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Lizard
04-08-2013, 08:12 AM
As part of a small project to put together some investment resources for friends who ask for general investment advice, I had a play with the Sorted investment planner (https://www.sorted.org.nz/calculators/investment-planner).

I really like the concept - 9 simple questions will sort the user into an investment category and tell them what sort of asset allocation they should have. It is well written, nicely displayed and easy to read.

However, I did have some concerns in regard the quality of advice - i.e. while I thought I was answering the questions from a conservative, but pragmatic investment viewpoint and gave a 4-9 year time horizon, the calculator decided I was a "growth" investor and told me I needed to invest for minimum of 9-12 years.

The asset allocation it suggested for a "growth" investor was 60% shares, 26% bonds, 10% property and 4% cash. It then stated that the likely range of returns was -5.5% to +22.5%, with an expected loss one year in six. This is where I cringe a little at the thought of my inexperienced friends putting 60% into shares and 26% into bonds. While the one in six down years might be correct, I doubt very much that falls in a portfolio of that composition would max out at -5.5% in one year - I would have thought at least -15%, if not -25% for a portfolio of that composition would represent the possible damage.

Finally, I found the graphical returns amusing - after suggesting I invest for 9-12 years, the graph then shows some theoretical outcomes (maybe these are randomly generated each time, so may vary with users?) where the growth investor is still below their entry value for the first 12-15 years and only doubles their money after 25 years - a return of 2.8% pa. Well at least that wouldn't get hopes up too much!

Overall, I find the various asset allocations are determined far too much by the approach of a professional fund manager rather than by the needs of the amateur investor (who are the clients for "Sorted"). The largest allocation to "cash" (term deposits) is 10% in the defensive portfolio, along with 70% in bonds and 14% in shares. My personal view is that the truly defensive investor who is self-managing and wants minimum hassle will probably have a more comfortable ride in rolling/staggered term deposits than trying to figure out the relative merits of various bonds and shares. They could certainly still expect to make at least the 1.5%pa compound returns that the graph suggests over 25 years. (I can't help wondering if the graphs are inflation adjusted, as well as net of fees and tax?)

BIRMANBOY
04-08-2013, 12:06 PM
Yes its a very basic setup but I suppose is better than nothing. My guess is that in order to cover the basics you end up having a fairly simple guideline. If they added a secondary or even third layer of information gathering would have been more productive but again the aim is to paint a broad brushstroke picture and then shunt people off to advisors etc. I went in as an over 65, small fixed income and conservative minded punter and it came back with cash 7%, bonds 63%, property 8% and shares 22%. How you put 8% in property is baffling me but 63% in bonds I would agree with. Of course then the investor has to find someone to advise which bonds and which shares so not an easy task. The "expected return" is a joke...-0.3% to 13% thats a cover my ass figure which isnt really all that helpfull. Its a shame that the Govt. doesnt actually go the next step and have AFA's available as a service for people who fall under or outside the private industry sector.
As part of a small project to put together some investment resources for friends who ask for general investment advice, I had a play with the Sorted investment planner (https://www.sorted.org.nz/calculators/investment-planner).

I really like the concept - 9 simple questions will sort the user into an investment category and tell them what sort of asset allocation they should have. It is well written, nicely displayed and easy to read.

However, I did have some concerns in regard the quality of advice - i.e. while I thought I was answering the questions from a conservative, but pragmatic investment viewpoint and gave a 4-9 year time horizon, the calculator decided I was a "growth" investor and told me I needed to invest for minimum of 9-12 years.

The asset allocation it suggested for a "growth" investor was 60% shares, 26% bonds, 10% property and 4% cash. It then stated that the likely range of returns was -5.5% to +22.5%, with an expected loss one year in six. This is where I cringe a little at the thought of my inexperienced friends putting 60% into shares and 26% into bonds. While the one in six down years might be correct, I doubt very much that falls in a portfolio of that composition would max out at -5.5% in one year - I would have thought at least -15%, if not -25% for a portfolio of that composition would represent the possible damage.

Finally, I found the graphical returns amusing - after suggesting I invest for 9-12 years, the graph then shows some theoretical outcomes (maybe these are randomly generated each time, so may vary with users?) where the growth investor is still below their entry value for the first 12-15 years and only doubles their money after 25 years - a return of 2.8% pa. Well at least that wouldn't get hopes up too much!

