also an opportune time up to June 30th to utilize their salary effectively by salary sacrificing that into superannuation. There is going to be a change in the amount you're able to place into that tax effective retirement scheme. As of 2012 July, the amount is significantly going to be dropped from $50,000 currently to $25,000. So, really people who are in that age bracket should get some advice around that.
Hutton: Generation Y has a reputation for wanting it all and wanting it now. Are they getting better at managing their money?
Parsons: To be honest, I haven't seen it at this stage. I am hopeful that perhaps they will have learned out of this GFC that we've gone through to perhaps align their spending a little bit to what their earnings potential is, but at the moment, yeah I'm quite doubtful. I haven't seen it at this stage.
Hutton: Viviane Parsons, thank you so much for your time today.
Parsons: Thank you.
27/01/2012 Like fear and greed, overconfidence can often be found lurking around investors' biggest mistakes, says US financial planner Carl Richards. The fine line between self-assured and overconfident Chrisitne Benz 27/01/2012 http://video.morningstar.com/aus/video/120111_overconfident_audio.mp4
Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
Investors often behave in ways that run counter to their own interests. Carl Richards, a financial planner, a blogger for The New York Times, and a contributor to MorningstarAdvisor.com, has written a new book that address this tendency, and it's called The Behavior Gap. He is joining me via Skype to talk about it today.
Carl, thank you for joining me.
Carl Richards: My pleasure; thanks for having me.
Benz: There has been a lot of academic research around this topic of investors who are overconfident and how that can impede their investment results. Let's talk about a sketch that you've got in the book on that front and also the experiences that you've had with investors who are overconfident.
Richards: I think overconfidence, besides fear and greed, it seems to be the little third partner of this little group that's always lurking around big mistakes. I think it's so tricky, because overconfidence is exactly how you would expect an expert to behave. [For instance,] you don't want an underconfident surgeon.
Benz: I don't.
Richards: I don't know anybody that does. You also don't want an overconfident surgeon. So where you cross that line between confident and self-assured, and overconfidence is really, really fuzzy.
It's a problem of experts, and so whenever you are taking care of your own money, or if you are offering advice to other people on their money, you've got to consider yourself at least somewhat confident or else you wouldn't be making those decisions.
The key is to figure out when we cross the line from confident to overconfident. It's really challenging. As I say in the book, if you are not worried about overconfidence, it's probably because you are overconfident.
So I think we just need to be more humble about the decisions we make when it comes to investments, and realize that often our gut is wrong on the investment side. Often it would make sense to run ideas past two or three people.
The other tricky thing about overconfidence that's really a whammy is that if you have a plan that you are very confident in, and you hold on and hold on and hold on, and then you finally capitulate, you are the one that's going to suffer the most. Because the people who bailed out early, they didn't suffer nearly as much as you did by being confident in your plan. So there is this really fine line--confident in your plan stick with it.
Benz: So the big risk of being overconfident in your view is that you can position your portfolio to benefit from one outcome but not really position it for outcomes that you didn't anticipate.
Richards: That's really good point. I think we are notorious for not understanding ... we are very bad in understanding things we don't know. I think often you position ... you think you've got one outcome.
We need to pick an individual stock, or even an industry--let's say I really feel strongly that commodities are going to do well next year. The fear with overconfidence is that you position a portfolio in a way that if you are wrong, you are going to really suffer. There is a conversation I like to have called the overconfidence conversation where you just ... give yourself permission to consider what would the impact be if I am right, and what conversely, and be careful, what would the impact be if I am wrong about this decision? How would my life change?
Benz: So the idea is that you don't want to position your portfolio to benefit from all-or-nothing outcomes. You really want to think about what's the devil's advocate case for this thing that I think I am so sure about.
Richards: There can be reasons we'd want to roll the dice on an all-or-nothing outcome. But you certainly wouldn't want to do that without at least recognizing that's what you are doing.
06/02/2012 If someone hypothetically sold everything in your portfolio today and you woke up tomorrow with cash, would you reinvest it the same way? Anchors away from your portfolio plan Christine Benz 06/02/2012 http://video.morningstar.com/aus/video/120111_anchor_mstar_audio.mp4
Christine Benz: Hi, I'm Christine Benz from Morningstar.com.
Investors often behave in ways that run counter to their own interests. Carl Richards, a financial planner, a blogger for The New York Times and a contributor to MorningstarAdvisor.com, has written new book that addresses this tendency, and it's called The Behavior Gap. He is joining me via Skype to talk about it today.
Carl, you've got a great sketch in the book, and I think it comes back to this idea of what a lot of behavioral economists call "anchoring." So let's talk about what that is, and also to the extent that you can offer some concrete ideas for investors to combat that tendency to anchor on what's going on in the present period of time.
Carl Richards: The idea behind anchoring, we all do this, and it's really easy, at least recently it's been, with real estate. We tend to get focused on a price, and it's often either the price we bought an asset at. We could talk about an individual stock; let's say that you paid $50. That's the example I use this sketch. You paid $50 for XYZ stock, or you put $5,000 into a specific mutual fund, and now it's only worth $30; the stock has gone from $50 to $30.
There is this tendency for us to feel like, "if it just gets back to $50, I'll sell it. I made a mistake," because we don't want to realize the loss. Selling it is actually the physical act that represents recognizing a loss, recognizing a mistake--I made a mistake--and so as long as we don't sell it, we can still pretend like maybe we didn't make a mistake.
So we anchor on this $50, and I hear people say this all time, "I'll just sell that when it gets back where I bought it." The thing we have to realize, and it is the same with real estate, if you're trying to sell a rental property or your own residence, and you paid $200,000 for the place and it's only worth $150,000, nobody cares that you paid $200,000. The market, and back to the stock example, nobody cares if you paid $50 and it's trading for $30. Nobody cares--the market doesn't care. The market doesn't care.
Benz: The stock doesn't know it was once $50.
