Investing for the long term
Investor Insights - Monthly news for investment professionals 7 July 2016

Longtime readers of Investor Insights will be familiar with our three golden rules of investment. In our view, you maximise your chance of investment success when you keep it simple, diversify and – most importantly – remember that “getting rich slowly never goes out of fashion”.

The rationale behind these principles is simple. Complex investments are hard to understand. How can you be sure that you have properly recognised and understood all of the risks? Diversification means that one badly performing investment should not disproportionately affect your overall investment outcome.

In our experience, the third golden rule is the toughest for investors to follow. We all dream of that inspired (or fortunate) investment that “sets us up for life”. The slow and steady approach seems too staid and boring for most of our liking. In this edition of Investor Insight, we re-examine the value of a patient, long term approach to investment.



Getting your mental game right

One of the most influential figures of modern investment theory is Benjamin Graham. Among his numerous protégés is the most famous investor of all time, Warren Buffett. Benjamin Graham began his course at the Columbia Business School by saying “If you want to make money in Wall Street you must have the proper psychological attitude.” Or, as the equally famous baseball identity, Yogi Berra would say “90% of investment is half mental.

The basic insight here is that most investment success (or failure!) is driven by emotion, rather than faulty logic. Investors are seduced by the ‘greed and fear’ cycle to buy (or sell!) investments at precisely the wrong moment. Just as markets peak, they experience all the bullish euphoria and leverage themselves to the hilt to buy investments at their most expensive. Then as markets decline, they become increasingly fearful, capitulating at the bottom of the cycle and crystallising their losses. Observers of the recent ‘Brexit’ vote in the UK would do well to recall this truth. It is important to separate well-founded negative sentiment, based on a rational analysis of developments in relevant markets, from mere fear triggered by the uncertainty of dynamic world events.

No matter how many times the ‘greed and fear’ cycle is written about, investors keep on repeating the same mistake. That is why it is important to take a long term approach to your investment. By looking long term, you can see past the emotions of the moment and recognise the cycles as they occur. Instead of being a risk to your investment outcomes, the greed and fear cycle can begin to work in your favour. You then have the ability to follow the advice of Warren Buffett to “...be fearful when others are greedy and greedy when others are fearful...



The power of compounding

The second advantage of taking a long term and patient approach to investment is that it allows you to unleash some seriously potent forces. Legend has it that Albert Einstein was once asked to nominate the most powerful force in the universe. He chose compound interest.

To see how this could be the case, consider the following scenario. Imagine you put aside $10,000 at the end of each year for your retirement. Imagine further that your investment is earning 7.21% p.a. (the average annual return of La Trobe Financial’s Pooled Mortgages Option since inception in October 2002).

After year one, you would have your initial $10,000 investment. After year two, you would have $20,721, being your contributions of $20,000, plus interest of $721. After ten years, you would have $139,543, being your $100,000 of contributions, plus $39,543 of accumulated interested.

Here is where things get really interesting. As you principal sum grows, you earn interest on the larger amount. That means that the amount of interest you earn grows each year. In year two (after making your initial investment) you earn $721 in interest. After year ten, you are earning $10,061 in interest on top of your regular contribution of $10,000. But after year twenty you are earning $30,244 in interest and after year thirty you are earning a massive $70,734.45. What’s more, your principal amount at the end of year 30 is $981,060, despite your total contributions coming to just $300,000.

As you can see, the longer you’re in the game, the more compound interest works for you. That’s why getting rich slowly never goes out of fashion.



Long term investment

In the context of long term investment, it is worth noting that the ASX and Russell Investments have recently released the 2016 Long Term Investing Report. This report looks at some of the key asset classes and their performance over longer term horizons (generally 10 and 20 years).

In this year’s report, the long term performance of the various asset classes was compared to a benchmark seen to be appropriate for a ‘reasonable’ balanced investor investing in a portfolio comprised of 70% growth and 30% defensive assets. This benchmark was set at a level of CPI plus 4% p.a. or an average of 6.6% p.a. over the 10 year period to end of December 2015.

Passing over the question as to whether a 70/30 growth/defensive portfolio is, in fact, balanced, the report noted that the average balanced managed fund returned just 5.7% p.a. over the period. In fact, only two asset classes beat the benchmark over the period. Residential property investment achieved 8.0% p.a. and hedged global bonds achieved 7.3% p.a. As you can see, La Trobe Financial’s asset class compares well even to the very best alternatives.



What about SMSFs?

Long term investment theory applies in particular to retirement savings. We’ve previously discussed the self-managed superannuation fund phenomenon and its implications for investors. A new report challenges whether some SMSFs are delivering appropriate outcomes for investors. According to an article in the SMH, “Between 2010 and 2014, the bottom 10 per cent of SMSFs, those with balances of less than $100,000, have lost money every year since 2008, according to Australian Taxation Office figures. The ATO figures reveal that 44 per cent of SMSFs have on average not made a return over the past seven years.

So what can these investors do? It’s actually not that difficult. They need to review their investment strategy. This is where the three golden rules of investment could be useful. Pick those investments that you understand, diversify your holdings and take a patient, long-term approach.

Remember those golden rules and the new financial year could be a successful one for you.

Best regards,

Chris Andrews
Vice President,
Chief Investment Officer

     
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The above awards and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Credit Fund and may be viewed

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 Credit Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. The PDS is available on our website www.latrobefinancial.com or by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.

- The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund and may be lower than expected. Investors risk losing some or all of their principal investment. The investment is not a bank deposit.
- Past performance is no guarantee of future performance.
- Withdrawal rights are subject to liquidity and may be delayed or suspended.
- The award and ratings were given to the Pooled Mortgages Option within the La Trobe Australian Credit Fund.
- Any rating is only one factor to be taken into account in deciding to invest.

1. Zenith's "recommended" rating indicates that it has high confidence in the manager meeting its objectives. The Zenith Investment Partners ("Zenith") ABN 60 332 047 314 rating referred to in this document is limited to "General Advice" (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product(s), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. To view the relevant research information, please visit www.latrobefinancial.com The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective.
2. SQM Research - 4 stars to 4.25 stars - superior, suitable for inclusion on most Approved Product Lists. To view the relevant research information, please visit www.latrobefinancial.com This rating will not take into account your, or your clients' objectives, financial situation or needs. It is up to investors to consider whether specific financial products are suitable for your objectives, financial situation or needs. Research houses receive a fee from La Trobe Financial for rating the product.
3. Lipper Leaders Rating Total Return (Score – 5) Lipper Ratings for Total Return reflect funds’ historical return performance relative to peers. The ratings are subject to change every month. The highest 20% of funds in each peer group are named Lipper Leader or a score of 5 for Total Return. Lipper Leader ratings are not intended to predict future results and does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright, All Rights Reserved.
4. Australia Ratings (AFSL 346138) makes every effort to ensure the reliability of the views and rankings expressed in its reports and those published on its websites. Australia Ratings research is based upon information known to it or which was obtained from sources it believed to be reliable and accurate at time of publication. However, like the markets, it is not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each rating for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Australia Ratings and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Australia Ratings hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.
La Trobe Financial is one of Australia's leading independent credit specialist Fund Managers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Credit Funds under AFSL 222213. It employs over 150 staff and has managed over AUD$10 Billion covering over 100,000 investment grade assets since inception in 1952.

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La Trobe Financial Services Pty Limited - Australian Credit Licence Number: 392385
La Trobe Financial Asset Management Limited - Australian Credit Licence Number: 222213

This publication does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek your own financial or other professional advice before acting or relying on any of the content.
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