Investment Articles

Am I wasting my money investing when the market is so bad?

This is a common concern you hear from people that have been salary sacrificing (investing) into superannuation in a declining share market. They see contributions being taken from their salary each week but their superannuation balance (investment) is stagnant or even going down. Should they stop investing or put it in cash?

Dollar cost averaging.

The advantage of ongoing salary sacrifice is that you are “dollar cost averaging” into the share market. By this we mean that you are investing the same amount into the share market on a periodic basis however if the share market is declining you are actual getting more for your money, more units or shares, which will recover in value if they are quality assets.

Dollar cost averaging does require a disciplined approach. You must invest the same amount at the same time of the month regardless of whether the share market has gone up or down. If the share market has gone up you were able to have purchased some assets at a lower price but the if the share market goes down you are now able to get more quality assets at an even better price!

Buy when shares are on sale.

A good example is if you are shopping for a new suit or dress. You can go to your favourite store before Christmas and pay full price or wait until the Boxing Day sales and get the same suit or dress for half price. It is the identical article of clothing but it is now on sale.

This is the same as buying quality assets when investing during times of uncertainty and volatility. You are getting blue chip shares on sale. Values do return to quality assets.

The share market can move quickly!

One final point about being out of the share market at the wrong time. The market can move a large amount in a single day. Missing out on just a handful of these significant trading days can have a large impact on investment returns. Some of the biggest trading days in the Australian share market are listed below:

6.71% – 2 Jan 2000, 6.10% – 29 Oct 1997, 5.76% – 13 Nov 1987, 5.5% – 25 Nov 2008

There is no bell that rings at the bottom of the market. Missing the biggest half dozen “up days” in a year makes a significant impact on your investment return for that year.

This is a reprinted summary from an article in http://www.barrylizmore.com.au

Barry Lizmore is a financial planner in Melbourne Australia and is a lecturer in financial planning at Deakin University. I have recently written a book, “Take Control of Your Money” which explains the financial planning process and answers questions such as: What is financial planning? What can a financial planner do for me and how much can I do for myself? What questions should I ask a financial planner? How much should advice cost me and how do I know if I am getting good advice? How can I determine my lifestyle and financial goals? How can I reduce risk?

My educational web site which includes information on my book is http://www.barrylizmore.com.au

Even though stock markets are generally having a bad time of it at the moment, as an investor there is no need to panic unduly. There are several strategies you can adopt to ease the pain and to protect your portfolio in the current environment. Let’s start with a little perspective on the situation.

At the start of 2012, it’s worth looking back at 2011. There was the major natural catastrophe in Japan for starters. Then there were problems in Greece and other sovereign European states, culminating in threats to the Eurozone as well as the Euro itself – plus of course the downgrading of the US credit rating. There was no doubt that the media seemed to revel in the bad news and as bad news sells, this is sure to continue.

Certainly investors voted with their feet, as they staged the biggest retreat from the stock market in 20 years. According to the latest figures from the Investment Management Association, private investors pulled a record £864m from investment funds in November, bigger than the retreat from the crisis of 2008.

But what effect did all these problems actually have on the markets? Well, in Europe, unsurprisingly most markets ended down for the year. The FTSE 100 lost 5.6 percent, whilst Germany’s DAX lost 14.7 percent. Interestingly, Far East and Emerging Markets also suffered, roughly along the lines of Europe. Overall Emerging Markets were down 14.5%, Japan was down 14.1% and Pacific ex Japan lost 10.9% – so simply avoiding European equities was not a solution.

However, as reported in the Guardian, in the US, the Standard & Poor’s 500 index closed 2011 just a fraction of a point below where it started the year. The S&P closed at 1,257.60, compared to 1,257.64 at the end of 2010. So its loss for the year was just 0.04 point. The Dow was up 5.5 percent for the year, whilst the Nasdaq composite index lost 1.8 percent.

So the US is not looking in too bad a shape and there are encouraging trends there as well, with some improvements on the unemployment and housing market fronts. Obviously there is an election later this year so the issues of debt and deficit are likely to be put on hold until 2013, but there are at least glimmers of hope.