Richards: The stock doesn't know, and nobody else in the market cares what you paid for it. All they care for is what's the value today. ... And I think we do this investments a lot; we think, "I inherited this from grandmother." We have these are emotional reasons, sometimes it's anchoring, sometimes it's other emotional reasons that we hold on to investments, and we end up with this sort of collection, almost like a smorgasbord; instead of a portfolio, we have this sort of collection that, "I bought that back here, and I bought this here, and I haven't sold it." Sometimes they represent skeletons in the closet.
I think one really helpful thing is what I call the overnight test, and it's just to take your portfolio--and I think it's helpful to do this once a year--I don't think you should be making these changes, but ask yourself this question: "If somebody sold everything in my portfolio today"--and again, this is totally hypothetical, don't worry about taxes, don't worry about commissions or fees, just hypothetically, if somebody sold everything in your portfolio today and you woke up tomorrow with cash, would you reinvest it the same way?
Almost universally when I ask that question, people say "no." I know that XYZ stock was a mistake or it's not appropriate for my portfolio or just because my grandmother owned it and I inherited it from her doesn't make it right for me, but there are these emotional reasons.
So once you've had that discussion, and said no I wouldn't reinvest it the same way, then you can get to work on the practical application of that information: What are the tax implications and how would you reinvest it? But I think it's helpful to at least start the conversation about, am I holding on to these things for emotional reasons that no longer make sense?
Benz: Carl, you also were forthright. You shared an example about your own experiences with real estate. Is that something that you think exemplifies this concept of anchoring?
Richards: Anchoring could have been a problem. I think the other problem at least with my own experience, we made some mistakes in our real estate decisions. We happen to live in Las Vegas. So the mistakes were amplified, because the market was so wild, and I think what you're referring to is, I wrote about it pretty publicly in the New York Times, and one of the mistakes we made, which there is a sketch earlier on in the book, is we projected the recent past and this is ... we just ... humans do this. We take the recent past, and we project into the future forever.
When real estate in Las Vegas was going up, and my income was growing and everything was great, it was very easy to say, "oh, this will continue." And we do this with the equity markets.
When things are bad, people say "It's going to bad forever; it's never going to change." We've got to remember, things change, and projecting the recent past into the future is a very, very dangerous game, and that's what happened. That's one of the classic mistakes we made.
25/11/2011 Given the importance of income stocks in a good portfolio, we help investors get a better understanding of the notion of "grossed-up yield". The importance of grossed-up yield Nicholas Grove 25/11/2011 http://video.morningstar.com/aus/video/
Nicholas Grove: With a lot of emphasis being placed nowadays on the place of solid dividend paying stocks in a good portfolio, investors may be reading a lot about the notion of grossed up yield. Here to help us get a better understanding of the concept, I'm joined by Morningstar's Senior Equities Analyst, James Cooper. James, thanks very much for joining us.
James Cooper: No problem, Nick.
Grove: First of all, James, what is meant by grossed-up yield?
Cooper: Look, the whole purpose of grossing up a dividend is to work out what -- how much profit is being distributed before tax. So, if you look at a company's profit and loss, they make a profit before tax and then pay a certain amount of tax on that profit. The corporate tax rate is 30%, but they may, for a variety of reasons, pay more or less than 30%. But the idea is to take the dividend which is paid out of those profits and work out what that dividend equated to before tax was paid by the Company.
So, if the Company has paid a 30% tax rate, imagine that they earned $100 of profit before tax. They then paid $30 of tax, giving them a profit after tax of $70. Now, if they then distributed that all as a dividend, they would have paid out $70. Imagine you were the sole shareholder, you received that $70. To gross that back up to the pre-tax amount, you multiply it by 100 over 70 right, which is –happens to be about 1.42, and that gets you back to the pre-tax amount.
Then as the shareholder who has received that dividend, when calculating what tax you pay on that dividend, you get a credit, a franking credit for the tax that was paid by the Company. So, the purpose is to ensure that the double taxation doesn't occur. You know, you own a company, it's paid tax, you've effectively paid tax. Why should you then pay a full amount of tax on that dividend when it's distributed to you if it's already taxed?
So, that's what it is. Sometimes, if the Company may have paid less tax than the 30%, you then receive a dividend, which is not termed a 100% franked. It might only be -- let's say it's 50% franked, meaning that only half the tax has been paid on that pre-tax amount. In which case, when you gross up your dividend for the purpose of calculating your tax, you then say 50% of that 0.42, so roughly 0.21 is then used in the calculation. So, it becomes 1.21 times the dividend that you have received. That gives the pre-tax amount. You then calculate the amount of tax as an individual you would pay on that amount of profit and then subtract what the company actually paid and you end up with paying the full amount of tax in the individual's hands, but not doubly taxed.
Grove: James, why is grossed up yield important?
Cooper: Well, if you look across a range of companies, you'll -- almost always dividend yields are just given in a -- as a net amount. They don't gross it up. They just tell you, you know, such and such is paying 5%. This one is paying 7%. This one is paying 3%. Now, if you don't gross them up, you actually get a false view of what that yield really is after-tax in the hands of the shareholder. So, the 6% yield, if it's not franked, will not actually be as valuable in most shareholders' hands as a 5% fully franked yield once you've got the benefit of the franking.
Grove: Finally James, just to reiterate, how do you calculate grossed up yield?
Cooper: Yes. Well, you start off saying, with your 100 over 70, which again is -- it's round about 1.42, and you multiply your dividend yield, say it's 5%, you'll multiply that by 1.42, which comes to a little bit over 7 I think it is, and that's your true yield which you then need to apply your personal tax rate to.
Again, if it's not 100%, if it's 70% franked, you then have to take that 0.42 part of that 1.42, so 70% of that 0.42 which gives you roughly 0.3. The equation then is 1.3 times the dividend yield.
Grove: James, thanks very much for joining us.
Cooper: That's a pleasure Nick.
