Share Markets continue their upward march after a strong 2017

Investors in the Australian and overseas share markets, such as the USA, Germany & Japan, enjoyed very healthy returns in 2017 as shown in this table. Morningstar Monthly Index Returns year ended 31 December 2017. Australia equities rose 11.8% in 2017, the US S&P 500 rose 21.8% and Japan 19.1%.

Of course, the big question is whether stock prices will continue to rise in 2018. The global economy looks very healthy at present and corporate profits are growing so most pundits are predicting further rises, as we have seen in the first few weeks of 2018, in spite of the likelihood of higher interest rates. It is worth noting, however, that the US stock market is experiencing its second longest bull market (prices rising) in history, as shown in this New York times article. It is also the longest bull market without a correction of 5% or more. My view is that this bull market may continue for a year or two more but history suggests that a significant correction (10% + fall in prices) is inevitable before too much longer so be prepared for that.

Australia’s apartment construction boom

 It’s no secret that we are building a lot of apartments in Sydney, Melbourne & Brisbane but most people wouldn’t recognise just how strong this building frenzy is relative to other countries. US financial expert John Mauldin (on page 6 in his newsletter) writes that as at September 2017 Sydney had:

“350 cranes being used to build high-rise residential properties. That’s more cranes than were deployed in all of North America’s twelve largest cities. Construction is booming in Australia. In fact, the comparison is even more stark. On a per capita basis, Australia has 14.6 times as many residential construction cranes working as North America does”.

Even if the statistics or the comparison aren’t 100% valid, anyone thinking of buying a high-rise unit should be cautious as there’s a real possibility that supply will outstrip demand for a few years and that could lead to some hefty price falls in some areas.

 What is an Enduring Power of Attorney

An Enduring Power of Attorney (EPoA) is a document where a principal (a person or company) appoints an individual or individuals (called the attorney) to act for the principal in relation to financial affairs, property matters and, in some States, lifestyle matters such as medical treatment or where the principal lives and how they should be cared for. The attorney should be someone you trust.

The most common situation where an EPOA may be used is in cases where a person no longer has mental capacity to make their own decisions usually because of deteriorating health.

It is also worth noting that the requirements to have an EPOA differ in each state.

In order to be prepared for the unexpected, it is not only important to have a valid EPOA document executed but to also regularly review the document to ensure it reflects the principal’s current wishes and circumstances.  An EPOA should also always be considered in the wider context of your estate plan.

What are investment benchmarks?

 J B Were says that “Investment benchmarks are performance standards against which the returns of an investment, such as a share, bond, fund or portfolio, can be measured. Investors compare the returns of an investment against a particular benchmark for a variety of reasons, for example to see whether a particular managed fund has performed better or worse than comparable funds.

In Australia, the most common benchmark is the S&P/ASX 200 index which measures the performance of the 200 largest (measured by market capitalisation) index-eligible stocks listed on the ASX.

For international shares, Australian investors typically consider the MSCI World Equity (ex-Australia) Index the best benchmark as it covers all major stock markets in the world, except Australia. The index can either be measured on an unhedged basis, where changes in the Australian dollar versus other currencies impact the index performance, or on a local currency basis, where currency changes do not impact the index returns.

Benchmark returns can measure both price returns, which are purely the changes in the prices of constituent securities, and they can also measure total returns which include income (e.g. dividends) assuming that the income is reinvested. This can make a big difference in markets, such as Australia, where the dividends can comprise a substantial proportion of the overall return an investor receives.

Benchmarks have a role in assessing performance but they can be too simplistic and need to be used judiciously.  For example, they have been criticised for not providing tax efficiency – for example the S&P/ASX 200 index excludes the value of franking credits and ignores the lower tax rate on long term capital gains”.

 Bitcoin – an explainer

Bitcoin is constantly in the news these days as the price moves up and down enormously. If you are interested in learning more about this phenomenon – personally I think it’s a bubble but only time will tell – you may find this article from The New York Times informative.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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