Overall, I find the various asset allocations are determined far too much by the approach of a professional fund manager rather than by the needs of the amateur investor (who are the clients for "Sorted"). The largest allocation to "cash" (term deposits) is 10% in the defensive portfolio, along with 70% in bonds and 14% in shares. My personal view is that the truly defensive investor who is self-managing and wants minimum hassle will probably have a more comfortable ride in rolling/staggered term deposits than trying to figure out the relative merits of various bonds and shares. They could certainly still expect to make at least the 1.5%pa compound returns that the graph suggests over 25 years. (I can't help wondering if the graphs are inflation adjusted, as well as net of fees and tax?)

CJ
04-08-2013, 02:31 PM
They seem to favour bonds which for a DYI investor, isn't such an easy option to diversify unless you have a lot of cash. Likewise 10% property - how do you do that unless you have a lot of money unless you just choose one property stock (is that equity or property??)

peat
04-08-2013, 06:16 PM
How you put 8% in property is baffling me

Listed property trusts would provide exposure to property and be relatively liquid and fungible.

And using managed funds would allow selecting a diversified portfolio of bonds and equities as well without involving further specialist research.
I haven't looked at Sorted but I imagine that's how they envisage their assessment being actioned.

RRR
04-08-2013, 07:35 PM
Investment planner tools, I think, are designed by the fund management industry to push its own products! There is no free lunch and one has to take responsibility for their own investment/saving decisions and is the hardest part for the investor to understand.

Lizard
05-08-2013, 06:36 AM
Hi Birmanboy, I am interested that you agree with 63% bonds and wonder if you would elaborate. Do you see advantages over term deposits? If so, are there specific constraints around the type of bonds you would purchase?

I have used bonds for the past 13 years, but have found them particularly "scary" investments from a number of viewpoints. While the bonds issued immediately post-GFC were largely good for investors, the choices available in the year or three leading up to the crisis saw me being sold PiNZ, Credit Sails, Babcock & Brown, South Canterbury Prefs - which I bought simply to maintain my % asset allocation. I was fortunate to exit two of those (and narrowly missed exiting a third). I still buy bonds for liquidity and currently have a fair chunk of re-sets bought at discount to face value, but unlike shares, it seems the % loss possible on bonds far exceeds the capital gains that are possible.

Also unlike shares, where good performance is usually aligned with management interests, it seems good performance on bonds is more contrary to management aims, which are to keep debt costs low. Therefore, any asymmetry of information between issuers and investors will likely result in terms unfavourable to the investor at time of sale. Combine this with an advice community that is rewarded for selling them and that the exact terms of debt securities are vastly more variable than those of equity and it seems very difficult for investors to understand what level of risk they are taking on.

The secondary market may offer better terms, but the standard transaction rates mean taking 0.5 - 1.0% brokerage off the overall returns received. It also seems capital gains from secondary market transactions are taxable as deemed a "financial arrangement", while 100% losses cannot be used? Both costs reduce the attractiveness of return and make it more unlikely that return will exceed that of term deposits once risk is accounted for.

My personal conclusion is that most amateur investors are better off with less in bonds and spreading any bond allocation between term deposits and shares. Some of the bond risk is alleviated by a good Financial Advisor, but at that point, the additional cost of advice needs to be considered, particularly if it means that funds the investor could manage themselves are now subject to an annual monitoring fee.

Maybe it is just my experience of the GFC that has tainted my perspective on bond instruments, so am interested in other thoughts from those who have used them more extensively.

BIRMANBOY
05-08-2013, 05:33 PM
Firstly DYOR of course but for me TD are a benchmark to be exceeded. At the moment a TD is 4.09% and bonds are returning for me anywhere from 6.85% to 9.1% so for me its no-brainer. Here are the pros and cons as far as I am concerned.
PROS
(1) if you buy at the initial release there is no brokerage fees or any charges
(2) you can buy as little as $2000 or as much as you want (varies somewhat)
(3) From a "safety" point of view you can be pretty sure a utility such as CENFA.NZX or TPW070 or TPW010 or a major infrastructure such as AIR010 are going to be OK
(4) Even when a bond gets called in early like Genesis recently, you still get your original investment back (if you purchased at outset)plus you would have had 8% (or whatever it was) for 2 years.
(5) If the Interest rates move in your favour you can end up with not only a hefty interest return but also cap gain if you wanted to sell.
CONS
(1) If you buy on market brokerage fees and charges apply
(2) If the interest rate shifts against you...substantially..you could be be sitting on a bond paying less than you could get as a TD. If you sell on the market after an adverse interest movement then you will probably sustain a loss on your capital which could exceed your gains from interest %. Luckily most interest movements are small so not a big deal at the moment.