26/09/2011 In this educational video, Morningstar helps novice investors understand some of the terms often found when you first pick up a mining company research report. Mining sector investing 101 Nicholas Grove 26/09/2011 http://video.morningstar.com/aus/video/
Nicholas Grove: Even if you're only a new comer to the share market, you're likely to have heard the names BHP Billiton and Rio Tinto. In this video, Morningstar Senior Equity Analyst, Gareth James helps novice investors understand some of the terms often found when you first pick up a mining company equities research report.
Gareth welcome.
Gareth James: Thanks, Nick.
Grove: First of all, Gareth, why should investors be interested in the mining sector?
James: Well, the mining sector is an extremely large part of the Australian market. There are around 2,300 companies listed on the Australian Stock Exchange, and around a third or 750 of those companies are mining companies. So, investors have a lot of companies to choose from. In the Australian economy, the mining sector is obviously extremely important too. Australia's two largest exports are iron ore and then coal. So, mining is very important to Australia.
Grove: What kind of investors should consider buying shares in mining companies?
James: The mining sector is typically considered a high-risk sector, particularly the small end of the mining sector. So, those companies with market capitalizations below $100 million, they are particularly high risk investments, so they tend to suit speculative investors. At the other end of the mining sector, we have the large, diversified, blue-chip mining companies. They tend to be highly profitable businesses, dividend paying stocks. So, we consider those companies to be medium risk, so suitable for long-term portfolio.
Grove: Gareth, what should investors look for in a mining company?
James: You look for different things, depending on the mining company. So, if you're look at small mining companies, those companies don't tend to be profitable, they tend to be exploration companies. So, you really need to focus on how much cash those companies have and how quickly they're getting through that cash. You also need to look at the track record of the directors and senior management, because when you're investing in those companies, you're really backing the individuals who are running the company.
At the other end of the market, for the larger mining companies, such as the blue-chip, diversified companies, you need to look at what's in that portfolio and what kind of commodities they're producing. You also need to look at what we refer to as the cash cost. Now, this is the operating costs per units of commodity produced. So, large mining companies will have very low cash cost and that's what you're really looking for in those stocks.
For the larger companies as well, you really need to have a good understanding of how much of the commodities they actually own. So, to do this, you can look at their resource and their reserve statements, and those statements tell you how much of the particular commodities they own in the ground. So, that's important, because that tells you how long that mine life is.
So the other thing that you need to be very aware of with mining companies is that capital expenditure. So, we'll use the term CapEx. For the smaller companies, this is very important because they can have a high CapEx, and they obviously don't have any earnings. So, it's important to understand how quickly they're getting through their cash pile.
For the larger mining companies, it's important too, because although they may have very high operating cash flow, if they have extremely high capital expenditure, then they may not generate very high free cash flow. Obviously, free cash flow is the important metric when we're looking at valuation of any company.
Grove: Finally, Gareth, what should investors do to get started?
James: So, I think the mining sector is a high risk sector. It can offer extremely high potential gains, but you do have to be aware of the risks. So, I think what we would recommend is that, investors take their time. Before investing they need to do a lot of research, so they can use the Morningstar website to look into companies' financial backgrounds. They can look into directors and senior management using the website too.
They can use Morningstar's equity research to understand more about the companies. Investors can also contact the research analysts here at Morningstar too. So, my advice would be to take your time, possibly set up some of your favorite stocks in the portfolio tool on the Morningstar website and keep an eye on them maybe for 6 months, 12 months time. When you're comfortable that you fully understand the risks then maybe consider making an investment.
Grove: Gareth, thanks very much for joining us.
James: Thanks Nick.
02/12/2011 We help investors understand a bit more about these instruments and their purpose, after the Australian government passed a law allowing local lenders to sell them. Uncovering covered bonds Nicholas Grove 02/12/2011 http://video.morningstar.com/aus/video/
Nicholas Grove: Investors may have recently heard about covered bond issues by ANZ and Westpac. After the Australian Government passed a law allowing the banks to sell them. Here to help us get a bit of a better understanding about these instruments I am joined by Morningstar Senior Equities Analyst David Walker.
David thanks very much for joining us.
David Walker: Hello again Nick, it's good to be back.
Grove: First of all David what is a covered bond and how does it differ from other types of bonds.
Walker: A covered bond is a new kind of debt security used to fund banks where the collateral is particular assets. A particular group of discrete indentified assets on the bank's balance sheet. This contrasts with the traditional kind of bank wholesale debt funding which is unsecured. Where in the event of the wind out banks would rank behind other more secured creditors.
Grove: David, why do banks issue covered bonds and who do they sell them to?
Walker: Banks wanting to be able to issue covered bonds to broaden their funding options. Their funding base. At this time the volatility, instability in global wholesale funding markets. To give them another kind of market in which to fund themselves away from traditional unsecured wholesale debt markets, gives them more options.
However regulators and the Parliament restricted the issuance of covered bonds to maximum of 8% of Australian assets on the balance sheet. So far the amount of covered bond issuance has been very small, just 1.25 billion in the case of ANZ and 1 billion in the case of Westpac. These figures compare with total loan books worth hundreds of billions of dollars. So if these banks get to the 8% limit at all, it will take years. A couple of banks has had to pull back from issuing its first tranche of covered bonds. Because it's found that global debt capital markets are too unstable at this time.
Grove: David what sort of risks do these instruments pose for shareholders in Australian banks and for deposit holders.
Walker: Well, it's good for shareholders, because it broadens the funding base of the bank in which they own equity. It creates a small risk for depositors which is why it's taken so long to introduce covered bonds in Australia. The argument by the regulator always was that in the event of the worst possible case, one of a liquidation of the bank. There might not be enough loans left on the balance sheet to fund a full payout of depositors.
However the amounts of covered bonds issues are so small compared to total size of the loan book. This is very unlikely additionally the ratio of loans to deposits is already very high, in the worst case there'd be more than enough loans to depositors which are in any event implicitly guaranteed by the Federal Government up to certain limits.
Grove: As in a side David with all that's happening around the world at the moment in Europe et cetera. How well positioned are our banks to weather the worst of all possible outcomes?
