Blog - Raiz Invest

Bring to the table win-win survival strategies to ensure proactive domination. At the end of the day, going forward, a new normal that has evolved from generation.

17-09-19

From George Lucas, Raiz CEO

Global recession worries aren’t gone

This week, chatter about a potential global recession continued, despite the International Monetary Fund (IMF) saying that it is “far” from forecasting such an event, according to news agency Reuters. Indeed, although growth is slowing, economies are still expected to grow, just at a slow rate.

Interestingly, the stock market has not really factored in a recession or growth slowdown into current prices.  That’s clear if we look so far at September, which has not been volatile and has in fact seen the market move up, including the S&P500 again approaching all-time highs.

 

A possible volatile month for markets ahead

Still, although September can be volatile it is usually October where sharp market movement occur. Even so, there are signs to the contrary. For instance, the jobs market is strong globally and hence it is difficult to imagine a credit event that could cause a global financial crisis-style market event when employment is strong.

Similarly, robust employment means people are paying taxes, which can only help governments meet their obligations and boost infrastructure spending. Companies, meanwhile, are still hiring, with the latest NAB business conditions survey in Australia showing that companies’ intention to hire have improved, despite overall business conditions falling 2.0 points to +1.0 in August.

Secondly, investment committees around the world are having to make increasingly difficult decisions given the relative value of equities to cash and bonds and illiquid assets like property. Each investment committee will come to a different conclusion, but with cash rates expected to fall by two more cuts this year in the US, and many government bonds globally trading at negative rates it is a difficult decision where to allocate the cash once you sell out of equities.  It is possible for this reason that equities will remain at record levels.

 

Trump open to temporary China trade deal

Turning to the US, this week saw the Trump administration announce it was considering a “temporary” trade deal with China. Markets have been fixated on the trade war for much of 2019 and rising hopes for a deal have boosted risk appetite and expectations for global growth. Rallies in the Euro and emerging market currencies show just how much the market is focused on the ongoing trade stoush.

However, even if a temporary trade deal is stuck, there is no sign that the US and China are any closer to bridging their fundamental differences. Indeed, it is my view that the trade dispute could escalate further in the future. Given that, and with global growth likely to remain weak more generally, I still expect riskier assets to come under pressure soon – but I have been wrong so far.

 

US consumer prices tick up in August

Still in the US, this week saw the core CPI inflation rate there rise 0.3 per cent to an 11-year high of 2.4 per cent in August. The US Federal Reserve has worried that inflation has been rising too slowly, citing this issue as one of the reasons it cut interest rates in July.  The August data is very unlikely to stop the Fed from cutting interest rates again next week.

Meanwhile, US retail sales data showed that underlying sales growth is slowing but still growing, pointing to Q3 consumption growth still likely to be above 3 per cent annualised and overall GDP growth coming in at about 2 per cent annualised.

There was also a small rebound in the University of Michigan consumer confidence index. It rose to 92 in September from 89.8 in August, providing further reassurance that a severe consumer-led downturn is unlikely.

 

____________________

Important Note: The information on this website is provided for the use of licensed financial advisers only. The information is general advice and does not take into account any person’s particular investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this website.

Investors only: The information in this Document is confidential it must not be reproduced, distributed or disclosed to any other person unless it is part of their statement of advice. The information may be based on assumptions or market conditions and may change without notice. This may impact the accuracy of the information. In no circumstances is the information in this Document to be used by, or presented to, a person for the purposes of making a decision about a financial product or class of products.

General advice warning: The information contained in this Document is general information only. It has been prepared without taking account any potential investors’ financial situation, objectives or needs and the appropriateness of this information needs to be considered in that context. No responsibility or liability is accepted by Instreet or any third party who has contributed to this Document for any of the information contained herein or for any action taken by you or any of your officers, employees, agents or associates.

Photograph of river with rocky shore

It’s been almost 30 years since the severe economic downturn that then Treasurer Paul Keating famously described as “the recession we had to have”. Fortunately, the early 1990s recession lasted only a couple of years (at its worst) and, since 1992, Australia has enjoyed uninterrupted economic growth.

Even the global financial crisis couldn’t break Australia’s stride: though the dollar depreciated, equity prices fell, and unemployment rose slightly, we still managed to avoid a bona fide recession.