Away from equities, bonds did well in 2011 which is somewhat surprising as they usually do badly in times of rising inflation. Long term gilts (over 15 years) returned 24.3%, index-linked gilts returned 15.4% and all gilts on average returned 14.2%. Corporate bonds which are normally riskier than gilts returned 7.1%. Elsewhere, gold returned 25.3%.

Because of this, well diversified investors will have been cushioned from the fall in equities via their holdings of gilts, bonds and other asset classes.

So how do you keep your portfolio ticking over in these difficult times?

Well, firstly, by playing a long-game. As investors in equities know, the whole process is a long-term game, and losses are only crystallised once the funds are eventually sold. So don’t panic – and hold onto your equities.

Secondly, you should ensure your portfolio is diversified. If you have a well-diversified spread across a range of asset classes, it is more than likely that if one area goes down, other asset classes should help provide protection.

Thirdly, you should look to rebalance your portfolio. As 2011 was a fairly volatile time for markets, it is likely that the portfolios of most investors are somewhat skewed, and will need rebalancing to get back in line with their model asset allocation. This might mean selling some gilts or bonds that performed well last year, to get their portfolios back in line.

Fourthly, you should consider a focus on income. Higher yielding stocks tend to outperform low yielding stocks over the long term and can contribute towards total returns if the dividends are reinvested. In fact 2011 was a not a bad year if you invested in good quality, long-term, dividend-paying companies. According to Capita Registrars, 2011 was a record year for dividend pay-outs, with investors in UK companies getting a £67.8bn bonanza – up 19.4% on 2010. Record dividends therefore provided a real bright spot for investors in an otherwise gloomy world.

Finally, if you are still looking to invest but are a little nervous, you should consider “pound cost averaging” – the process where you invest amounts on a regular ongoing basis rather than as a lump sum. This process helps to smooth out your investment returns, as when share prices are low you end up buying more shares – but obviously fewer when the price is high. So when the market is depressed, you benefit by buying more shares, which will be good news when the stock markets rise again.

So the picture for 2012 may still look gloomy but it should be borne in mind that the markets have priced in a good deal of the problems already. Whilst the short-term could remain tough, particularly if something dramatic happens, like Greece defaulting for example, it should be remembered that on a historical price/earnings (P/E) basis, equities are now undervalued. So as mentioned above, holding on for the medium to long term would seem to be the sensible option.

A review of your portfolio also makes sense at a time like this, so if you haven’t done so already, contact your local independent financial adviser, who will be able to help you with an appraisal of your overall financial objectives and strategy.

Chris Flood, MA (Oxon), MBA, is a marketing and management consultant based in Bristol UK. He writes articles on investments and financial planning as well as other subjects. For a review of your investment portfolio, please go to http://www.kelland-gloucester.com/investment-management.asp

Further information about Kellands Gloucester and its services can be found at http://www.kelland-gloucester.com

Should I switch my investment selection to cash?

People who have existing investments in superannuation or non-super investments may have the facility to switch investment options. Typically they are in a balanced or growth fund which have a high exposure to growth assets such as Australian and international shares and property.

A balanced fund typically has 60% to 75% exposure to growth assets while a growth or high growth fund may have up to 100% in growth assets with a typical asset allocation of say 50% Australian shares, 40% international shares and 10% property.

The greater the exposure to growth assets, the greater the long-term investment return however the greater is the volatility. When we talk about the risk of an asset allocation we generally do not mean that you will lose your money, but rather that the investment returns are more volatile. You will have a wider range of investment returns and a greater incidence of negative returns.

The more defensive assets that you have, such as cash and fixed interest, the lower the long-term investment return, however the lower the volatility. This is known as the risk/return trade off. As much as we would like it, you cannot have both high investment returns and low volatility.

By switching from a balanced fund or growth fund into a defensive asset such as cash you will reduce volatility which does limit the further downside if the market continues to deteriorate. You must however realise the consequences of your action.

Consequence One – You crystallised what has been a paper loss.

Let us assume that you are invested in growth assets. There has been a 20% fall in the share markets. You are scared that you could “lose” more money and so switch into cash. Yes, the share market could fall further and you would limit the downside risk, but have you really “lost” any money at this stage?