Walker: The worst possible outcome is that global wholesale debt funding market close completely for several months. Now if this happens, Australian banks have sufficient liquid assets to meet, maturing wholesale debt funding requirements over the months ahead in this emergency situation. However they can't keep doing that forever.
Most likely if this were to happen the Australian Government would reintroduce its AAA rating guarantee of bank wholesale term debt funding as it did in global financial crisis. This will come on top of Australian bank's existing superior credit ratings compared to other global banks. So it will put Australian banks in a very strong position. Additionally Australian banks recently have been lengthening maturity of the wholesale funding from say around two years before the credit crisis to more like 4 to 5 years.
So in contrast to European banks which have a problem with a lot of their wholesale funding rolling over time. Not much Australian wholesale bank funding at this time doesn't mature for several more years.
Grove: David thanks very much for joining us.
Walker: My pleasure.
06/12/2011 Overcoming mental roadblocks like loss aversion, the endowment effect, and recency bias can have a profound effect on investors' returns, says Sanibel Captiva's Pat Dorsey. Rewire your brain for better investing Jason Stipp 06/12/2011 http://video.morningstar.com/aus/video/111017_dorsey_us_audio.mp4
Jason Stipp: I'm Jason Stipp for Morningstar. As part of Morningstar's 5 Days to Better Investing, today we're talking about behavioral finance and how you can actually behave better and improve your chance for better returns.
Joining me today to talk about some behavioral finance issues is Sanibel Captiva Trust's, Pat Dorsey. He is their director of research, and a former director of equity research here at Morningstar.
He is going to give us some tips to overcome some of those stumbling blocks.
Thanks for joining me, Pat.
Pat Dorsey: Always happy to be here, Jason.
Stipp: So behavioral finance, it seems to me that if you did overcome some of these mental areas, you might able to improve things on the margin, but the fact is that the way that you behave, your temperament, actually has a much bigger potential impact on your returns.
Dorsey: It's absolutely huge. There's a Buffett quote that I always love, which says that once you go from 130 to 160 IQ, it really doesn't matter. What gets people into trouble in investing is their temperament, making the wrong decisions, not being smarter or less smart.
Stipp: So as a smaller investor, this is one of those things you actually can control and you actually can have a pretty big impact on your returns.
Dorsey: Especially because, as a smaller investor, you don't suffer from something that most portfolio managers do, which is called career risk. If you're a portfolio manager, at your average large mutual fund shop, your performance versus the benchmark and your peers is being tracked week by week. You underperform for a couple of weeks, or you have a rough quarter, your boss is going to come around and say, "You know, Jason, I think it was those stocks--ACME or whatever else--that you bought, and they're not doing so well."
And so you go, "Ugh! If I keep owning those, I might lose my job," and that's a huge issue for you. Whereas, of course, if you are an individual investor, you can't fire yourself. You have no career risk in that sense. So, hopefully, you can think a little more rationally.
Stipp: So thinking a little bit more rationally, this is a way for you as an individual to potentially get ahead, but it doesn't mean that it's easy. These are the things that are difficult to overcome.
So, I'd like to talk about some of these mental roadblocks that we encounter, and specifically, I'd like to start with what's known as "loss aversion" because this is something that's probably on a lot of investors' minds recently. So, what is this exactly and how can you overcome it?
Dorsey: What it boils down to--and this is really one of the original findings in behavioral economics that we're not the rational utility maximizers that the economists would think we are--is that losses hurt us two times more than gains give us pleasure--two times more than gains give us pleasure.
And the outcome of this is that people are unwilling to convert in investing an unrealized loss into a realized loss. Hanging on to your losers and just sort of watching them go down, go down, go down, hoping they bounce back a little bit so you'll sell them. I think that's something a lot of investors can sympathize with. And it's not because we are stupid or weird; that's how our brains are wired. It's hard for us to lose money. It's hard to say, "Well, I am down 10% on this, but I was wrong. My investment thesis was just flat wrong. So, I am going to take my loss and move on to the next investment." It's very, very difficult to do, but it's one of the reasons why people tend to hold on to their losers way, way too long.
Stipp: So, how can you overcome this, because you don't necessarily want to lock in a loss if you think that the security has a brighter future, but how do you make sure that you are cutting something of loose when you need to cut it lose? What's the mental exercise you need to go through?
Dorsey: The mental exercise is look into the future and not the past--which is a lot harder than it sounds, of course. The market doesn't care whether you have a gain or a loss. The security doesn't care if you have a gain or a loss. The security doesn't know. All that matters is what will that company earn in the future, or how will that mutual fund manager invest your assets in the future. What they have done recently is close to irrelevant.
So that's what you need to be thinking about going forward. If you have a loss in it, but your original investment thesis was sound. If the manager is still executing on their process. You stand pat. But if you have a loss and the competitive situation has heated up for the company or the manager has gotten fired or kind of gone off the rails, which mutual fund managers do once in a while, well then the future has changed; but it's the future that's changed. It has nothing to do with what the securities' returns have been in the past.
Stipp: Another mental roadblock that can cause investors to hold onto something too long is known as "endowment effect." What exactly is that and how does that affect investors?
Dorsey: This is a great one. So, we overvalue what we already own. I actually gave a talk on behavioral finance just this past Friday in Omaha, The University of Nebraska at Omaha, and I did an exercise where basically I asked students, what would they pay for a coffee mug, and then I asked another group of students, I gave them the mug and said, what would you sell this back to me? It's the exact same mug. Two times was the difference. So, basically, people would only pay $3 for the mug, but if I gave them the mug and asked them to sell it back to me, it took about $6-$7. So, that's insane because it's the same mug, right?
And so the outcome of this in investing is that people tend to get very ... have you've ever heard "falling in love with your stocks?" Maybe you have a security that has a low cost basis, it's done well for you over many years, and then it kind of starts to roll over, and roll over, and roll over, and roll over, and you're reluctant to let it go. It's because you're not evaluating securities on a level playing field.