However, recent economic headwinds have caused investors to sit up and take notice. The ‘R’ word has reappeared, with some economists wondering if, after 28 years, Australia’s luck might finally be about to run out. In that context, savers may be wondering what they can do to stay ahead of a possible downturn.

Meantime, historically low interest rates from the Reserve Bank of Australia (RBA) means the hunt is also on for better returns. Finder research suggests that if both rate cuts have been passed on to deposit-holders, savers stand to lose $2.6 billion in interest.

This produces a complex economic environment for investing.

Here are three things to remember about building wealth in these multifaceted conditions.

 

Inflation is catching up

In a low-rate world, leaving cash in bank accounts or uncompetitive term deposits could mean that after inflation and tax, your money could be going backwards. RateCity shows interest rates for saving accounts as at 23 July 2019 after the Big 4 have passed on the RBA’s second cut:

Bank Product Base rate Max. rate
CBA Goalsaver 0.01% 1.15%*
West

pac

Life 0.60% 2.10%
NAB Reward Saver 0.11% 1.86%
ANZ Progress Saver 0.01% 1.95%

* For balances under $50K. CBA offers higher rates for higher balances.

When you consider the impact of taxation on the gross interest earned on these accounts, many savers will be earning less than the rate of inflation (1.3%).

To take an example, a person who is earning at the top tax rate (47%) and has $10,000 in an at-call account earning 2% p.a. interest will earn $106 after tax over a period of one year. Add in the effect of inflation (at 1.3%), and their $10,106 will be worth only $9,976 in real terms. Banks may be considered as safe as houses, but at least your house doesn’t get smaller every year.

If you’ve got cash in on-call accounts, consider why it’s there. Cash accounts are important for a rainy-day fund or for saving in the short term but may not generate wealth over the medium or long term. A failure to invest and instead leaving cash to languish in low-interest call or term deposits could, depending on your circumstances, be a guaranteed way to lose money in real terms.

And, if further cuts to cash rates eventuate, this could get worse. Minutes from the RBA’s July meeting indicate that the door is still open for further cuts: “The Board would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

In a recent survey of RateSetter investors, 75% of respondents said that continued low bank interest rates contributed to their decision to invest their funds in RateSetter.

 

Diversify, diversify, diversify

Is it possible to responsibly pursue better returns in a low-interest environment, with some critics speculating a possible recession? The key could be diversification.

Build resilience into your portfolio by making sure it comprises a blend of shares, bonds, cash, property, and so on. Remember: the asset mix of your portfolio should be based on your risk tolerance, and not on whether markets rise or fall (which they will in a cyclical fashion anyway).

A mix of defensive, fixed income and growth assets within a portfolio such us with Raiz and RateSetter, can help mitigate risk and expand the prospects of reliable earnings.

 

Use fixed-income assets as a life-jacket

Government bonds were among the strongest performing assets during the last global recession, outperforming the ASX 200 despite seven months of negative returns. While rates of bond issuance decreased slightly, the more notable shift was towards shorter term bond terms.

There’s a good reason for the popularity of bonds even during a recession. Along with other forms of fixed-income assets, like consumer credit (i.e. personal loans), they tend to demonstrate high resilience and consistent returns. So, including bonds and other fixed-income investments in your asset mix can provide stability through economic downturns.

 

Guest post contributed by RateSetter

RateSetter is Australia’s largest peer-to-peer lender, that allows you to earn attractive returns by investing in a portfolio of consumer loans. To start investing with RateSetter you can register here. RateSetter are offering Raiz investors a $25 sign up bonus if you register before 30 September 2019.

 

Don’t have the Raiz App?

Download it for free in the App store or the Webapp below:

download-raiz-app
Click to download the Raiz app

Important Information

The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.

The information in this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.

Past return performance of the Raiz product should not be relied on for deciding to invest in Raiz and is not a good predictor of future performance.

Globe on table representing global foreign exchange markets

Currency values are in constant flux, regularly going up and down in value. Five years ago, $1AUD was worth $0.90 USD. Today  it’s worth $0.68 USD.

However, this isn’t entirely random and there are factors that affect its performance. In this post we examine five factors that influence currency value.

1. Interest rates

Australia’s interest rates are set by the Reserve Bank of Australia (RBA).