If you are invested in a well diversified managed investment which holds quality assets you have not lost any money until you decide to sell. The managed investment may well hold the same assets each day such as the same commercial office buildings, the same share of airports and other infrastructure and the same shares in blue chip companies, however the market prices these assets higher or lower each day for various reasons. It does not mean that the long-term investment value or earning capacity of these assets has changed.

A good example is your home. Each day your home is worth more or less for various reasons such as a change in interest rates, employment or a change in housing supply, however you do not see this change in value until you sell your house or your neighbour sells theirs. Note that your house has not changed. It has the same number of bathrooms, bedrooms, kitchen fixtures and landscaping.

Now suppose that you have decided to sell your house but there is no urgency. If there was a sudden downturn in the market would you sell your house then or would you wait for the market to recover and then sell? Most people would wait for the housing market to recover however it is amazing how these same people take the opposite view to their investments such as superannuation and sell at the bottom of the market.

Consequence Two – You miss the upside when the markets come back.

People who make the switch from a balanced or growth fund into cash say that they will get back into the market, “when things settle down.” But what does this mean in reality? When do they go back into their higher growth option? After the market has already gone up 20%?

There is no bell that goes off when the share market has reached a low point and a bull market returns. Typically most of the investment returns after the end of a bear market happens within a relatively short period of time after the low point. If you “cash out” once the market has already fallen 20% and then wait until the share market has “settled down” and has recovered 20% you have lost a significant portion of the value of your investment which could have been avoided if you had stayed in the same investment option throughout the market downturn.

Many people make the classic mistake of looking in the rear view mirror and follow past investment returns. They buy high and sell low.

Yes, by switching from a balanced fund or growth fund into a defensive asset such as cash you will reduce volatility which does limit the further downside if the share market continues to deteriorate. You must however realise the consequences of your action.

This is a reprinted summary from an article in http://www.barrylizmore.com.au

My educational web site which includes information on my book is http://www.barrylizmore.com.au.

Whilst forestry investments are seen by many institutional and private investors as a potential safe haven from the volatility associated with traditional asset s like equities, at the same time there are a number of variables linked to the general economy that do have a significant bearing on the performance of the asset class.

For the most part, current market demand for timber in any given location is the biggest influence over timber prices. As with any commodity, when stocks of the product are high and demand is suppressed then prices fall as assets are sold off at knockdown prices to create revenue. Likewise, when supplies are limited and demand is high, then we see the opposite happen; commodity prices rise as buyers compete for the best quality and indeed quantity.

In fact, it is worth touching on the cyclical nature of any commodity market, but especially soft-commodities. If a poor global harvest causes a shortfall of wheat, then prices rise, as the price rises, farmers plant more of the crop the next year as the higher price makes it more profitable. So the next year you have a surplus of supply as more acres are sown to wheat and subsequently the prices fall. And there you have it! A beginner’s introduction to the basic rule of commodity price cycles.

So we have ascertained that demand affects prices, but what impact is that likely to have on the performance of forestry investments? Well the answer in short is not as much as one would expect. A number of credible academic studies have revealed that forestry investment returns are driven by the biological growth of the tree into valuable timber stands (605 of returns), whilst timber price appreciation accounts for just 6%, and besides, when prices are depressed, timber growers simply leave their trees to grow, getting bigger and offsetting and drop in timber prices, an action known as storing value on the stump.

One must also consider that demand for timber is regional, which effectively means that a forestry investment in one area might perform markedly better than a timber investment in another area, simply because demand for wood products in region A is much higher. I for one have always found it to be quite misleading to use global statistics to define the potential performance of a local property-based investment such as forestry. Let’s look at like this; housing starts in the USA are low because the economy is depressed so timber prices are low due to a low demand (fewer people and businesses are building or remodelling homes), whereas in China, India and Central America, demand is increasing daily as both countries enter into their most resource-intensive phase of growth, building houses, infrastructure and demand more biomass for energy production. It goes without saying then that a timber stand in Florida might be worth less today than a timber stand in Latin America where demand is much higher and the property is better positioned geographically to participate in the supply chain in the region.

In summary, a range of factors affect demand for wood products and therefore the potential performance of forestry investments, but these variable are not global but local, so one must look to the dynamics of the market most relevant to the location of a particular forestry investment if one is to plan and project effectively and accurately.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

As existing populations in developing economies become richer, they shift towards a higher protein, more resource intensive diet, and millions of new meat eaters come to the table annually. This dietary shift is driven primarily by rising household incomes. On average annual incomes are forecast to rise by just under 300%from US$ 5,300 to US$ 16,000 by 2050 (Alexandratos, N. World food and agriculture: outlook for the medium and longer term).

The recent decades of unparalleled global economic expansion, most pronounced in developing and emerging economies, has resulted in the proliferation of a new middle class that has purchasing power beyond their basic needs. In fact, per capita meat consumption in developing countries has doubled since the early 1980s.

Whilst livestock production has historically been supported by grazing and crop/food waste, an increasing demand for meat has led the global livestock industry to become increasingly reliant on grain as a primary livestock feed. According to the United States Department of Agriculture (USDA), in modern intensive livestock farming where the majority of feed is grain based, 7kg of grain are required to produce one kilogramme of beef (Fortune Magazine, 2009, As world population expands, the demand for arable land should soar. At least that’s what George Soros, Lord Rothschild, and other investors believe).

On a global average basis, given that part of the production is based on other sources of feed, such as grazing land and organic waste, 3 kg of grain is required to produce 1 kg of meat(FAO, 2006, Livestock’s long shadow).

As meat production now depends on grain as a key input, any increase in demand for meat results in an acceleration of demand for arable and grazing land area. At least 35-40% of all cereal produced in 2008 was used as feed for livestock(FAO, 2006, Livestock’s long shadow). This leaves an estimated 43% of cereal production available for human consumption after losses from harvest, post-harvest and distribution are taken into account.

In percentage terms, the effect of increased income on diets is greatest among lower and middle-income populations which currently consume the lowest percentage of animal products (Devine. R., 2003, La consommation des produits carnés, INRA).

This indicates great potential for increased meat demand on a global basis given that low-income countries which account for 5.1 billion of the world’s population consume less than half as much meat (as a percentage of dietary energy intake) as high-income countries which account for only 1.3 billion of the world’s population (FAO, 2008, The state of food insecurity in the world 2008).

According to the UN FAO, consumption of animal products per capita in industrialised nations will increase modestly from 825 kcals per person per day today, to just fewer than 900 kcals per person per day by 2050. Yet in East Asia meat consumption is expected to rise from around 400 Kcals per person per day to around 625 Kcals per person per day, an increase of over 56%. Meat consumption in South Asia meanwhile is expected to double from 200 Kcals to 400Kcals(Food and Agriculture Organisation of the United Nations, 2006).

In summary, this shift towards a protein-based diet will continue to drive farmland investment returns as values continue to increase in the face of exponential growth in demand for soft-commodities.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors. For more information, download FREE investment guides at the DGC Asset Management website.

Reading the recent business headlines, confidence surveys and economic strategy reports regarding the market volatility in Greece and the US, it is apparent that we are all concerned about things continuing to head downhill. This market volatility, including the insolvency issues in Greece and high unemployment rates in the US, will continue as governments reluctantly accept this outcome and in the aftermath global economic growth (and consequently investment returns) will remain below average for years to come. However, there are still some positive areas to be encouraged by, amongst the long list of worrisome points.

1. Share valuations are reasonable.
The price-to-earnings ratios in New Zealand, Australia and the US indicate good value for investors. The NZ market is currently trading at an average PE ratio of 13.5 (slightly less than its long-term average of 13.7) and the AU market is at 11.7 (some way below its long-term average of 14.3). The US market PE is currently 12.2, not quite as cheap as the lows reached in the financial crisis, but also much lower than the highs of over 16 that were reached in 2007.

2. Dividend Yields Above Long-Term Average
Dividend yields are (in a lot of cases) higher than those available in term deposits and fixed interest may provide some share price support as income-seeking investors have limited choice.