And that is how you tackle this, is you always tackle securities on a level playing field, whether you own the fund or don't own the fund, own the stock or don't own the stock--it's not relevant. All that matters is, how will it perform in the future? So, again, it's very hard to do, but focusing on "this manager has made me lots of money" or "this stock has gone up a lot in the past six or seven years." Those are not relevant pieces of data.
Stipp: So, it's not only how well will it do in the future, but how well will it do in the future compared to what your other options may be as well?
Dorsey: Exactly right, exactly right. So, certainly, it could be that I think this stock will continue to grow earnings at a 3%-4% rate, but maybe the market is taking a giant header. Maybe China just fell by 50% and Chinese stocks are on sale, you're going to get a much better growth rate there at similar valuations. So, evaluating other alternatives always makes sense.
Stipp: So, Pat, another thing that can hold me up is the fact that I like to be liked, and this is related to something called social proof. What is that?
Dorsey: Basically, it's just that--that humans are wired to be social animals. You go back to the savannah where we kind of evolved, and, you know, being in a band of six was probably more likely to help you survive than being one guy who couldn't get along with anybody. So we're wired that way for survival purposes.
But in investing, it can get you into a lot of trouble, because just because the crowd is doing something doesn't mean it's right. It doesn't means it's wrong, either, but certainly doesn't mean it's right.
And frankly, the financial media can reinforce this, because what sells magazine and ads on CNBC is what's popular right now. So the media tends to talk about what's in favor, not what's not in favor.
And so, the way to tackle this as an investor, to try to get around this, is just to bear in mind that just because everybody else is doing it, everybody is talking about it, doesn't mean it's the right decision. In fact, again it's not relevant. Whether your buddy is buying the stock or whether there is lots and lots of stories about a particular asset class in the paper, it's simply not relevant to whether that asset class or that fund or that stock will do well in the future.
Stipp: So it doesn't mean that the crowd is wrong necessarily, but it doesn't mean that they are right necessarily?
Dorsey: Exactly. You don't want to be a knee-jerk contrarian. I mean, look at what happened to knee-jerk contrarians like David Dreman, for example, in late '08 with the banking stocks. They didn't recognize that it was different that time. There had been a huge shift in the mortgage marketplace that was going to cause losses to be worse than they'd ever been in the past.
In that case, just blindly running in the opposite direction of the crowd didn't do you any good. Again, it's not that what the crowd thinks, you should always be running in the opposite direction. It's that what other people think is irrelevant. It's your money. It's the stock you own. It's a fund that you own. What people on CNBC think about it, what a writer at Fortune magazine thinks about it, what your brother-in-law thinks about it. It's not relevant.
Stipp: So Pat, another thing that has come up, and I think this is another timely one, is the fact that we've seen not only in 2008 that horrible market downturn, but also a lot of rockiness again in the late summer and early fall here that creates the sense of things are going down again. They are going to keep going down. That's what we've been seeing. This is related to something called recency bias. How does that play out and how can you overcome that?
Dorsey: People tend to overweight the most recent information. So, of course, in 2007 home prices weren't go up forever. In 2009, we were talking about, Dow 2000 and things like that. So this has been demonstrated empirically, actually, with sell-side analyst estimates, which consistently lag actual earnings, lag by 9 to 12 months. Typically sell-side consensus earnings turn most bullish right as actual earnings roll over, and they turn most bearish right as earnings recover. That's because they're overweighting the most recent information.
And the way to get around this as an investor is to just look over the long span of time, just look at average earnings growth for corporate America, it has been 5%-6% over a long span of time. That's kind of the relevant number, much more so than "were earnings down 15% last year or up 20% last year."
So, looking at lots of data over long spans of time, asset class returns, something that I think Jack Bogle has always spoken a lot about. Looking at what asset classes, equities, bonds, what have you, had done over long spans of time is a much better guide to your future experience than what's happened in the past year.
Stipp: Last one, Pat. We talked about how, as humans, we like to be liked, but as humans we also like to be right. So I think we go out and tend to try to find things that will support our argument. This can lead to something that's known as a confirmation bias. How do you overcome this?
Dorsey: We process information that we already agree with more easily. Most Democrats don't hang out with people with Sarah Palin bumper stickers. Most Republicans don't have a GObama sticker on their car. We hang out with people who think like us. And in investing, that means if you feel good about the market, you probably read a bullish investor, right. If you thought Treasuries were a terrible investment, you're probably saying, "Go Bill Gross!" over the past year. That didn't work out so well. It turned out that people on the other side of that trade were more right.
So what you need to do, then, is you literally need to read about points of view, listen to individuals, consciously seek them out, who make your tummy ache. They make you feel bad, because they're disagreeing with you, and frankly their point of view says, you might be wrong. But that is really valuable information to know.
You kind of go back to the ... Ronald Reagan "Trust, but verify," it's kind of like. That trust your own opinions, but verify them. Verify them by actively seeking out people with the other point of view, and then testing your own beliefs. You might wind up saying well, "I'm still right," or you might come across information you wouldn't have otherwise found that will help you make a better decision.
Stipp: Well, Pat, it doesn't sound like it's easy to overcome a lot of these mental roadblocks, but certainly it sounds like it could pay off for you in the long run. Thanks for joining me.
Dorsey: Thanks so much for having me, Jason.
Jason Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching./video/transcript/2026 mailto: ?subject=Rewire your brain for better investing&body=http://www.morningstar.com.au/video/story/2026 Weathering volatile markets in retirement
23/11/2011 With the right allocation plan, retired investors can avoid making big--and potentially costly--portfolio shifts during turbulent times says Morningstar US' Christine Benz. Weathering volatile markets in retirement Jason Stipp 23/11/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/2016 mailto: ?subject=Weathering volatile markets in retirement&body=http://www.morningstar.com.au/video/story/2016 Three steps to better stock investing
31/10/2011 Focusing on competitive advantage, valuation, and margins of safety is a winning strategy for stock-picking, says Morningstar US' Heather Brilliant. Three steps to better stock investing Jeremy Glaser 31/10/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/2002 mailto: ?subject=Three steps to better stock investing&body=http://www.morningstar.com.au/video/story/2002 Ask the analyst: Active vs passive, credit securities & alpha
14/09/2011 In this back-to-basics educational video, Morningstar analysts help investors understand the terms; active vs passive investing, credit securities, and alpha. Ask the analyst: Active vs passive, credit securities & alpha -- 14/09/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1966 mailto: ?subject=Ask the analyst: Active vs passive, credit securities & alpha &body=http://www.morningstar.com.au/video/story/1966 Making sense of the sell off
09/08/2011 Ibbotson's Brad Bugg answers investors' top five questions on the recent market downturn. Making sense of the sell off -- 09/08/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1929 mailto: ?subject=Making sense of the sell off&body=http://www.morningstar.com.au/video/story/1929 Ask the analyst: Gearing, hedging & high conviction
27/07/2011 In this back-to-basics educational video, Morningstar analysts help investors understand terms such as gearing, hedging, and high conviction or concentrated strategies. Ask the analyst: Gearing, hedging & high conviction -- 27/07/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1915 mailto: ?subject=Ask the analyst: Gearing, hedging & high conviction&body=http://www.morningstar.com.au/video/story/1915 Last minute tax tip reminders
27/06/2011 With tax time drawing even closer, there are a number of strategies you can implement to minimise your tax and maximise your income. Last minute tax tip reminders Christine St Anne 27/06/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1890 mailto: ?subject=Last minute tax tip reminders&body=http://www.morningstar.com.au/video/story/1890 Essential guide to ETFs 2
09/05/2011 In the second part of our five-part ETF video series, Morningstar's Zac Wallis gives an insight into researching your ETF investments. Essential guide to ETFs 2 -- 09/05/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1853 mailto: ?subject=Essential guide to ETFs 2&body=http://www.morningstar.com.au/video/story/1853 Essential Guide to ETFs
02/05/2011 In the first part of our five-part ETF video series, the ASX's Jonathan Morgan lays out the fundamentals. Essential Guide to ETFs -- 02/05/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1847 mailto: ?subject=Essential Guide to ETFs&body=http://www.morningstar.com.au/video/story/1847 Understanding the insurance industry
03/02/2011 We help investors sort through terms often used by the big insurers in the wake of the Queensland floods. Understanding the insurance industry Nicholas Grove 03/02/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1780 mailto: ?subject=Understanding the insurance industry&body=http://www.morningstar.com.au/video/story/1780 Wading through the banking jargon
25/01/2011 We help first-time investors understand terms that are often bandied about by Australia's big banks. Wading through the banking jargon Nicholas Grove 25/01/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1774 mailto: ?subject=Wading through the banking jargon&body=http://www.morningstar.com.au/video/story/1774 Rethinking fixed income
17/01/2011 Government initiatives to boost retail bond market create opportunities for investors. Rethinking fixed income Christine St Anne 17/01/2011 http://video.morningstar.com/aus/video/ -- /video/transcript/1769 mailto: ?subject=Rethinking fixed income&body=http://www.morningstar.com.au/video/story/1769 Huntley's adventures in investing 4
20/12/2010 The fourth in a series of videos on Ian Huntley's tips for finding great companies run by great people. Huntley's adventures in investing 4 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1733 mailto: ?subject=Huntley's adventures in investing 4&body=http://www.morningstar.com.au/video/story/1733 Huntley's adventures in investing 3
20/12/2010 The third in a series of videos on Ian Huntley's tips for finding great companies run by great people. Huntley's adventures in investing 3 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1732 mailto: ?subject=Huntley's adventures in investing 3&body=http://www.morningstar.com.au/video/story/1732 Huntley's adventures in investing 2
20/12/2010 The second in a series of videos on Ian Huntley's tips for finding great companies run by great people. Huntley's adventures in investing 2 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1731 mailto: ?subject=Huntley's adventures in investing 2&body=http://www.morningstar.com.au/video/story/1731 Huntley's adventures in investing
12/11/2010 The first in a series of videos on Ian Huntley's tips for finding great companies run by great people. Huntley's adventures in investing -- 12/11/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1710 mailto: ?subject=Huntley's adventures in investing&body=http://www.morningstar.com.au/video/story/1710 A guide to resources investment 4
20/12/2010 This sector can be a minefield but Morningstar's Mark Taylor finds the gems. A guide to resources investment 4 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1737 mailto: ?subject=A guide to resources investment 4&body=http://www.morningstar.com.au/video/story/1737 A guide to resources investment 3
20/12/2010 This sector can be a minefield but Morningstar's Mark Taylor finds the gems. A guide to resources investment 3 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1736 mailto: ?subject=A guide to resources investment 3&body=http://www.morningstar.com.au/video/story/1736 A guide to resources investment 2
20/12/2010 This sector can be a minefield but Morningstar's Mark Taylor finds the gems. A guide to resources investment 2 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1735 mailto: ?subject=A guide to resources investment 2&body=http://www.morningstar.com.au/video/story/1735 A guide to resources investment 1
20/12/2010 This sector can be a minefield but Morningstar's Mark Taylor finds the gems. A guide to resources investment 1 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1734 mailto: ?subject=A guide to resources investment 1&body=http://www.morningstar.com.au/video/story/1734 ETFs: All you need to know 6
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part six of six. ETFs: All you need to know 6 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1751 mailto: ?subject=ETFs: All you need to know 6&body=http://www.morningstar.com.au/video/story/1751 ETFs: All you need to know 5
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part five of six. ETFs: All you need to know 5 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1750 mailto: ?subject=ETFs: All you need to know 5&body=http://www.morningstar.com.au/video/story/1750 ETFs: All you need to know 4
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part four of six. ETFs: All you need to know 4 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1748 mailto: ?subject=ETFs: All you need to know 4&body=http://www.morningstar.com.au/video/story/1748 ETFs: All you need to know 3
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part three of six. ETFs: All you need to know 3 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1747 mailto: ?subject=ETFs: All you need to know 3&body=http://www.morningstar.com.au/video/story/1747 ETFs: All you need to know 2