If interest rates are increased, holding that nation’s currency generates higher interest payments, creating more opportunities for profit growth. This draws in traders who try to buy it up, increasing the price of the currency.

Conversely, if the rates are decreased, opportunities for profit decrease and the currency is considered less valuable, causing people to try sell it off. With falling demands, the currency’s price falls.

2. Economic stability

A stable economy is perceived as low risk, attracting foreign investment. This demand increases the price of its currency.

In contrast, a weaker economy leads to investors losing confidence and withdrawing their investments, leading to the currency dropping.

3. Trade-Weighted Index

The trade-weighted effective exchange rate index (TWI), a common form of the effective exchange rate index, is a multilateral exchange rate index. It is compiled as a weighted average of exchange rates of home versus foreign currencies, with the weight for each foreign country equal to its share in trade.

When exports outweigh imports, an economy is said to have a ‘trade surplus’, strengthening the stability of said economy. The currency value rises as foreign consumers buy the currency to purchase exported goods.

On the other hand, when imports are greater than exports, an economy experiences a ‘trade deficit’. The country must sell its own currency to purchase the imported goods, leading to a reduction in currency value.

The TWI is a way of measuring the above in one simple number.

4. World events

Geo-political events, crisis, and impending election can all affect the strength of a currency based on how that affects the perception of a country’s stability. A positive event can attract foreign investors, with a rise in foreign capital increasing the value of the currency. A country in crisis can lead to a loss of confidence and depreciation of its currency value.

5. Government debt

Government debt by itself not necessarily a negative. It can help improve local infrastructure and creative economic growth. However, when it is too high, it can lead to inflation and currency devaluation.

When public debt is reduced, the economy becomes more stable and again attracts more investors, increasing the value of the currency. If public debt increases, the government may issue more currency, increasing the volume in circulation (known as quantitative easing). This dilutes the value of existing currency holdings, causing prices to drop.

Don’t have the Raiz App?

Download it for free in the App store or the Webapp below:

download-raiz-app
Click to download the Raiz app

Important Information

The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.

The information in this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.

Past return performance of the Raiz product should not be relied on for deciding to invest in Raiz and is not a good predictor of future performance.

If you wait until age 40, how much will you have to deposit each month to reach the same amount?

Important Information

The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.

The information in this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.

Past return performance of the Raiz product should not be relied on for deciding to invest in Raiz and is not a good predictor of future performance.

03-09-19

From George Lucas, Raiz CEO

Nervous truce in US, China trade war sees equity markets up

Firstly, looking at equities, the S&P500 closed last week back near the top of its recent range, with key resistance up near the 2,945 level and the index still within 5 per cent of its all-time high.

This suggests that — taking a step back from market volatility and US President Donald Trump’s recent trade war tweets — that many investors are still not overly worried about the outlook.

One possible explanation for the comparatively limited reaction in equity markets is that investors are still clinging to hopes that the trade war will blow over. However, this position doesn’t look particularly credible anymore given both China and the US have recently doubled down on their positions. An escalation in the trade stoush seems a much more likely outcome.

The second theory is that there are continued hopes among investors that the global economy will be fine, despite the trade war. Admittedly, its direct effects on the rest of the world are likely to be relatively small, but its indirect impact via confidence and investment remains unclear.

The problem with both these analyses is they miss the bigger picture in that the global economy has already lost momentum for reasons not directly related to US-China trade. Data out of Germany this week showing its economy contracting on weaker exports in Q2 is a stark reminder of this.

Powell uses Jackson Hole to hint at Fed rate cut

Global growth will probably remain weak even with some further easing of monetary policy by the US Federal Reserve later this year. Indeed, Federal Reserve Chairman Jerome Powell’s much-anticipated speech at the Jackson Hole conference hinted that the Fed will cut interest rates at its September meeting, but did little to clarify intentions beyond that.

As it stands, investors expect a further 100 basis points of cuts over the next 12 months, but those projections are almost certain to be revised down at the September meeting. It’s not only investors who have been disappointed by the Fed’s gradual approach, with President Trump repeatedly — and increasingly stridently — calling for much looser monetary policy.

It’s likely that the Fed will cut twice more this year largely on fears financial conditions could tighten if it disappoints market expectations. In saying that, the Fed has never cut by more than 75 basis points in a year outside an actual recession and the US is not currently in a recession.

