Stocks go up in the long, long, long run

Stocks go up in the long, long, long run

We’re almost there — at a record high in Aussie stocks. The ASX 200 is within spitting distance of its 2007 peak.

Over the same timeframe, gold has more than doubled in Aussie dollar terms.

But perhaps we’re not going back far enough.

Aussie stocks have doubled since the early 2000s.

The gold price has quadrupled.


Going nowhere for 12 years

Stocks have gone nowhere for 12 years.

And an inanimate lump of metal is doing better than the captains of Aussie industry going back even further than that. What does that tell you about our corporate high flyers?

But my real concern is for all those who had to retire in the meantime. The people who, in 2009, had to sell their stocks at half the price they bought them at in 2007, for example.

That’d be tough to stomach. Financially and otherwise.

I wonder how many retirees kept faith in the system all this time. How many had to come out of retirement to cover up for the finance and superannuation industry’s shifty assumptions about stocks going up in the long run.

Our readers are often in one of the two groups. People who don’t stick their head in the sand when they realise they’ve been lied to.

Not amongst our readers are the people who never saw their retirement pots recover. They never saw stocks perform as financial advisers and politicians had promised. The retirees who watched their portfolio tumble and then lag for the rest of their lives.

If only someone could be held accountable for the disappointment…

All this is an international problem, too.

Here in the UK, the FTSE 100 was at its 2001 level just a few months ago. But pity the Italians, who remain down more than 50% from the year 2000.

Then there’s the Japanese, who are nowhere near all-time stock market highs reached in the 90s. At least people there have largely given up on stocks as a retirement vehicle.

Despite the government’s best efforts…

Does the index still cut it?

There are a few more things to factor into the stock market index calculation, too. The companies within the indices have changed.

The ASX 200 and other indices show the successful companies that got added to the indices.

 Many laggards that investors actually owned dropped out and disappeared from the index. But not from actual investment performance in your portfolios.

It looks to me like buybacks, financed by low interest rates, have pushed up prices to give a misleading picture, too. Buybacks means investors sold out, instead of holding on during the gains those buybacks delivered.

Only dividends are a saving grace. But not many stock market punters focused on those to begin with.

I wonder how many people would’ve invested in the stock market at all with the benefit of hindsight.

That’s not a very useful thing to ponder. Until you compare it to your outlook now.

Do you still believe in the stock market index? Do you expect stocks to go up in the long, long, long run instead of just the long run? Are you willing to wait that long? Or are you looking for something better? Do you want to avoid being caught up in another disappointment like the past 12 years?

Understanding the gold price, for example, would’ve served you well for the last 15 years. (That’s since our founding publisher tipped it as the trade of the decade.)

Only one year featured a significant interruption of the upward trend.

Price of Gold


Owning gold would’ve had the additional benefit of avoiding Australia’s financial planning industry.

In fact, it looks to me like the financial planning industry was a bigger threat to Aussies’ wealth than the stock market for the last few years.

You’ve been shafted for decades

The Royal Commission added up the amount of compensation paid so far, before it found the big skeletons in the banks’ closets during its hearings:

In 2012, ASIC entered into a settlement agreement with CBA to make available up to $136 million as compensation to CBA customers who had borrowed from the bank to invest through Storm Financial.

CBA had already provided approximately $132 million to Storm Financial investors under its resolution scheme.

In 2013, ASIC intervened in a class action brought against Macquarie Bank in respect of Storm Financial regarding the fairness of settlement arrangements. The Full Federal Court held that the distribution of the settlement sum was not fair and reasonable to all group members and a revised settlement arrangement was made. Macquarie agreed to pay $82.5 million by way of compensation and costs.

In 2014, ASIC made a settlement agreement with the Bank of Queensland. BOQ agreed to pay approximately $17 million as compensation for losses suffered on investments made through Storm Financial.

But Storm was just one bad operator, right? The general quality of financial advice at Commonwealth Bank’s Commonwealth Financial Planning wasn’t much better:

CBA paid more than $20 million in compensation to clients who had received inappropriate financial advice from two [Commonwealth Financial Planning] advisers […]

It later became apparent, however, that the misconduct extended beyond these two advisers and CBA subsequently implemented a second compensation program.

In 2013, Australian media reported misconduct by financial planners at CFPL, a systematic cover up by management, and inadequate offers of compensation to complaining customers.

In July 2014, CBA commenced the Open Advice Review Program. The program was open to those who had been customers of CFPL and Financial Wisdom between 1 September 2003 and 1 July 2012. The program has offered a total of $37.6 million in compensation to customers.

I wonder how many customers were still missed the fourth time around.

Then there was the ‘fees for no service’ scandal:

At that time, the total amount paid and to be paid as compensation was estimated to be about $850 million – but the then Deputy Chair of ASIC said that he “wouldn’t at all be surprised if it ends up being in excess of a billion dollars”.

Evidence given during the seventh round of hearings supported that prediction. By the time of those hearings:

• the amount that AMP expected to pay was $359.7 million, of a total amount of approximately $1 billion received by AMP in ongoing service fees in the 10 year period between 2008 to 2017;

• CBA had paid a total of approximately $116 million in remediation for its “fees for no service” conduct; and

• Westpac estimated that, for its salaried advisers, across both 2017 and 2018, $117 million would be paid.

Even after death, Aussie retirees aren’t safe from the Australian financial services industry:

‘[In] June 2018, AMP made a breach notification to ASIC and APRA that, in short, it had retained or not properly refunded premiums charged to members after their death. That breach notification identified 3,124 members with a total of $922,902 in premium refunds owing.

At 5 September 2018, AMP had identified that 4,645 customers were affected by this issue, with $1.3 million in premium refunds owing.

In the sixth round of hearings, AMP’s Group Executive for Wealth Solutions and Chief Customer Officer, Mr Paul Sainsbury, explained that AMP commenced an investigation into whether it had charged deceased members fees after notification of their death following “Commonwealth Bank’s circumstances around premiums [for] deceased members”.

Between them, AMP, ANZ, CBA, NAB and Westpac will pay customers of their advice licensees or their superannuation funds compensation totalling $850 million, or more, for taking money as payment for services that were not provided.

Consider for a moment what it means that all the banks were caught doing this. They can’t blame isolated mistakes in their IT systems. Although they tried.

Then there’s my personal favourite. Manipulating people’s loan applications to get them past lending standards:

As was noted in the Interim Report, even confining attention to home loans, about $239 million had been repaid to customers in respect of processing and administrative errors before the Commission began its inquiries.

I expect the total value of compensation paid for LAF manipulation should be in the hundreds of billions. Enough to wipe out the Aussie banking system in one fell swoop. But nobody believes me. Just as they didn’t believe me in 2014

Now, the value of compensation paid to victims of Australian financial advice probably just scratches the surface of what the industry actually got away with. All out of the savers’ pockets. Selling insurance through super is another can of worms I won’t even get into.

All this is a long-winded way of saying that Australian savers, investors and retirees have been comprehensively shafted every which way for decades now.

Are you still playing their games? Or do you want alternatives?

You could opt out of risky stocks by investing in Aussie government bonds, for example. Yields are at record lows, below 1.3%…

Savings at the bank aren’t much better.

What are you going to do?

That’s what we’re trying to figure out for you. To find the ideas and investment strategies that actually work. For a fixed subscription fee.

No commissions, trailing or otherwise, and no management fees. You don’t even give us the money to invest for you, which means we don’t generate counterparty risk.

That’s how investment strategies should work. And we’re rather proud to be different.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia