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Investing: How to reduce concentration risk

27 October, 202127 October, 2021 Investing

Concentration risk. No, it’s nothing to do with thinking too hard about something. In fact, it’s more likely to be a result of not paying enough attention. Concentration risk is the increase in investment risk that comes about from not sufficiently diversifying your portfolio. In other words, too much money is concentrated in too few assets, sectors or geographical markets. This can happen: Intentionally, because you have a strong belief that a particular share or sector, such as resources, banks or property, is likely to outperform in the future. Unintentionally, through asset performance. One or two shares deliver spectacular gains, making the entire portfolio more sensitive to moves in just a couple of assets. Or maybe shares as a whole enjoy a period of strong growth. Even though you hold a large number of different shares, the increased exposure to one asset class increases the risk to your portfolio. Accidentally, through poor asset selection. As at December 2020, nine of the ten top companies that make up the MSCI World Index also appear on the top ten list of the main US index, the S&P 500. Investing in two funds, one that tracks the world market and one that tracks the US market won’t deliver the level of diversification you might expect. Managing your risk The solution to concentration risk is our old friend, diversification. Appreciate the importance of asset allocation, the art of spreading your money across the main asset classes of shares, property, fixed interest and cash. Ensure your asset allocation matches your tolerance to investment risk. Diversify within each asset class. Holding the big four banks is not a diversified share portfolio. If property is your thing, buying four one-bedroom apartments in the same building, or even in the same area, creates a huge concentration risk. Understand each investment and its role in your portfolio. Does share fund A hold similar shares as share fund B? Do they both have the same strategy? Get a professional opinion. Even if you are confident in making your own investment decisions it’s wise to run them by a licensed adviser. It’s surprisingly common for investors to develop an emotional attachment to particular shares or properties they own. Concentration risk can also increase over time due to lack of attention. Your financial planner will assess your portfolio for hidden concentration risk and help you achieve a better balance of investments. The information provided in this article is general in nature only and does not constitute personal financial advice.

Economic Update: July-September 2021

7 October, 20217 October, 2021 COVID-19, Economy

COVID here to stay The third quarter of the calendar year brought with it the third and by far the biggest wave in COVID-19 infections. Largely restricted to NSW and Victoria the outbreak was driven by the highly infectious Delta variant. Such was its speed of spread it forced a change in strategy from one of elimination to learning to live with the virus, supported by a massive vaccination campaign. By quarter’s end vaccination rates were closing in on key targets that will allow a slow and selective lifting of the severe lockdown conditions that have prevailed for months. Time to chill You know Australia has a housing problem when the head of one of the big banks, in this case Matt Comyn at CBA, calls for action “sooner rather than later” to stop the property market overheating. This was on the back of CoreLogic data showing house prices in Melbourne and Sydney rose 15.6% and 26% respectively over the 12 months to August. The International Monetary Fund (IMF) also called on Australian regulators to cool the market. Don’t expect this to happen through the usual instrument of increased interest rates. Rather, look for reduced lending in specific sectors, such as investors, higher deposit requirements, or testing loan serviceability at higher interest rates. Pop goes iron ore Iron ore’s price bubble eventually popped as China instructed its steelmakers to cut back on production. Over the quarter the ore price fell 45%, with major miners taking an equivalent hit. BHP, Rio and Fortescue saw their shares tumble 33%, 26% and 44% respectively. Hot topic In August the Intergovernmental Panel on Climate Change (IPCC) released its latest report. It warned that “unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to 1.5°C or even 2°C will be beyond reach”. The report paints a grim picture of what that warmer world will look like and returned climate change to the front pages of the world’s newspapers. The numbers Equity markets experienced a bit of a rollercoaster ride over the quarter. All the major indices posted record highs, but most ended up within 1% of where they started. The Aussie dollar also had a volatile quarter, trading between 71 and 75.4 US cents and finishing at 72 cents. It was a similar story against the other major currencies. In both cases the late-quarter sell-offs were blamed on expectations of higher US interest rates. On the radar Many of the world’s leaders will come together in Glasgow at the end of October for the 26th UN Climate Change Conference (COP26). If they heed the warning from the IPCC, and if they agree to take the necessary steps to limit warming to 2°C (and preferably 1.5°C), it will set the scene for a dramatic economic transformation, with huge opportunities for those who can sort the winners from the losers. Of more immediate concern, Chinese property company China Evergrande appears to be on the brink of collapse. Heavily indebted to the tune of US$300 billion, if it is allowed to fail it is likely to have global ramifications, not the least for Australia. China’s construction boom has been a huge driver of demand for our iron ore. The information provided in this article is general in nature only and does not constitute personal financial advice.

Economic Update: April-June 2021

21 July, 202114 July, 2021 Updated on14 July, 2021 COVID-19, Economy

Employment surprise JobKeeper was a cornerstone of Australia’s response to the coronavirus pandemic. It provided millions of Australians with an ongoing income and kept thousands of businesses afloat, so when it came to an end in March expectations were that there would be a sharp spike in unemployment. One estimate was that 150,000 workers would lose their jobs. Happily, that wasn’t what happened. From March to April the unemployment rate dropped from 5.7% to 5.5%, then fell to just 5.1% in May. That’s below the 5.2% that applied in January 2020 before the pandemic hit, and an amazing outcome given the damage that COVID-19 continues to inflict on a virus-weary world. Housing continued to sizzle… Aspiring homeowners and upsizers endured another quarter of woe as home prices continued to soar. Nationally, dwelling prices were up 6.1% for the quarter and 13.5% for the year, with houses outperforming units. Of course, on the other side of the equation are homeowners, many of whom are delighted by the significant boost to their wealth. Continuing low interest rates remain the key driver, but other issues have played a part, including stamp duty discounts and households redirecting the cash they would otherwise have spent on overseas holidays. Lockdowns last year also affected the normal supply of property leading to pent-up demand. As subsidies are rolled back, supply and demand normalise and if population growth remains low, property price growth may well come back to ‘normal’ levels. And despite the RBA not expecting to raise interest rates until at least 2024, some economists are pointing to the low unemployment figures to predict that interest rates may begin to rise by the end of 2022. There is also growing speculation that the RBA and APRA will lift lending standards (e.g. requiring lower loan to valuation ratios) in order to rein in galloping price growth. …as did share markets Global markets performed strongly over the quarter with many setting record highs. Locally the S&P/ASX200 rose 7.7%, beating the MSCI All-Country World Equity Index, which was up 6.9%. Tech shares were back in the lead with the NASDAQ gaining 11.2%, while the S&P500 rose steadily to gain 8.6%. The Aussie dollar fell slightly against the major currencies weakening late in the quarter following talk that the next move in US interest rates may be up. Also… – Workers receiving the minimum wage will see a boost to their pay packets from July, with the minimum wage rising by 2.5% to $772.60 per week or $20.33 per hour. – Most people will see the superannuation guarantee (SG) payment from their employers rise by 0.5% to 10% of normal wages. This is one step on the path to raising the SG to 12% by 2025. – According to Credit Suisse, nearly one in ten Australians are now millionaires. Twenty years ago the figure was less than 1%. Of course a million dollars today doesn’t have the buying power it did 20 years ago, but only Switzerland has more millionaires per capita than we do. – Massive infrastructure projects and home renovation booms have caused a global shortage of building materials. An indicator, perhaps, that some COVID-19 stimulus measures have been a tad overdone? The information provided in this article is general in nature only and does not constitute personal financial advice.

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