Trump hints at support for more tax cuts

Trump — because he is not getting his rate cuts — is now said to be considering further tax cuts. But even if he keeps pushing for them, there’s good reason to think won’t happen. Remember, Democrats control the House of Representatives and won’t want to help Trump in an election year, while Republicans may also balk at increasing US fiscal debt that’s already near 5 per cent of GDP.

Australian construction work slumps

At home, the slowdown in Australia’s construction industries has ramped up, with new data showing a sharp decline in building work done in Q2. This suggests private investment fell further in the three months to June and lifts the downside risks to GDP growth.

Still on the construction sector, it’s unlikely that rebounding machinery and equipment investment in Australia will be enough to offset the current slump in construction activity. However, Australian firms have revised up their forecasts for future capital expenditure, so the drag from falling investment may ease gradually over the coming quarters.

Don’t have the Raiz App?

Download it for free in the App store or the Webapp below:

download-raiz-app
Click to download the Raiz app

Important Note: The information on this website is provided for the use of licensed financial advisers only. The information is general advice and does not take into account any person’s particular investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this website.

Investors only: The information in this Document is confidential it must not be reproduced, distributed or disclosed to any other person unless it is part of their statement of advice. The information may be based on assumptions or market conditions and may change without notice. This may impact the accuracy of the information. In no circumstances is the information in this Document to be used by, or presented to, a person for the purposes of making a decision about a financial product or class of products.

General advice warning: The information contained in this Document is general information only. It has been prepared without taking account any potential investors’ financial situation, objectives or needs and the appropriateness of this information needs to be considered in that context. No responsibility or liability is accepted by Instreet or any third party who has contributed to this Document for any of the information contained herein or for any action taken by you or any of your officers, employees, agents or associates.

Bondi Beach

Guest post written by Bondi Beauty

There are ways to still eat healthy and be fit, whilst saving money at the same time.

There’s a stigma attached to the idea that when you are fit and healthy you need to spend a lot of money to stay that way.

In-fact there are multiple ways to still save money without it effecting your healthy lifestyle.

Start by reviewing your health-related expenses

Grab a notepad and pen and start writing out all your health-related expenses. This includes what you spend on gym memberships, fitness gear, health foods and even paid health apps you might be using; or haven’t used since you purchased.

Now, go through each item you’ve written down and see where you are spending the most money.

Ditch unused gym subscriptions and fitness apps

Do you have a monthly subscription to an app which you aren’t even using, whilst spending too much money on a gym membership that you only go to once a week?

It might be time to find a gym with no contract commitments where you don’t have to pay monthly fees, and ditch the health and fitness app if you haven’t used it for more than a few months, or ever.

There are loads of great options like Class Pass which has the option to trial for free for the first week and then select a plan for as little as $11.30 a week for six classes a month. No lock in contracts or membership joining fees and you have the flexibility to join any Class Pass registered fitness group, from Pilates, yoga to weights and even boxing.

Not only will this save you money on gym memberships, it also offer a great variety of locations, classes and is an easy way to meet new people.

gym
A no lock-in contract gym membership could potentially save you money

Reduce how often you eat out

What about food? Are you eating out too much?

Eating out is great, but when you calculate what you’ve spent over a week of purchasing lunch and dinner nearly every day, you’ll mostly likely find you have spent more than what a week-worth of groceries would cost.

Reduce how many times a week you eat out and reserve it for special occasions only.

There are loads of affordable ways to eat at home. Buy produce which is in season and limit the amount of meat you buy. Start experimenting in the kitchen and get cooking.

If you cook extra, you can save the leftovers and use them for lunch meals to stop you buying out every day at work. Freezer options are a great alternative to those nights when you get home too late and don’t have time to cook.

Instead of booking a table at your favourite restaurant, why not invite your friends over for a cook fest or potluck dinner. Share what yummy inspirational and healthy recipes you have found with your mates and cook up a feast. It’s cheaper and you control what you’re eating.

Don’t spend too much on activewear

According to sports psychologist Dr. Jonathan Fader, when you purchase new activewear, it inspires you to work out harder. But that doesn’t mean you need a new outfit every week. Activewear can be costly.

All you need are a few key items and you can cleverly mix and match your outfits for every workout, and easily look like you have multiple outfits.

If you have excess gym accessories and activewear outfits you don’t need anymore, or have hardly used, why not sell them on eBay for some extra cash.

This is a great way to get a return on your health and fitness and have extra money on the side if you really want to treat yourself to brunch with your mates on the weekend.

Don’t have the Raiz App?

Download it for free in the App store or the Webapp below:

download-raiz-app
Click to download the Raiz app

Important Information

The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.

The information in this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.

Past return performance of the Raiz product should not be relied on for deciding to invest in Raiz and is not a good predictor of future performance.

Emergency Helicoptor in Alpine Mountains

You might just be the luckiest person on Earth if you go through life without ever running into a situation that requires immediate and unexpected access to money. In these events, it helps to have an emergency fund (a.k.a rainy day fund) to soften the financial impact in stressful periods.

Unfortunately, 1 in 3 Australians admit their current spending is beyond their means and more than 50% of the population wouldn’t be able to cover the loss of income without turning to a credit card or loan. In the event of losing a job the imminent stress of rent, utility bills, food, and family related expenses can all come across as overwhelming burdens.

Humorously referred to by some as a F**k Off Fund, it is generally recommended to have three to six months worth of expenses saved away in your emergency fund. This sounds difficult to achieve on top of general living expenses, but the good thing about an emergency fund is that you can take time to build it up.

3 Tips for saving for an emergency fund:

Save in small steps

There’s an English proverb that says ‘beware the beginning’. Small steps don’t seem like much in the beginning but there’s no limit in the end!

The key is saving regularly. $2-5 a day doesn’t seem like much, but add it up and you can see $730-$1825 stashed away in savings in 1 year.

Automate your savings

Scheduling automated deposits into your savings account removes emotion and self-discipline from saving. Setting up an automatic transaction on the same day you get paid will whisk the money out of your spending account before you have the chance to spend it.

Use a good old piggy bank

Why not have a bit of fun by conjuring up some childhood nostalgia and getting an actual piggy bank to put away loose change? You can even gamify the experience – say every time you’re late to an event put away $1 into your savings. Once you fill it up, you can pour it into your Emergency fund.

Don’t have the Raiz App?

Download it for free in the App store or the Webapp below:

download-raiz-app
Click to download the Raiz app

Important Information

The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.

The information in this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.

Past return performance of the Raiz product should not be relied on for deciding to invest in Raiz and is not a good predictor of future performance.

Market Update

20-08-2019

From Raiz CEO, George Lucas

Markets jittery on global slowdown fears

This week, gloom around the global economy deepened, with bond yields plunging and stock markets falling — trends we’ve seen since late July. Indeed, in the US, shares slumped and investors fled to bonds with such intensity that short-term yields rose above longer-term ones, creating an inverted yield curve for the first time since the global financial crisis 10 years ago.

Globally, bank equities, which make up large portions of indices such as the SP500 or the ASX200, have struggled more than most recently. We expect them to remain under pressure, especially in Europe. As mentioned previously, we do not expect this volatility to ease back for some time.

What’s more, European bank equity valuations are now nearly as low as in the depths of the 2009 global financial crisis, the 2012 eurozone crisis, and the 2016 Italian banking woes and Brexit.

‘Fundamental’ questions surround bank business models

In this context, there are fundamental questions about bank business models as a flat or negative yield curve makes it harder for banks to turn a profit. Banks make money by borrowing short term and lending long term and it is hard to pass on negative rates to retail depositors.

Looking ahead, the picture doesn’t look overly positive. Interest rates are likely to remain very low in Europe for the foreseeable future and while the yield curve may re-steepen a bit in the coming years, the spread between shorter and longer rates will probably remain lower than in the past.

The fate of the Japanese banking sector provides a neat comparison. After the country’s housing bubble burst in the early 1990s, Japanese banks lost most of their market value. But, unlike US banks after the 2008 crisis, in Japan they never really recovered. Instead, permanently low interest rates and a flat yield curve have translated into persistently weak profits.

Does an inverted yield curve signal a US recession?

This week’s inversion of the yield curve set off alarm bells because, in the US since the 1960s, an inverted curve is often followed by a recession. However, one potential problem in using the slope of the yield curve to predict whether there will be a recession in the US is the “distorting” influence on bond yields of other factors besides investors’ expectations for monetary policy.

