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Welcome to the Cuffelinks Newsletter Edition 291
At the start of every year, investors are inundated with forecasts and projections on all manner of financial metrics. Company profits, economic growth, currencies ... on it goes. In theory, they act as inputs to asset allocations as portfolios are rebalanced.
Yet some of the world's most successful investors eschew these guesses about the future. Warren Buffett told the 2003 Berkshire Hathaway Annual Meeting:
"We don’t give a hoot about anybody’s projections. We don’t even want to hear about them, in terms of what they’re going to do in the future. We’ve never found any value in anything like that."
Another of our favourites, Oaktree's Howard Marks, has been writing letters to his clients for decades. In 1993, he wrote:
"Groucho Marx said "I wouldn't join any club that would have me as a member." Another formulation may be "I would never act on any forecast that someone would share with me." I'm not saying that no one has above-average forecasting ability. Rather, as one University of Chicago professor wrote in a paper years ago, such forecasters are more likely to be sunning themselves in Saint Tropez than going around entreating people to borrow their forecasts."
(The new client memo from Marks includes the famous 'beer' explanation of the tax system).
What does our annual look at the Morningstar Gameboard tell us? It's all over the place and history is no guide. The best asset class in 2016 was Small Caps, and it was the best again in 2017 then the worst in 2018. Australian fixed interest was near the bottom in 2016 and 2017 and top in 2018.
Nobody predicted Australian government bonds would win in 2018, when interest rates were supposed to be rising with the Fed tightening, the threat of inflation and massive bond issuance. But as the chart below shows, there was a big fall in Australian bond rates and forecasts were wrong.
It's time for a government bond face-off
Dear reader, don't switch off because we're on to fixed interest ... it's important. In one corner, Paul Chin says diversified portfolios should always hold some government bonds, while Jonathan Rochford says now is not the time. You're welcome to take sides in the comments.
Last week's articles on Labor franking changing behaviour and new superannuation policies drew plenty of comments, and Shadow Treasurer Chris Bowen laid down the gauntlet on ABC Radio on Tuesday:
"I say to your listeners, if they feel very strongly about this, if they feel that this is something which should impact on their vote, they are of course perfectly entitled to vote against us."
Also this week, Gemma Dale reports on the ASX and foreign bourse trading patterns of nabtrade clients. Nicholas Paul believes the QE flood of liquidity lifted all boats on a rising tide, but now it's time to know what you own as you navigate tougher markets. Similarly, Miles Staude cautions investors who say they need 10% returns but without taking capital risk.
Did you realise the reduction in the income threshold for the extra 15% tax on super contributions has led to thousands of taxpayers receiving a new tax bill? Julie Steed explains how this has crept up on many.
Notwithstanding our comments on the perils of forecasting, this week's White Paper from AMP Capital's Shane Oliver lists his macro factors affecting investments in 2019.
Graham Hand, Managing Editor
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Thanks to our Sponsors for their commitment to investor education
“Cuffelinks provides individual investors with access to independent, quality financial writing, helping them to make informed financial decisions.” - Australian Shareholders' Association
“Australia’s foremost independent financial newsletter for professionals and self-directed investors.” - Australian Investors Association
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The latest insights and ideas from hundreds of market experts
Newsletter Edition 291, 1 February 2019
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Government bonds always have a role in diversified portfolios
by Paul W. Chin
Government bonds do not feature in most retail portfolios, but they carry defensive qualities with income to offset the higher risks in other asset allocations. Are they always worth including? Read more…
Why bother investing in government bonds?
by Jonathan Rochford
Government bonds produced good returns last year, but at the current starting position of lower rates, the cost of defensiveness is probably a limited payoff. Read more…
Know what you own in complex markets
by Nicholas Paul
In some markets, the sheer volume of money flows into both good and bad companies, but when tougher conditions inevitably come, it’s the quality earnings that sustain. Read more…
Trading trends feature global moves
by Gemma Dale
Notwithstanding the popularity of ETFs, Australians are increasingly trading directly on foreign exchanges as online brokers make execution easier. But traditional local names remain popular. Read more…
Great investment expectations are deluded
by Miles Staude
Many investors are deluding themselves expecting high returns without taking risks, and it has poor consequences for retirement planning and setting goals. It pays to be more realistic. Read more…
Is a Division 293 tax notice coming your way?
by Julie Steed
It sounds arcane but it could be costly. For the first time, about 44,000 individuals will receive their first Division 293 notice early in 2019, and it will surprise many. Read more…
Marks and the tax system explained in beer
by Graham Hand
In his latest memo to clients, Oaktree’s Howard Marks quotes the popular ‘beer’ example to explain the tax system, and we reproduce it here. Read more…
Have Your Say in 2019
by Cuffelinks
Welcome to the ‘Have Your Say’ section. We have received thousands of comments on articles over the years, but here is a chance for you to set the agenda. Comment on any subject relevant to our audience. Read more…
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 Sponsor White Paper
A list of lists on the 2019 investment outlook
Shane Oliver provides his key insights on the investment outlook, covering diversified portfolios, recession fears, global politics and Australian property. Read more.
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