NZ Shares & Property Trusts – generating an annual dividend yield of 7%
AU Shares – yielding around 5% are achievable
US Share – yield on 10yr treasury bonds being outpaced by share markets average dividend yield (rare occurrence).

3. Interest Rates Likely To Remain Low For some time
Official Cash Rate expectations have taken a turn from the expectation that they would be raised by 0.5%, with local interest rates on hold for now and any move in the AU rates likely to be down rather than up. The vast majority of us are sitting on floating mortgage rates – keeping costs low for borrowers, assisting consumer and business sentiment and also helping yield the gap between shares and other forms of investment.

4. Oil Prices Have Fallen From Their High
Oil is a key component for most sectors of industry, and oil prices have a large impact on consumer confidence. The West Texas oil is 25% lower than its May high and Brent crude is 12% off its highs.

5. Corporate balance sheets are much stronger than they were in 2008.
The corporate world is on a much more secure footing than it has been in the past. Average debt levels in Australia are now at 27% (compared with the long term average of 50%). Corporate debt levels in New Zealand and the US have fallen by a similar amount.

This is a modified article from Mark Lister. To read the complete article visit www.craigsip.com. Craigs Investment Partners Limited (formerly ABN Amro Craigs.) is an NZX Firm that was established in 1984. It is one of New Zealand’s largest and most established investment advisory firms.

In the current global climate, defined by low interest rates; high inflation; volatile investment markets; and poor short term visibility, investors are seeking out alternative investments that generate growth and income that does not depend on traditional market performance.

As such, much attention has been focussed on timber investments as a tool to preserve capital, hedge inflation and generate superior income in a low-risk environment.

Institutional Investors such as pension funds, university endowments and hedge funds have long known the benefits of investing in timber assets, with many such as the Yale University Endowment Fund holding 28 per cent of their investment portfolio in real-asset alternative investments including tropical forestry investments and farmland.

Timber investments are seen as generating non-correlative investment returns due to the fact that the majority of revenues is sourced from the biological growth of the tree, with only a small percentage of return attributed to timber price growth or land value appreciation. One credible university study found that over 60 per cent of returns from forestry investments can be attributed to the ‘biological hedge’.

Demand for timber products remains strong, and rises roughly in line with population expansion, a factor compounded by economic expansion in developing nations leading to a n increase in consumption of timber products per capita as new homes and other infrastructure in developed.

Currently, around 30 per cent of global timber supplies are sourced from illegal logging, and a further 40 per cent form unsustainable sources. The future demand dynamics then indicates that timber investments are likely to continue to outperform other assets such as equities, as they have for the past 30 years.

Taking a very broad view, forestry investment returns can be enhanced and potential downside risk substantially reduced through the application of strategic species and location selection, combined with experienced forestry management to create a sustainable and profitable investment model.

Broadly speaking, the faster a tree grows into commercially viable timber, the greater the return on investment, so selecting fast-growing tropical timber species is the first step in consolidating profitable forestry investments. Bamboo is one example of a timber species with great potential as a subject of sustainable forestry investments due to the fact that the rate of biological growth is so rapid as to ensure a commercially viable, harvestable timber stand within 4 years of planting.

Other features to take into account to maximise forestry investment returns are sustainable plantations managements, suitable site selection and investing in upstream products developments, allowing timber growers to process their raw materials and sell value-added timber products such as boards and other processed wood products.

Investors interesting in harnessing the characteristics of forestry investments for their own portfolio should be encouraged to seek advice from an independent third party with experience in identifying and delivering successful forestry investment projects.

DGC Asset Management provide independent advice for Investors interested in direct forestry investments.

Investors typically use performance benchmarks like the Sharpe Ratio or the Sortino Ratio to rank mutual funds, ETFs, and index trackers. However, these common performance benchmarks have several drawbacks and can often be very misleading. The Omega Ratio, however, addresses these shortcomings and delivers a far more sophisticated method of ranking investments.

The Sharpe Ratio originated in the 1960s and is also known as the reward-to-risk ratio. It’s the effective return of a fund divided by its standard deviation, and its primary advantage is that it is widely given in fund data sheets. The standard deviation is employed by the Sharpe Ratio as a proxy for risk. However, this is misleading for several very important reasons.

Firstly, standard deviation assumes that investment returns are normally distributed. In other words, the returns have the classic bell-shape. For many investment vehicles, this is not necessarily the case. Hedge funds and other investments often display skew and kurtosis in their returns. Skew and kurtosis are mathematical terms that indicate wider (or narrower) or taller (or shorter) distributions than that typical of a normal distribution.

Secondly, most investors think of risk as the probability of making a loss – in other words the size of the left-hand side of the distribution. This is not what is represented by the standard deviation, which merely indicates how widely dispersed investment returns around the mean are. By discarding information from the empirical returns distribution, standard deviation does not adequately represent the risk of making extreme losses.

Thirdly, the standard deviation penalizes variation above the mean and variation below the mean equally. However, most investors only worry about variation below the mean, but positively encourage variation above the mean. This point is partly address in the Sortino Ratio, which is similar to the Sharpe Ratio but only penalizes downside deviation.

Finally, the historical average is used to represent the expected return. This again is misleading because the average gives equal weighting to returns in the far past and returns in the recent past. The later are a better indication of future performance than the former.

The Omega Ratio was developed to address the failures of the Sharpe Ratio. The Omega Ratio is defined as the area of the returns distribution above a threshold divided by the returns of a distribution below a threshold. In other words, it’s the probability-weighed upside divided by the probability-weighted downside (with a higher value being better than a lower value). This definition elegantly captures all the critical information in the returns distribution, and more importantly adequately describes the risk of making extreme losses.

However, an investment with a high Omega Ratio can be more volatile than an investment with a high Sharpe Ratio.

Both the Sharpe Ratio and Omega Ratio can be easily calculated using tools like spreadsheets or other math packages.

Samir H Khan writes for http://investexcel.net, a repository of tools and commentary for investors and quantitative analysts. For example, the website offers a spreadsheet which calculates the Omega Ratio.

The Thrift Savings Plan currently offers ten investment funds. Five are U.S. and international stock and bond index funds: they replicate the performance of broad market indexes. The other five TSP funds, the Lifecycle Funds, are professionally managed portfolios which consist of a specific target allocation of the 5 individual TSP index funds.

The TSP Funds contain a diversified portfolio of thousands of individual stocks and bonds. Investing passively in index funds such as these is generally considered to be a good retirement savings strategy. The alternative is for you or an investment manager to actively pick individual stocks and bonds to buy and sell. Apart from being impractical for individual investors, this latter strategy usually also leads to inferior investment results: research has shown that most professional active fund managers under-perform a passively managed portfolio of index funds such as the TSP funds.

Here’s a summary of the five primary TSP Funds:

The G Fund is invested in U.S. Treasury securities which are guaranteed by the U.S. government. The nice thing about this fund is that it’s practically risk free (your investment is guaranteed not to lose any money), and yet the interest rate is substantially higher than what you would earn in other safe investments like bank savings accounts, certificates of deposit, or money market funds. If you are very risk-averse, this is definitely the place to park your savings.
The F Fund is a bond index fund, invested in high-grade U.S. government and corporate bonds. Its performance is very similar to the private sector iShares Barclays Aggregate Bond ETF.
The C Fund is a U.S. stock index fund that mirrors the returns of the S&P 500 Index, which consists of large U.S. corporations. Its returns are essentially the same as the SPDR S&P 500 ETF.
The S Fund is invested in the stocks of small to medium-sized U.S. companies. It’s designed to complement the C Fund, so if you invest in both, you basically own shares in almost all U.S. stocks. There aren’t a lot of index funds that track these companies, but if you own both the TSP S Fund and C Fund, then your investment returns will correlate closely to a broad U.S. stock market index fund like the Vanguard Total Stock Market ETF.
The I Fund is allocated to international stocks. It allows you to diversify your portfolio by investing in the stocks of companies in more than 20 developed countries in Europe, Australia, and Asia. There are several private sector equivalents to the I Fund, including the iShares MSCI EAFE Index Fund.

