Investment Book Recommendation

The Little Book of Common Sense Investing
by John C. Bogle.
 

This is probably the only book on investing you’ll ever need to read. At the 2017 AGM of Warren Buffet’s company, Berkshire HathawayJack (John) Bogle was introduced as the “person who has done the most for the American investor.” He has contributed immensely to making investing accessible to the general public.

We attended the Berkshire Hathaway 2017 AGM and picked up a copy of this book on our return. The book’s message is simple yet powerful. Whether you are a novice or professional investor, you’ll learn something. This is probably the best book ever written for investors to help understand how the investment markets and financial services industry operates. So if we had to pick one book on investing this is it.

“The two greatest enemies of the equity fund investor are
expenses and emotions.”

John C. Bogle, The Little Book of Common Sense Investing

Bogle provides a detailed overview of two different investment options: actively managed funds and index funds. The book provides evidence of why it’s better to invest your money in a low-cost index fund instead of giving it to a high-cost investment fund, run by a fund manager.

He also outlines why;

  1. The way to wealth is to capitalize on the magic of long-term compounding of investment returns.
  2. Most funds will underperform a simple index fund.
  3. The stock market increases and how to value it.
  4. Simplicity will always beat complexity.
  5. The stock market is a giant distraction to the business of investing.
  6. How to calculate future investment returns from the stock market.

Common sense investing is not as easy as it sounds. Let us know if you would like a copy of this Little Book of Common Sense. If you would like us to help you implement some common sense investment strategies do get in touch. We’d be delighted to help.

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What is the Investment Outlook

What’s the Investment Outlook?

Covid-19; What is the Investment Outlook?

Covid-19 is first and foremost a human tragedy

While markets were aware of COVID-19 in China, the catalyst for the market drop in late February was when the virus hit Europe. Then it became clear it was now a global issue. As a result of the ongoing COVID-19 crisis, global equity markets fell 30% from their Feb 20th high. Recent recovery means markets have rebounded and are now around -15% from the same levels. A 60/40 global multi-asset portfolio, which consists of 60% stocks and 40% government bonds, is down 5 – 6% over the last 12 months. Not a favourable result, but not the end of the world either.

Stock Market Expected Returns

Stock market share prices are based on an expectation of future company earnings, earnings over the next 30 years, not just over one year. We expect these earnings will suffer for between 10 and 20 months. A global recession is now evident. Investment markets and market-related investments will recover. The expected return of global stock markets remains over 5% pa. This expected 5% pa is very attractive relative to global bonds expected return at less than 1% pa. It looks likely that the massive government and central bank stimulus packages and QE will keep bond rates lower for longer. In the short-term, the movement in the Stock Markets are driven by opinions, sentiment, and fear. However, over the long-term, the global trajectory is upwards, and increasing markets are driven by one thing: earnings.

Patience is rewarded

After an investment market fall of over 20% (bear market), the average recovery period has been 15 months. The last four bear markets have been followed by 10.9 years, 12.8 years, 4.8 years, and 9.8 years of global investment market growth, respectively. The Fama/French research graph below shows that the average US Investment market return after a 20% market decline is 11.65% pa over the following five years.

 

What Next?

Our emotions will certainly be tested. Working from home, cocooning, and social distancing have and will be challenging on many fronts. Investment market performance can test feelings also. Even in the worst historical markets, stocks never declined as quickly as they did last month. There may be several bear market rallies that give investors a sigh of relief, only to see a move to lower prices.

Reasons for realistic optimism.

Equities are attractive versus most other asset classes. Financials and real estate sectors are likely to come under pressure. Technology and sustainable, climate change industries will prosper. Emerging Markets are the geographic region most likely to flourish quickest. The recovery is expected to be reasonably quick, once a solution to the virus is discovered. A few countries have begun to ease some lockdown restrictions, including two of the worst affected, Italy and Spain.

Days or Decades?

We are very aware of both the local and global issues, particularly around employment and cash-flow, for both individuals and small businesses. As Financial Planners, we try to help you`focus on your lifestyle over the coming years and decades. We try to help you stick to the plan even when its uncomfortable, so that your pensions and investments will provide the lifestyle you are looking for in future years. Sometimes the daily news headlines can be overpowering. A little more time for activities such as gardening, painting, exercising in the fresh air, even parenting, is good for the soul, and even Mother Nature is benefiting in this Covid-19 crisis. In our opinion, cautious optimism is a better view than pessimism and negativity. I think it’s safe to say that 2020 is not turning out like any of us expected, or hoped. The past 90 days have been challenging in many different ways. It is likely the trajectory of the next decade will be upwards and onward, with many bumps and hollows along the way, just like normal. In the meantime, we are here to help. Does anyone else miss Brexit? Read More: What To Do If Investment Markets are in Freefall

Pat Leahy, Certified Financial Planner.