Like shares there are some bonds that show more risk than others so due diligence is necessary. As always the bonds showing the biggest yields are obviously being percieved as being riskier so I tend to be conservative. APN media would be an example..its a punting bond and for many reasons I would stay away. I do have however WKSHA which is a Downer bond that recently shifted to an annual reset. This is returning at current levels 6.82% but I purchased it at a price so that it is returning me 9.1%. This is my "risky" bond and only makes up about 5% of my bond portfolio. Ultimately whether you prefer the security of a TD or the risk of a bond is going to depend on two things...firstly how much effort and research you are prepared to devote to the situation and how conservative are your bond choices. I also have INFRATIL 060, 070, 090, 170 and 190 which range from 6.85 to 8.5. These i see as being a little risky but Infratil has a good track record and as an infrastructure investor I think they are smart people. Bonds and debt securities definitely require a bit more work and experience but the good thing is that as long as you stay conservative and on top of whats happening its hard to lose the lot....you might lose $3/400 if interest rates change but the % yields are compelling especially against the TD.
Hi Birmanboy, I am interested that you agree with 63% bonds and wonder if you would elaborate. Do you see advantages over term deposits? If so, are there specific constraints around the type of bonds you would purchase?

I have used bonds for the past 13 years, but have found them particularly "scary" investments from a number of viewpoints. While the bonds issued immediately post-GFC were largely good for investors, the choices available in the year or three leading up to the crisis saw me being sold PiNZ, Credit Sails, Babcock & Brown, South Canterbury Prefs - which I bought simply to maintain my % asset allocation. I was fortunate to exit two of those (and narrowly missed exiting a third). I still buy bonds for liquidity and currently have a fair chunk of re-sets bought at discount to face value, but unlike shares, it seems the % loss possible on bonds far exceeds the capital gains that are possible.

Also unlike shares, where good performance is usually aligned with management interests, it seems good performance on bonds is more contrary to management aims, which are to keep debt costs low. Therefore, any asymmetry of information between issuers and investors will likely result in terms unfavourable to the investor at time of sale. Combine this with an advice community that is rewarded for selling them and that the exact terms of debt securities are vastly more variable than those of equity and it seems very difficult for investors to understand what level of risk they are taking on.

The secondary market may offer better terms, but the standard transaction rates mean taking 0.5 - 1.0% brokerage off the overall returns received. It also seems capital gains from secondary market transactions are taxable as deemed a "financial arrangement", while 100% losses cannot be used? Both costs reduce the attractiveness of return and make it more unlikely that return will exceed that of term deposits once risk is accounted for.

My personal conclusion is that most amateur investors are better off with less in bonds and spreading any bond allocation between term deposits and shares. Some of the bond risk is alleviated by a good Financial Advisor, but at that point, the additional cost of advice needs to be considered, particularly if it means that funds the investor could manage themselves are now subject to an annual monitoring fee.

Maybe it is just my experience of the GFC that has tainted my perspective on bond instruments, so am interested in other thoughts from those who have used them more extensively.

Lizard
05-08-2013, 06:55 PM
Bonds and debt securities definitely require a bit more work and experience but the good thing is that as long as you stay conservative and on top of whats happening its hard to lose the lot....you might lose $3/400 if interest rates change but the % yields are compelling especially against the TD.

Thanks for your insights, Birmanboy. Much appreciated and I can see where you are coming from. It seems you had the good sense to avoid getting sold re-sets as the market was peaking or junk securities and have stuck to better quality issues which enable you to make a good premium over TD's. :)

Like everything, experience and work make all the difference to results. I guess that is where I favour term deposits for the more newbie DIY investor to cover their conservative fund allocation - only very minor requirements for work and experience in order to achieve an average result at minimal risk. (Some might think the Open Bank Resolution policy changes that risk level somewhat, but in the event one of the major banks needs OBR, then local market shares and bonds will likely be fairly perilous investments too!).