The other five funds, the TSP Lifecycle Funds, consist of professionally managed investment portfolios designed to meet investment objectives for a specific target date (the date on which you plan to begin withdrawing your money). The L Fund assets are invested in the individual TSP funds (the G, F, C, I, and S Fund) according to a target portfolio allocation which is adjusted every 3 months. The target allocation starts out risky, with a large percentage of stock funds such as the C, S, and I Fund. As the target date approaches, each L Fund becomes gradually more conservative, by shifting a larger portion of your assets into bonds such as the F Fund and G Fund. This investment strategy assumes that, while you’re still a long time away from retirement, you’re willing to take on greater risks in order to increase your potential investment returns. Also, while you’re still at the start of your career, you have a longer period to recover from potential investment losses, considering that you’ll continue to make monthly contributions to your account for many years.

Depending on your personal circumstances and target retirement date, you choose one of the five L Funds: L Income, L 2020, L 2030, L 2040 or L 2050 Fund. The L Income Fund is the most conservative asset mix and assumes that you’ve already started withdrawing your savings. The L 2050 Fund is the most aggressive allocation, currently 90% stocks and 10% bonds.

Benefits and Disadvantages of Investing in the TSP Funds

Many investment advisors recommend that for long-term retirement savings, you buy and hold a low-cost, broadly diversified portfolio of domestic and international stock and bond index funds. With the available TSP investment funds, you can do an OK job at this. By investing in all five individual TSP funds, or in one of the Lifecycle Funds, you’ll have a decent portfolio, with an ownership share in thousands of U.S. and international stocks and U.S. bonds. And the TSP funds have extremely low annual expense ratios, several times lower than comparable private sector mutual funds and ETFs, keeping more of your money working for you.

So what’s wrong with the list of currently available TSP investment choices? Some investors want to own Emerging Markets stocks (in addition to the Developed Markets international stocks in the TSP I Fund). Or an allocation to real estate (REITs), or inflation-protected securities (such as TIPS). And some would even like access to more exotic investments like international bonds, high-yield bonds, and other hedges against inflation (commodities and precious metals like gold and silver). Professional advisors would differ on how suitable these investments are. Most would agree that TIPS are a good idea, and for more risk-tolerant investors, perhaps a small allocation to REITs and Emerging Markets stocks.

One great benefit of investing in an L Fund is simplicity: it’s a “set it and forget it” investment plan. You choose an L Fund, determine your monthly contributions, and the fund administrators take care of everything else: regular portfolio rebalancing, and gradually adjusting the asset allocation as you approach retirement. But there are also a few downsides. First, the L Funds with the longer time horizons are fairly risky allocations (for example, currently 90% stocks and 10% bonds for the L 2050 fund), and you should make sure that you can stomach the inevitable volatility as a result of owning a portfolio dominated by stocks. If you’ve owned stocks for the past decade then you already know this: it can be quite a bumpy ride. Also, some investors want more control over their exact portfolio components, when to rebalance, and how soon to start shifting the allocation to a more conservative asset mix as they approach their planned retirement date. Some investors also prefer a tactical asset allocation, shifting their mix based on asset class trends, economic circumstances or other criteria. Owning a portfolio of the individual TSP funds will work better for these investors.

Learn more about the TSP Funds and get daily price and performance updates at http://www.tspfolio.com/tspfunds

The current economic climate, defined by low interest rates, volatile equity markets and poor short-term visibility, is leading Investors of all shapes and sizes to investigate alternative investment assets in an effort to boost portfolio performance whilst also reducing exposure to traditional assets like equities.

Forestry is one sector where investment returns are driven more by the biological growth of trees into valuable timber than traditional growth fundamentals. Forestry also provides a shelter for capital, and superior compound growth, even during falling markets.

Institutional Investors have led the charge into forestry investments with Pension Funds and Hedge Funds acquiring timberland properties as part of their diversification strategy. This has led to the emergence of a plethora of forestry investment products aimed at the retail Investor.

With options to acquire small forestry plots within large, managed plantations in Brazil, Costa Rica, Panama, Sri Lanka, Fiji, Thailand, Nicaragua, Australia and New Zealand, potential Investors could be forgiven for feeling confused, and the lack of quality information about the sector for Financial Advisors leads many to divert their Clients attention to other, more traditional investment assets like residential or commercial property, or even equities.