Another complicating factor is that the last three US recessions of the past 30 years were preceded by an inversion of both the actual yield curve and the risk-neutral yield curve. In this cycle, only the actual yield curve has inverted while the risk-neutral yield curve remains positive.

There’s also the US Federal Reserve’s own model to consider, which uses the slope of the actual yield curve to estimate the chance of the economy being in recession in 12 months’ time. Derived from 1959 to 2009 monthly data covering eight recessions, the model in July forecast a 31 per cent chance of the US being in recession in July 2020. This has probably risen now with the further recent steepening.

It’s this increasing risk of recession, and therefore slowing global growth, that’s behind the recent sell-off in global markets, while the renewed US-China trade war is more a catalyst than the cause.

No-deal Brexit risk lifts in UK

Turning to the UK, this week saw the risk of a no-deal Brexit increase, according to an assessment by the German government. It thinks there is a “high probability” of a no-deal Brexit on October 31, since UK Prime Minister Boris Johnson is unlikely to soften his hard stance on the Irish backstop.

The appraisal, made in a German finance ministry document, underlines Berlin’s staunch opposition to any renegotiation of the Brexit withdrawal agreement as demanded by the new British PM.

Don’t have the Raiz App?

Download it for free in the App store or the Webapp below:

download-raiz-app
Click to download the Raiz app

Important Note: The information on this website is provided for the use of licensed financial advisers only. The information is general advice and does not take into account any person’s particular investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this website.

Investors only: The information in this Document is confidential it must not be reproduced, distributed or disclosed to any other person unless it is part of their statement of advice. The information may be based on assumptions or market conditions and may change without notice. This may impact the accuracy of the information. In no circumstances is the information in this Document to be used by, or presented to, a person for the purposes of making a decision about a financial product or class of products.

General advice warning: The information contained in this Document is general information only. It has been prepared without taking account any potential investors’ financial situation, objectives or needs and the appropriateness of this information needs to be considered in that context. No responsibility or liability is accepted by Instreet or any third party who has contributed to this Document for any of the information contained herein or for any action taken by you or any of your officers, employees, agents or associates.

Modern Portfolio Theory (MPT) is a useful theory that shows how investors can construct a portfolio of assets that maximises expected returns for any given level of risk.

You’re probably familiar with the saying “don’t put all your eggs in one basket”, a short but effective analogy for explaining diversification. Spread the money in your portfolio across different investments, and it should reduce risk.

MPT is useful in that it provides a theory to determine which combination of investments (assets) you should spread your money across, in order to achieve the lowest possible risk for your desired level of expected returns.

Assets are not limited to one class of investments, such as shares in Australian companies, but include a range of assets such as bonds (government and corporate), domestic shares (Australian) and international shares (US, Europe, Asia etc). This allows for a more robust diversified portfolio.

In its simplest form, MPT answers this question:

I’m willing to take on this level of risk, what assets should I include in my portfolio to maximise my expected returns?

How does Modern Portfolio Theory work?

The first step is to calculate the expected returns and risk (measured as the variance of returns) of a combination of assets. Risk is often a historic measure not a forecast. Expected return however is often a forecast, so if this estimate is incorrect then so is the portfolio construction.

When calculating variance, you also calculate the covariance (correlation) between assets.  If two assets share a strong positive correlation, it means that both assets tend to move up or down in value at the same time. The implication of this being that investing in two positively correlated assets would be riskier than investing in two non-correlated assets.

Risk can be lowered in MPT portfolios by investing in non-correlated assets. This means assets that might be risky on their own, can actually lower the overall risk of the portfolio by introducing an investment that will rise when other investments fall.

However, correlations also tend to be historic measurements, not forecasts, and are thus subject to possible change as the past is not necessarily a good prediction of the future.

Being able to calculate a portfolios risk and expected return allows you to plot every possible combination of assets on a graph. The graph has portfolio risk on the X (horizontal) axis and expected return on the Y (vertical) axis. Using this plot, you can determine the most optimal portfolios for a given level of risk or expected return.

Raiz Efficient Frontier Graph
The yellow hyperbola is known as the ‘Efficient Frontier’.

