2016 September Monthly Update

hammock-1248939__180At the end of September 2016, Slack Investor is embracing the slackness of it all and stays IN for all his ASX, US and UK index positions.

The reason for this lack of action is that none of his preset stop losses have been breached and,  as the Slack Investor has a natural pre-disposition to be in the market earning dividends from investments, he cools his heels for another month … ahhhh the bliss of it all … decisions can be so fatiguing!

More detail and chart and table updates can be found on the ASX, UK and US index pages.

First Investment … Index Funds … Sounds Fun!

stock-exchange-1426332__180OK … the cushion is sorted and we are ready to start on the path to financial independence with our first investment.

However, we are just starting and our first plunge into the share market shouldn’t be with an individual company … this is too risky … exposure to the whole market through an index fund is a good first step.

The main reason for this strategy is that Slack Investor has found that – despite his great prowess as an investor (?) there are many unknowns when it comes to an individual share or stock.

Slack Investor does a great deal of research on a company before he parts with his dollars and, despite being convinced at purchase time that this company will be a great winner, this does not always turn out to be the case.

Slack Investor has been in this investing game for a considerable time and despite this 30-year experience and diligent research his documented win probability for an individual company (Selling the share for more than I bought it) is surprisingly (to an optimist like me!) low.

Slack Investor win probability ... is just over 50%.

This sounds like I don’t know what I am doing … However, bear with me …If you follow Slack Investor and use the enduring wisdom of many successful investors

“Cut your losses short and let your winners run.”  

… You will be well on the road to financial freedom.

This is because individual stocks that you keep in your portfolio (Winners) may increase in price by 5-500% (or more!) but if you limit your losses on losing stocks to around 15% you will end up with a solid investment portfolio. For the record, the Slack Investor portfolio has between 20-30 individual shares/managed funds and, including dividends, has achieved a 5-year average annual Internal Rate of Return (IRR) of 14.6% (as at 30/06/16)

If you don’t want to get involved with a stock broker, and you have $5000, then the most excellent Vanguard Funds offer exposure to the whole Australian, US or World markets through their managed funds. For example the Vanguard Index Australian Shares Fund offers exposure to the whole Australian share market for a management fee of 0.75% p.a. with a published 5-year annual average return of 8.7% (after fees)

Or, you could take the plunge and sign up with an Online Broker. Slack Investor uses CommSec. After a bit of paperwork you should then be able to trade on the ASX online and get exposure to the world of Exchange Traded Funds (ETF’s). You will have to pay brokerage for each trade but otherwise, costs are low.

Two such Australian ETF’s are SPDR S&P/ASX 200 (STW) and Vanguard Australian Shares Index Fund (VAS) . They have management costs of 0.19% and 0.15%, respectively, with 5-year average net total returns of 9.98% and 9.32% respectively (31/08/16).

The stock market is a capricious beast and susceptible to whims and world events. Of course, past returns on the stock market are no guarantee of future returns – but, if you put your faith and money into the whole market through an index fund for 3-5 years you will usually be rewarded.

Shares? … What about a house!

washington-d-1607766__180Dipping your toe into the stock market can be a daunting experience. A lot of people feel more comfortable with investing any saved money into residential property. In Australia, this has been usually a great idea – As well as income provided by your renters, there are tax advantages in negatively gearing your property. However, residential property has run long and hard and property yields are looking a little bit skinny. Corelogic reports that, as of September 2016

  • Australian gross rental yields for houses are currently recorded at 3.1% and unit yields are 4.1%, both of which are record lows.

Prediction of future property yields and capital growth rate depend on a complex mix of supply, population growth and interest rates. The low yields and the large sums required to get into the housing market make housing a difficult first investment in capital cities – and Slack Investor thinks the days of big capital gains for residential property are behind us.

I am not against residential property and it is one of the Slack Investor foundation blocks that you must have a plan to own your own home – in a place that you like – before financial independence and retirement.

For many, the forced savings commitment that a home loan provides is a great way to wealth accumulation – the money disappears from your account prior to you having a chance to spend it! It is a pity that much of the home loan payment is portioned to loan interest – but this is not such a concern for a long term commitment, especially in times of capital appreciation.

Owning a home gives Slack Investor a great joy that cannot be measured in financial terms alone.

glennstevens
Glenn “Sexy” Stevens, RBA retiring governor and Slack Investor favourite.

So where should you start investing … Bank cash rates are low (1.5% from August 2016) and several punters think that they may be low for some time. Slack Investors favourite banker, the Reserve’s Glenn Stevens has just cut the cash rate to 1.5% and thinks that the low inflation environment and conditions for Australian economy growth are expected to remain the case for some time.

Cash is safe and reliable though, and is the best place for your cushion while your are saving up your first investment bundle. But putting your money in the bank will not make you financially independent … you have to take some risk.

Share investment, is not recommended for very short time frames as the stock market can be very volatile  … but If you have some money set aside that you can afford to leave in the market for 2-3 years – It is an excellent place to start your investing journey. Most Australians already have exposure to shares through their superannuation funds … and if you look at share investment as a chance to become a company part-owner, why wouldn’t you give it a go!

 

One More Marshmallow Please …

marshmallows-788771__180Once the financial cushion is established the hard graft of saving must commence … Fortunately, Slack Investor has always been a good saver and a lot has to do with the mystical trait of delayed gratification. A famous experiment was conducted at Stanford by Professor Walter Mischel. It is worth expanding on this research as Slack Investor finds this trait to be fundamental to the pursuit of financial independence.