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Compound Interest, 8th Wonder of The World

The 8th Wonder of The World

A Simple Idea.

Charlie Munger, the vice chairman of Berkshire Hathaway says, “Take a simple idea and take it seriously”. The simple idea that should be taken seriously by every investor is the ability to earn compound interest on your savings over the coming decades.

Compound Interest and College Fees

Let’s look at a simple example. We all want to give our kids, or even our grandkids, the best possible start in life and a good education is half the battle. However, education, particularly third level education does not come cheap. College fees may be free, but other costs certainly add up. Conservative estimates suggest annual costs vary, but begin from €10,000 to €12,000. Currently, the monthly child benefit amounts to almost €300 per month for two kids. Take the following scenario: 

  • Save €300 per month.
  • Investment strategy is market related.
  • Timeframe is for 10 years.
  • Assume annual interest rate, net of costs, is 5% per annum.
  • No indexation of contribution applies here.

Compound interest adds €11,544 to the value of your investment. We’ll leave you contemplate the difference between this and the current deposit based returns, which are small fractions of 1% per annum. Simple interest would have added €1,800 over the 10 years.

Snowball Effect

Think of compounding as like a snowball rolling down a steep hill. As it gathers more snow along the way, momentum increases and the ball becomes deeper and broader as it moves forward. Compound interest is amazing but just like most things in life, there’s no free lunch. The simple truth is that it takes a long time to work. To get the rewards you have to stick with it and stay the course during good times and bad. Problems arise with the snowball if you start making withdrawals, a 10 year horizon rather than a 10 month plan is required.

Investment Plans @ 5% p.a.

Focusing on trying to grow your wealth by compounding is a key element of any investment plan. The same applies with retirement plans. Just take a look at the graph below which JP Morgan Asset Management created to illustrate the power of compounding. One line shows the example of somebody starting to save at 25, let it be for retirement. This clever person that starts to save at 25 years old, accumulates circa €284,000 more in retirement funds than the person that starts at 35 years old. The 35 year old has still done well!

Investment Returns – What to Expect From Here.

Perhaps you are wondering about the 5% return piece of this jigsaw. Complex investment options can give the illusion of control. Our theory is that advice doesn’t have to be complicated to be good. Equities have delivered the best investment returns for investors over the long-term. Despite various recessions, business progress has been the order of the day in developed and democratic countries. Equities, which are essentially a collection of businesses, have reflected this.

The MSCI World Index has generated 10 year annualised returns of 7%, 6% and 12% for each of the last 3 decades, respectively (see table below). In our view the easiest way to ensure that a portion of your money will compound at a consistent rate over the coming decades is to invest in a strategy that gives you exposure to world equity markets.

We help you invest in portfolios that focus on large and medium sized companies that are globally diversified. Focusing on dividends plus dividend growth is, in our opinion, the most reliable way to invest in and make money from equities over the longer term. This applies particularly in today’s extraordinary bond market environment, where so many Euro government bonds have negative yields.

Meanwhile, European investment markets remain some 35% below its March 2000 highs, while Emerging Markets equities remain some 25% below their October 2007 highs. Japan is still 45% below its 1989 peak. The world is still concerned about global trade wars, rising Middle East tensions, Brexit, a slowing global economy, a possible recession next year, slowing industrial production, earnings estimates being revised down, possible impeachment of President Trump, etc. 

We do understand these fears, but perhaps investors are too negative in their views. In summary, while we are very aware of the global issues out there. Cautious optimism is a better market view than pessimism – Just look at the investment returns below for the disciplined investors availing of the eighth wonder of the world (Albert Einstein).

 

Pat Leahy, Certified Financial Planner.

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Investment Book Recommendation

The Little Book of Common Sense Investing
by John C. Bogle is probably the only investing book you’ll ever need to read. At the 2017 AGM of Warren Buffet’s company, Jack (John) Bogle was introduced as the “person who has done the most for the American investor.”

What is the Investment Outlook

What’s the Investment Outlook? Covid-19; What is the Investment Outlook? Covid-19 is first and foremost a human tragedy While markets were aware of COVID-19 in China, the catalyst for the market drop in late February was when the virus hit Europe. Then it became clear...