BIRMANBOY
06-08-2013, 11:05 AM
I dont know if I would consider someone buying a TD as an "investor":laugh: but yes take your point...its certainly safer than what we do and better than in the bank or under the futon. Banks failing are an entirely seperate situation and I dont buy into the whole bunker/collapse of civilization/shotgun and farming rabbits in the huindred acre wood philosophy. I dont see financial education as being an either /or situation however and IFFFF I was an AFA I would be saying to my customers if you want me to help you you need to help yourself. So this would entail...parking in a TD and showing them how and where to educate themself. If they dont want to participate in the process then the LCD of a TD is fine but what a waste.:(
Thanks for your insights, Birmanboy. Much appreciated and I can see where you are coming from. It seems you had the good sense to avoid getting sold re-sets as the market was peaking or junk securities and have stuck to better quality issues which enable you to make a good premium over TD's. :)

Like everything, experience and work make all the difference to results. I guess that is where I favour term deposits for the more newbie DIY investor to cover their conservative fund allocation - only very minor requirements for work and experience in order to achieve an average result at minimal risk. (Some might think the Open Bank Resolution policy changes that risk level somewhat, but in the event one of the major banks needs OBR, then local market shares and bonds will likely be fairly perilous investments too!).

CJ
06-08-2013, 11:49 AM
(3) From a "safety" point of view you can be pretty sure a utility such as CENFA.NZX or TPW070 or TPW010 or a major infrastructure such as AIR010 are going to be OK
Whats your view on holding bonds in companies like the ones you mention (ie. "safe" infrastructure companies), verses holding the shares in those companies where the Dividend yield is probably similar.

Note: I am not at the stage where I need the income from my investments other than to reinvest.

BIRMANBOY
06-08-2013, 01:37 PM
Depends on the timing...AIR010 is paying 6.9% as a bond but 3.85% as a share. Infratil is share dividend of 3.33% but returning 6.75% to 8.5% as a bond. Trust Power is 8.4 and 6.75% as bond and as a dividend share is 5.48%. All at current prices share prices and assuming you got bonds at application. However if you owned shares at lower prices could be comparable. I like to have a wide range of shares and bonds since if the proverbial faecal matter hits the oscillating wind generator I dont want to be cut up and buried in the back yard by my wife. I dont like to spend all my time following and tweeking my portfolio so I try and follow a system of do it right first and then leave it alone. I dont need the interest or dividends at the moment so it all gets re-invested periodically but with shares I am fussy about what price i pay...at the moment I have a sizeable cap gain sitting because of low holding price mostly. Problem with this is of course that it means opportunities are few if I use my holding price as a benchmark. Bonds are usefull for this as new ones pop up everynow and then. IFT recently had one at 6.75 so good timing.
Whats your view on holding bonds in companies like the ones you mention (ie. "safe" infrastructure companies), verses holding the shares in those companies where the Dividend yield is probably similar.

Note: I am not at the stage where I need the income from my investments other than to reinvest.

CJ
06-08-2013, 02:08 PM
Trust Power is 8.4 and 6.75% as bond and as a dividend share is 5.48%.Aren't you comparing gross and net yields there. Dividend yield is net 5.48% but gross yeild is 7.5% which puts it right in the middle of what I assume are the gross yeilds from the Bonds.

AIA, VCT and CEN are all yielding under 4% (lower than their respective Gross dividend yeilds) if bought on market so they were obviously issued during happier times for Fixed interest investors: https://www.asbsecurities.co.nz/rw/es/ASBSecurities/Announcements/DailyNZFixedInterest.pdf

BIRMANBOY
06-08-2013, 02:45 PM
I use declared dividends as benchmark....prior to imputation credits..as far as I can see that is what TP has on their website. This is comparable to gross yield on bonds before tax...unless Trust Power has declared a net dividend? Problem is its sometimes difficult to ascertain whats what. Re AIA etc Yes as interest rates drop more people are willing to pay premium for older higher yielding bonds so current yield can be unattractive..to me anyway. However someone must be buying them?