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part two of six. ETFs: All you need to know 2 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1746 mailto: ?subject=ETFs: All you need to know 2&body=http://www.morningstar.com.au/video/story/1746 ETFs: All you need to know 1
20/12/2010 Morningstar's Tim Murphy delivers a comprehensive guide to this asset class. Part one of six. ETFs: All you need to know 1 -- 20/12/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1744 mailto: ?subject=ETFs: All you need to know 1&body=http://www.morningstar.com.au/video/story/1744 The inside line on indices
25/11/2010 Exploring the construction of market indices with MSCI Executive Director, Michael Anderson. The inside line on indices Darin Tyson-Chan 25/11/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1719 mailto: ?subject=The inside line on indices&body=http://www.morningstar.com.au/video/story/1719 The ABC of ETF investing
-- Morningstar's Tim Murphy explains ETFs and how they fit into a portfolio. The ABC of ETF investing Christine St Anne -- http://video.morningstar.com/aus/video/ -- /video/transcript/1707 mailto: ?subject=The ABC of ETF investing&body=http://www.morningstar.com.au/video/story/1707 Navigating a low-growth terrain
03/11/2010 Capital preservation is the key to creating wealth over the next decade. Navigating a low-growth terrain Victoria Tait 03/11/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1704 mailto: ?subject=Navigating a low-growth terrain&body=http://www.morningstar.com.au/video/story/1704 Navigating through ETF products
13/10/2010 What do the range of ETF products mean for investors? Navigating through ETF products Christine St Anne 13/10/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1688 mailto: ?subject=Navigating through ETF products&body=http://www.morningstar.com.au/video/story/1688 Why don't we value financial advice?
09/09/2010 It's official. A natural bias towards instant gratification is shrinking our net worth. Why don't we value financial advice? -- 09/09/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1658 mailto: ?subject=Why don't we value financial advice?&body=http://www.morningstar.com.au/video/story/1658 Morningstar's Best Businesses
-- Every year, Morningstar analysts weigh developments and crunch numbers to find Australia's top businesses. Senior resources analyst Mark Taylor reveals what it takes to make the grade. Morningstar's Best Businesses -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1491 mailto: ?subject=Morningstar's Best Businesses&body=http://www.morningstar.com.au/video/story/1491 Why interest rate rises are good news
-- Investors should be happy with the RBA hiking interest rates, Vanguard's Robin Bowerman explains. Why interest rate rises are good news -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1528 mailto: ?subject=Why interest rate rises are good news&body=http://www.morningstar.com.au/video/story/1528 Things to do before end of financial year
-- It's already June, but it's not too late to make some improvements to your tax return Things to do before end of financial year Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1582 mailto: ?subject=Things to do before end of financial year&body=http://www.morningstar.com.au/video/story/1582 Where credit is due
-- Just when we think life is returning to normal, the credit numbers tell a different story. Morningstar's David Ellis explains. Where credit is due Victoria Tait -- http://video.morningstar.com/aus/video/ -- /video/transcript/1583 mailto: ?subject=Where credit is due&body=http://www.morningstar.com.au/video/story/1583 Are hybrids the right choice?
-- They're more stable in choppy markets, but the case for hybrid investments has some risks, too Are hybrids the right choice? -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1607 mailto: ?subject=Are hybrids the right choice?&body=http://www.morningstar.com.au/video/story/1607 Do star ratings work?
-- Morningstar's star ratings are based on quantitative measures but is this meaningful for investors? Do star ratings work? -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1570 mailto: ?subject=Do star ratings work?&body=http://www.morningstar.com.au/video/story/1570 How to read a profit and loss statement
10/08/2010 Morningstar's James Cooper helps make sense of profit and loss statements. How to read a profit and loss statement -- 10/08/2010 http://video.morningstar.com/aus/video/ -- /video/transcript/1634 mailto: ?subject=How to read a profit and loss statement&body=http://www.morningstar.com.au/video/story/1634 Does currency count?
-- Ian Huntley gives his views on how important getting the exchange rate right is on your investments. Does currency count? -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1605 mailto: ?subject=Does currency count?&body=http://www.morningstar.com.au/video/story/1605 Bonds are back
-- No longer boring - where bonds can fit in your portfolio Bonds are back Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1603 mailto: ?subject=Bonds are back&body=http://www.morningstar.com.au/video/story/1603 Always apply the five-minute rule
-- If you can't understand an investment product in five minutes, walk away, says Vanguard chairman and CEO Bill McNabb. Always apply the five-minute rule -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1601 mailto: ?subject=Always apply the five-minute rule&body=http://www.morningstar.com.au/video/story/1601 ETFs: Effectively using ETFs in your portfolio
-- We know what they are and how to buy them, but how do we incorporate them in a portfolio? ETFs: Effectively using ETFs in your portfolio Julia Newbould -- http://video.morningstar.com/aus/video/ -- /video/transcript/1592 mailto: ?subject=ETFs: Effectively using ETFs in your portfolio&body=http://www.morningstar.com.au/video/story/1592 How to use stock research
-- Understand the different kinds of equities research and how our analysts produce it. How to use stock research Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1588 mailto: ?subject=How to use stock research&body=http://www.morningstar.com.au/video/story/1588 How investors can "beat the devil"
-- Investors need to "beat the devil", or silence the voices that go against good financial strategy. How investors can "beat the devil" Julia Newbould -- http://video.morningstar.com/aus/video/ -- /video/transcript/1581 mailto: ?subject=How investors can "beat the devil"&body=http://www.morningstar.com.au/video/story/1581 Making back your losses
-- Is there anything a financial planner would advise you to do to recoup your losses quickly? Making back your losses -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1571 mailto: ?subject=Making back your losses&body=http://www.morningstar.com.au/video/story/1571 Beware capital gains tax on SMSF rollovers
-- Certain activities in running a self managed super fund can trigger capital gains tax liabilities. Beware capital gains tax on SMSF rollovers Darin Tyson-Chan -- http://video.morningstar.com/aus/video/ -- /video/transcript/1558 mailto: ?subject=Beware capital gains tax on SMSF rollovers&body=http://www.morningstar.com.au/video/story/1558 How to avoid ETF bloopers
-- Do you really know what lies beneath your ETF? Find out how to avoid the pitfalls. How to avoid ETF bloopers -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1526 mailto: ?subject=How to avoid ETF bloopers&body=http://www.morningstar.com.au/video/story/1526 Get started with low entry funds
-- Some high quality funds have minimum investment thresholds of just $5000 Get started with low entry funds -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1525 mailto: ?subject=Get started with low entry funds&body=http://www.morningstar.com.au/video/story/1525 Why fixed interest remains a vital part of your portfolio
-- They may not be as exciting as some, but fixed interest investments play an important role. Why fixed interest remains a vital part of your portfolio -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1523 mailto: ?subject=Why fixed interest remains a vital part of your portfolio&body=http://www.morningstar.com.au/video/story/1523 Did asset allocation fail?