For example, assume we are looking to construct a portfolio with a standard deviation in risk of 7%. Using the graph, we could see that Portfolio A has an expected return of 8% and a standard deviation of 7%, whilst Portfolio B has an expected return of 6% and a standard deviation of 7%. Investors would consider Portfolio A to be more ‘efficient’ because it has the same risk but higher expected return.

Keep in mind that past performance is no indication of future performance, however it can be used to understand the best possible portfolio mix with the least amount of risk.

How Raiz uses Modern Portfolio Theory

The Raiz Portfolios were put together with the help of the Nobel Prize winning economist and father of Modern Portfolio Theory, Dr. Harry Markowitz. Using MPT our portfolios are designed to give you the best possible returns for the least amount of risk.

The risk, correlations and expected returns are all based on historic performance.

We use a total of 9 different ETFs to construct our portfolios. In each portfolio these ETFs are allocated a certain percentage depending on the desired level of risk for that portfolio. For example, the more conservative portfolios have a larger percentage allocated towards government bonds, which are generally less risky than equities.

Raiz Portfolio
An example of a Raiz portfolio

The benefit of micro-investing with Raiz, which allows fractional holdings in the ETFs, is that with a minimum investment of $5, this amount is allocated across all ETFs within your portfolio (Bonds, Australian shares, US shares, Asia shares, Europe shares etc).

If you were to create one of our 7 ETF portfolios through a broker, you would be required to purchase all 7 ETFs separately, incurring possible trading/brokerage fee for each of these 7 trades.

You would also need much more money to invest in the portfolio as brokers don’t allow fractional holdings to get the correct weights in the portfolios (i.e. you can only buy whole units of an ETF). An ETF can trade for more than $300, and if, for example, it only made up 10% of a portfolio, you would need to invest $3,000 into that portfolio to get the correct weighting.

Automatic rebalancing is our method of maintaining your specific portfolio allocation. Market fluctuations may cause some of the securities in your portfolio to appreciate or depreciate in value. When this occurs, we use automatic rebalancing to bring your portfolio back to its specified allocation. This ensures that the securities in your investment account are proportioned correctly to match the allocations deemed most optimal according to MPT.

If we’re getting technical, it also allows us to pick up the concave risk associated with the rebalance while also benefiting from the convex risk associated with index funds. That’s a blog post for another day.

Don’t have the Raiz App?

Download it for free in the App store or the Webapp below:

download-raiz-app
Click to download the Raiz app

Important Information

The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.

The information in this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.

Past return performance of the Raiz product should not be relied on for deciding to invest in Raiz and is not a good predictor of future performance.

Stack of rocks on beach

06/08/2019

From George Lucas, Raiz CEO

I would like to be able to say that the trade war between China and the US will end soon. But I don’t think that will be the case. China is perfectly aware that an election is looming in the US in November 2020, and that a trade war might reduce President Donald Trump’s chances of being re-elected.

What this means is that market volatility (large down and up moves) may be with us for some time, as the US election is 15 months away.

The recent move by the Chinese in response to Trump’s comments, that he will add tariffs to another US$300 billion of worth of Chinese goods, was to cut US agricultural imports. Not bad news for our farmers but definitely not good for global markets.

At the same time, the Chinese have let their currency, the renminbi, fall sharply against the US dollar. This may have more to do with market forces than China deliberately manipulating its currency. However, overnight the US Treasury has labelled China a “currency manipulator”, further escalating the trade war. This could lead to further sanctions against China from the US in the future.

The harsh reality is that relations (at all levels) are not improving between China and the US, with the inevitable consequence of having a negative impact on markets as investors evaluate the effect the trade war is having on global growth, company profits and employment.

While we cannot eliminate the uncertainty associated with markets, we can try to manage it. The Raiz philosophy of investing small amounts regularly, through our automatic savings features, such as round ups or recurring deposits, can help manage this uncertainty and is one of the keys to having a healthier return and account balance over the long run.

Timing the market at the right time is difficult, even at the best of times. We understand it’s hard when it is your money being affected by market volatility and like you, we want markets to only move in one direction – upwards. But while that’s never the case, in the long term, equity markets do recover from events like these, and continue to rise.

Important Information

The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.

The information in this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.

Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.

Past return performance of the Raiz product should not be relied on for deciding to invest in Raiz and is not a good predictor of future performance.

Bitnami