8th August 2007

Dear Investor,

Growing rich slowly will never go out of fashion

In our final Investment News in the series examining the three (3) immutable rules of investing:

  1. never put all your eggs in one basket;
  2. a higher rate of return always equals higher risk; and
  3. getting rich slowly will never go out of fashion; don’t rush, and always ask questions,

we review the final investment rule of “getting rich slowly will never go out of fashion”.

In one of his annual addresses to investors in Berkshire Hathaway, Warren Buffet (the Oracle of Omaha) and one of the world's biggest investors stated:

“Investing is not like Olympic diving...you don’t get extra points for degree of difficulty.”

Buffet perhaps best managed to sum up our third immutable rule of investing: that is keep it simple and don’t invest to get rich overnight on speculative tips, but invest for longer periods getting modest stable returns which will be repeatable.

Often we hear of investors chasing higher returns because of a recommendation from a trusted source.

Rates of return: what history shows

At the end of June 2003, many superannuation and managed funds and shares reported negative returns for the second year in a row. World share markets generally lost value, and even the Australian market lost ground between June 2001 and June 2003.

History shows we cannot expect smooth growth year after year. History also gives us a realistic and useful starting point for what you might expect in the future, especially if you consider a wide range of markets over a long period of time.

It can also help you resist the danger of losing all your money from chasing unrealistic returns. When returns from well regulated investment markets go down, disappointed people sometimes get drawn into extremely risky products or even outright frauds.

100 years of history

Here's what a survey of 100 years of investment returns from 16 financial markets around the world shows.

See Triumph of the Optimists, by Elroy Dimson, Paul Marsh and Mike Staunton (3 academics from the London Business School), published by Princeton University Press, 2002.

Compound real rates of return after inflation 1900-2000

Financial asset Australia World*
Shares 7.5% per year 5.8% per year
Bonds 1.1% per year 1.2% per year
US Bank Bills 0.4% per year 0.9% per year
* Worked out by weighting 16 major markets according to size

Of course, past performance might not be repeated.

ASIC also consulted licensed actuaries to estimate what returns would be reasonable over the long term for four of the most common investment options used by super funds and professional investment managers. These estimates are for returns before any money is taken out for fees and taxes.*

Investment option What it roughly means Acceptable rate range
70–80% in shares or property
Aims for higher returns over the long term and so risks higher losses in bad years. 8%–9%
60–70% in shares or property, the rest in fixed interest and cash
Aims for reasonable returns, but less than growth funds in order to reduce risk of losses in bad years. 7.5%–8.5%
Capital stable
60–70% in fixed interest and cash (some invested in shares or property)
Aims to reduce risk of losses and therefore accepts a lower return over the long term. 5.5%–6.5%
Capital guaranteed
By law, invests 100% with Australian deposit-taking institutions or in a capital guaranteed life insurance policy
Guarantees your capital and accumulated earnings cannot be reduced by losses on investments. 5%–6%

*ASIC’s licensed independent actuaries consulted a variety of sources including assumptions used by industry groups, leading asset consultants and publicly available survey data about superannuation fund investment strategies.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

* La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
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