In this article we look into the main concerns regarding these retail forestry investments, and look to how risk can be properly assessed and mitigated.

The main issue regarding the vast majority of direct forestry investment products on the market is the basic structuring of the product. To avoid being classified as a collective investment scheme, many of the projects mean individual Investors purchase or lease a defined individual plot within a larger plantation, and having a notional choice of Forest Manager to look after the property and harvest / sell timber at the relevant point in the life cycle of the Forest.

Avoiding collective investment regulations means that Promoters can market and sell to any Investors freely, without the restrictions associated with collective investments which allow only certified sophisticated or high net worth individuals participate.

In reality, only two such schemes have been found to be operated in the way laid out in the marketing material, whereas the majority, it seems, do in fact manage the entire plantation as a whole, pool all plantation income and distribute to individual Investors based on their proportional ownership. Investors do not in fact receive income from their own, individual plot.

Whilst actually more secure (no physical risk to your individual plot), this structure managed in this way is quite simply a collective investment scheme. No commercial forest can be operated in any other way, fact. Most forestry investments therefore, should be collectives.

It is this collective management, combined with the fact that most of these investment opportunities are heavily front-loaded with profit for the Promoter and Project Developer that make for a huge counterparty risk. One such scheme in Brazil is selling a hectare of young teak trees (worth no more than $5,000 in the real estate market) to Investors for £100,000 on the basis that the timber sold will generate a profit.

Of course, investing in forestry is not a one-off capital investment; trees must be expertly managed over long periods of time and this requires capital. So the bulk of the invested capital is likely to be required to fund the on-going management of the trees and infrastructure. However only one company out of 9 assessed has been able to show that the majority of invested capital is ring-fenced for property management, in fact much of the revenue from Investors ends up in the salesmen’s pocket, earning up to 20 per cent of invested capital commissions. A different project identified in Brazil offered a 40% commission to interested Brokers!

Let’s look at the numbers and run a very basic feasibility study. One hectare of established teak will encompass circa 1,250 trees, with around 400 trees making it to year 25, at which point they will yield something like 1 cubic metre of commercially viable timber per tree. Teak timber trades at about $400 per cubic metre for processed wood and about $250 for logs, so one hectare will produce about $100,000 worth of logs to be sold at the farm gate, minus the cost of harvesting.

How then is an Investor paying the equivalent $155,000 for this hectare today supposed to make a profit if total revenue (excluding any residual revenue from intermittent thinning) is less than $100,000? Are investors reliant on timber prices increasing?

Well, if timber price were to increase at a rate of 6% per annum, then plantation income would jump up to $300,000 at harvest ($756 per log) in 25 years’ time, but factor in inflation at then current rate of 5% per annum and the income in real terms (inflation adjusted), falls back to $120,000. A 20 per cent return over 25 years equates to a simple annualised rate of less than 1%.

It is extremely likely that, once Investment eventually dries up as Investor appetite is satiated (as in the case of many similar failed Managed Investment Schemes in Australia), then the Project Developer has no economic incentive to continue, and there is no capital left to fund the continual management of the property.

At this point the Project Developer disappears and Investor are left with a few trees worth much less than they paid for them, with no way of accessing them or managing them, or even disposing of them. It is in fact most likely that the assets would be sold by receivers to recoup some capital and in that instance, Investors would get back only the real estate value of the property (remember the $5,000 per hectare).

In short, there is a huge economic incentive for Promoters to establish and sell such schemes as they make huge profits up front, but very little incentive to continue to operate them after the lion’s share of capital is invested (and syphoned off).

There is a huge risk that Investors could be left high and dry with notional ownership of assets worth nothing and no way to access them.

Although one or two good schemes do exist, the majority we have assessed have demonstrated nothing but the willingness of some ‘entrepreneurs’ to jump on the bandwagon and cash in on unsuspecting Investors.

For further information about direct forestry investments involving the acquisition of timber properties, including direct investments in UK forestry properties, please contact DGC Asset Management.

DGC Asset Management offer research, due diligence and opportunities to invest in real-assets in the agriculture, forestry and renewable energy sectors.

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