Well, to start off, what does it mean? In short, it’s just rapid change and unpredictability. Australians are usually a fairly optimistic bunch (she’ll be right, mate), but when most people think of volatility and investment, it’s a different story. Most people would suggest, when it comes to markets, volatility means down. That’s not necessarily the case.

Now, lets talk for a minute about the recent uptick in volatility. Firstly, let’s put this into perspective.

• In 2017 the S&P 500 Index (a broad measure of the US stock market) recorded eight days of a one per cent or greater move (either up or down), with no days seeing a move of two per cent or more for the entire year.
• Since the start of 2018 (to 10 April) there have been 68 trading days in the US. Across this timeframe, the S&P 500 Index has recorded 28 days of a one per cent or greater move in either direction.
• The largest daily move was more than four per cent, as well as one day of more than three per cent and six days of more than two per cent.
• An increasing mix of factors has contributed to this noticeably higher level of volatility, including a divergence in price/value between classifications of stocks; industry trends; and macro-political influences.

What are we worried about?

• The potential for rising interest rates;
• The US Deficit;
• Chinese Growth

That’s a start.

So, we can comfortably say that volatility is ‘likely’. Now, everyone would prefer (I imagine), a nice steady graph of their chosen investment market such as shares, property, bitcoin (just kidding) going steadily up and to the right. Like this.

But that’s not going to happen. In fact, over the last 12 months, the ASX 300 (the most commonly used proforma for the Australian Stock Market, has been like this.

 

That’s why there is a picture of a roller coaster in the heading.

But, and this is the good news, most Australians of working age are already making the most of this volatility without even knowing about it. Making regular contributions to investments (also known as Dollar Cost Averaging), helps smooth out these returns, and can even mean your investments make money when the price doesn’t rise. Huh?

The mathematics are a topic for another day (awww says everyone we love mathematics), but the good news is, if you have an employer (or are an employer) and are receiving regular super contributions, then volatility is probably your friend. There’s a few disclaimers like you don’t want too much volatility close to retirement, but if you are working, and say below 55, volatility may be the wind in your sails (Terry always likes a boating reference).

I will go into the specifics of how dollar cost averaging can work next week, but until then if you have any questions, please give us a shout.

 

One of the things I hear regularly is people ask “What’s a good question to ask your adviser?” No questions guarantee you will find a good adviser, but some good questions may potentially throw up some red flags to avoid.

In light of the Banking Royal Commission, this is ever more relevant. There have been ‘independent’ planners with questionable activities as there have been with ‘institutional’ planners, but these questions are likely to give you a bit more insight into where you stand.

Who owns your business?

Most advice firms are owned by a handful of individuals. Be wary of those with institutional ownership, especially when those institutions also manufacture financial products. Massive conflicts of interest.

Who provides your licence (AFSL) to operate?

We have seen alleged examples of poor behaviour from CBA, Westpac and AMP aligned businesses. You may prefer a firms who has their own licence. This doesn’t guarantee a good adviser either. On key advantage of not being institutionally aligned, like AMP, Charter, BT, Hillross and the like  is that firms without institutional ownership are likely to be free to recommend a broader universe of funds and insurance products. If you are meeting with a firm licensed by a bank, ask them what percentage of their clients’ funds or insurance contracts are placed with related entities. This should tell you all you need to know.

Do you own any shares in the company you are recommending I invest in?

This is a tricky one. If your adviser recommends you buy some CBA shares as a part of a direct share portfolio, chances are they may have some too. Thats probably not an issue. What may be an issue is that some advisers are developing their own in-house sector funds. For example, the Acme Financial Adviser Australian Share Fund (err, this is not actually a real fund). This creates a conflict of interest. Focus on those who have a broad Approved Product List (APL) to recommend only the best-in-breed and most fee-competitive funds.

What is an Approved Product List (APL)?

Put simply, an APL is a list of products that have been researched by the licence holder, and approved for use by the advisers. An institutionally owned licence that has an APL not much wider than their own products would appear restrictive of what the adviser could recommend.

Conversely, a wide list of available products should mean an advise is free to choose what really IS in your best interests.

To clarify, the issue with restrictive APL’s is to me, fairly clear. The banks are taking a lot of flak at the moment, most of which appears warranted. But that doesn’t mean that all the bank products are bad for all the people all the time. In fact, as an outside example an AMP super product MAY be the best thing for the next client that walks in the door. If that is the case, the adviser should be able to demonstrate that to their client. The problem is, would that same product be suitable for ALL clients, at ALL times? Maybe not. An ability then for an adviser to use that AMP product when it suits, and a wide range of other products to suit other clients at other times is likely to provide a better answer to all of the clients of that adviser.

At Accrue Financial, we still believe that the best way to get to know an adviser is to get a referral from a trusted friend or other professional. Word of mouth still works, as the people giving the recommendation have gone through the processes before.

If you have any other questions on this post, please let us know, and keep an eye out for more questions in the weeks to come.