-- Asset allocation still has a relevant role despite recent market falls, says Ibbotson president Peng Chen. Did asset allocation fail? Julia Newbould -- http://video.morningstar.com/aus/video/ -- /video/transcript/1509 mailto: ?subject=Did asset allocation fail?&body=http://www.morningstar.com.au/video/story/1509 Rate rise but retail, housing surprise
-- Surprising economic data provides a mixed view of the Australian economy as the RBA raises the interest rate. Rate rise but retail, housing surprise Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1504 mailto: ?subject=Rate rise but retail, housing surprise&body=http://www.morningstar.com.au/video/story/1504 Diversification still works: Roger Ibbotson
-- Roger Ibbotson, founder of Ibbotson Associates and a professor at Yale discusses what investors can learn from the financial downturn. Diversification still works: Roger Ibbotson -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1495 mailto: ?subject=Diversification still works: Roger Ibbotson&body=http://www.morningstar.com.au/video/story/1495 Why raise interest rates?
-- What exactly does tweaking interest rates do for the economy, Shane Oliver explains. Why raise interest rates? -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1487 mailto: ?subject=Why raise interest rates?&body=http://www.morningstar.com.au/video/story/1487 Save 'more' for retirement, but how much?
-- Australia's leading financial organisations agree we need to save more to survive retirement, but opinions are divided on exactly how to do it. Save 'more' for retirement, but how much? -- -- http://video.morningstar.com/aus/video/ -- /video/transcript/1486 mailto: ?subject=Save 'more' for retirement, but how much?&body=http://www.morningstar.com.au/video/story/1486 Lessons from history
-- Morningstar senior equities analyst David Walker gives a history lesson on the boom-bust cycle. Lessons from history Nicholas Grove -- http://video.morningstar.com/aus/video/ -- /video/transcript/1357 mailto: ?subject=Lessons from history&body=http://www.morningstar.com.au/video/story/1357 More investor mistakes, part 1
-- Ian Huntley provides more insight into the most common investment pitfalls More investor mistakes, part 1 Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1352 mailto: ?subject=More investor mistakes, part 1&body=http://www.morningstar.com.au/video/story/1352 The gift of philanthropy
-- Charities in crisis call for clever contributions through a donor's life The gift of philanthropy Julia Newbould -- http://video.morningstar.com/aus/video/ -- /video/transcript/1365 mailto: ?subject=The gift of philanthropy&body=http://www.morningstar.com.au/video/story/1365 Great investor mistakes
-- Nicole Manktelow talks to Ian Huntley about the mistakes investors commonly make Great investor mistakes Nicole Manktelow -- http://video.morningstar.com/aus/video/
transcript/video/transcript/1370 mailto: ?subject=Great investor mistakes&body=http://www.morningstar.com.au/video/story/1370 Why invest in funds
-- Morningstar's Tim Murphy explains why funds make sense for rookie investors. Why invest in funds Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1390 mailto: ?subject=Why invest in funds&body=http://www.morningstar.com.au/video/story/1390 Frequently asked funds research questions
-- Editorial and communications manager Phillip Gray answers your FAQs Frequently asked funds research questions Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1391 mailto: ?subject=Frequently asked funds research questions&body=http://www.morningstar.com.au/video/story/1391 Learning from missed opportunities
-- Ian Huntley talks about the stocks he wished he'd bought and how investors can learn from missed opportunities. Learning from missed opportunities Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1401 mailto: ?subject=Learning from missed opportunities&body=http://www.morningstar.com.au/video/story/1401 Is your fund a zombie?
-- Once trendy but now neglected, could your fund be described as a zombie? Morningstar's Phillip Gray explains. Is your fund a zombie? Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1413 mailto: ?subject=Is your fund a zombie?&body=http://www.morningstar.com.au/video/story/1413 Reading your super statement
-- Morningstar says it's better to engage with your super than bury it away, Phillip Gray explains. Reading your super statement Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1414 mailto: ?subject=Reading your super statement&body=http://www.morningstar.com.au/video/story/1414 What your fund isn't telling you
-- Australian funds lack the transparency of those in other markets. We explain why you should ask your fund for more information. What your fund isn't telling you Nicole Manktelow -- http://video.morningstar.com/aus/video/ -- /video/transcript/1423 mailto: ?subject=What your fund isn't telling you&body=http://www.morningstar.com.au/video/story/1423 Trustee Education
-- Liz Westover gives her recommended changes to superannuation trustee skill and knowledge. Trustee Education Darin Tyson-Chan -- http://video.morningstar.com/aus/video/ -- /video/transcript/1424 mailto: ?subject=Trustee Education&body=http://www.morningstar.com.au/video/story/1424