The Stanford study was published in 1972 under the dry academic title of Cognitive and attention mechanisms in delay of gratification. And started with a preschool child sitting in a chair, and placing a marshmallow on the table in front of them. The researcher then told the child that he was going to leave the room and that, if the child did not eat the marshmallow while he was away, then they would be rewarded with a second marshmallow. However, if the child decided to eat the first one before the researcher came back, then they would not get a second marshmallow.

The researcher left the room for 15 minutes and the child would either gobble the treat … or wait patiently for what must have been a very long 15 minutes. In the original experiment, one third of the preschoolers managed to get the second marshmallow.

The really interesting part of the Marshmallow Experiment happened years later where follow up studies tracked each child’s progress in a number of areas.

The children who were willing to delay gratification and waited to receive the second marshmallow ended up having higher university entrance scores, lower levels of substance abuse, lower likelihood of obesity, better responses to stress, better social skills and generally better scores in a range of other life measures.

The children were followed for more than 40 years and the researchers concluded

… that the ability to delay gratification was critical for success in many of life’s challenges.

You might think that this ability might be part of your natural make up,  but Slack investor and a bunch of Behavioural Analysts think that this delayed gratification can be learned (i.e., Older children were better at the task)… And the best way get this delayed gratification going … is to start saving. Some tricks you can use are to get a portion of your pay paid automatically deducted into a separate account … or set aside a review day at the end of the month so that you can slide any money that you don’t need right away to a separate online savings account.

These accounts are easy to set up and are offered by many banks. Slack Investor has a few accounts with ME Bank, but there are many offerings in the Australian Market. In addition to your transaction account, start a “Cushion” online a/c and a separate “Savings” online account. With your regular contributions they will grow and the delayed gratification vibe can warm your heart! … and you will eventually have all the marshmallows that you could possibly eat!

The Trend is Your Friend

“The trend is your friend”

The origins of this trading maxim are a little hazy but scores of successful trading schemes have grown from these roots. The highly successful US trader Ed Seykota is the source of many wise words on trading and he completes this saying with

“ … except at the end where it bends”.

This summarises the simple message of trend trading – but the complexity comes in determining when the trend has started and finished.

HigherHighsThe basis of trend trading is in Dow theory. Charles Dow was one of the pioneers in technical trading and described how a stock price chart can be seen as a succession of peaks and troughs. He defined an uptrend when a chart was showing a series of higher highs and higher lows and a downtrend when a series of lower highs and lower lows were being established. The uptrend breaks when the stock price moves below a previous higher low. Slack Investor makes use of this trend finish signal as an exit for the index trades shown on the ASX Index, UK Index and US Index pages. There is a refinement to this simple strategy and the Slack Investor will exit an index trade only when the closing price is below a stop loss set by a previous higher low. This refinement helps to screen out any short term price lows that might occur during trading.

Ed Seykota has also has stated that

“Trends become more apparent as you step further away from the chart”

These wise words echo the Slack Investor strategy of trading the long term trends – by analysing trends on weekly or monthly charts.

Creating a Cushion

taps-small
From http://www.spinaltap.com/

When is the right time to start investing? … The glib answer is NOW! … or, as soon as you can. However, there are things that must be taken care of first.

We have to create a cushion. This is your emergency fund that will carry you through … or at least not make you freak out so much … when one of life’s emergencies raises its head. The cushion is just my preferred term. The Barefoot Investor calls it his “Mojo” fund on his instructive site. The best place to keep your cushion is away from your day to day expenses in a separate high interest online account that is specifically set up as your emergency fund.

How big should your cushion be? This is difficult to define, but it should be enough to cope with unexpected bills or any of the usual life emergencies – Car problems .. Medical problems … House Problems… etc.

In the words of the immortal Spinal Tap

“The bigger the cushion … the sweeter the pushin’ …”

Do yourself a favour and research the incomparable film  “This is Spinal Tap” further . A Rob Reiner mockumentary that is as old as my investing career (30 years) but contains many classic scenes … All I can say is, that if you ever get the financial blues, just spend a minute with Nigel Tufnel … “These go to Eleven”.

Your cushion should be at least $2000  … and ideally enough to carry you through a couple of months expenses (rent, food, etc). As reported on the House of Debt Blog, a recent survey of 25 000 American households found that almost 40% of individuals either could not, or probably could not, come up with $2000 if an unexpected need arose. I am sure that this would be the same or worse in Australia and the UK.

Once you have enough cash in your cushion to help you ride out a few of life’s storms … and enough financial discipline to keep this fund for real emergencies … then it is time to start investing.

houseofdebt_20140407_12
http://houseofdebt.org/2014/04/07/the-financial-vulnerability-of-americans.html

First Post … mmmm

I suppose that it is important to start of this blog with a profound post … just joking! … In reality, I am not sure how this blog will evo1374027484173661141the-thinkerlve – and what it will eventually contain.

This blog has started as a means to plot down the things that, through a great deal of trial and error, I know about investing. I don’t pretend to be a master investor – but through the years, I think that I have learned a lot and have developed methods that will work for most investors.

I have been lucky enough to learn from many kind investors over the years, together with reading many fine books on economics and investing. The knowledge that I have is continually being updated. Together with books, there are some great finance blogs that I continue to find interesting.
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In essence, I want this blog to contain information that I wish I had 30 years ago – when I first started to think about saving for my retirement. I like to think that with the type of information that Slack Investor presents, my journey to financial independence might have been a little shorter.