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Keys to Financial Security

In the 1950s and 1960s, a lot of Australians have good financial security skills.  They understood about saving. They understood about living within your means. They understood about the risk of debt. People lives conservatively.

For most Australians today, those skills have been lost.

  • Today people "expect" high returns from their investment portfolios, because that is pretty much what they have experienced as "normal".

  • Today people think almost nothing about the risk of having very high debt. (In Australia, 90% of household debt is mortgage debt .... and unlike Europeans and Americans and Japanese people, it is outside is of the experience of most Australians alive today, that house prices can go down .... a long way and for a very long time).

  • Today, very few people seem able to live within a budget. That is, very few Australians seem to have spending discipline.

  • Today's, for many young people, there is almost nothing in the way of a savings discipline .... and they want everything today. They do not want to want till they have enough savings to pay for it.

So in many ways, the modern day mindset is very similar to the mindset of the 1920s. In the 1920s, everyone "knew" that "good times" would last forever. And then came 1929-1932, when "everything" changed. The last time was in a similar position (speaking as at October 2019) in its long-term debt cycle, Australia's economy/markets is roughly where it was in 1929/1929 ...   

This web page is intended to provide you with some of the knowledge, you need to survive (and perhaps even thrive) in the next phase of the long-term debt cycle.

One of the things that most Australians do not understand is the long-term historical lessons about the volatility and variability and risk in share market investing. Shares are a cornerstone to many investment portfolios - and they are a major cornerstone of most superannuation fund investment portfolios. However, most Australians do not realise that the 100+ year history of share investing show that shares can be a highly unreliable source of investment return over the short, medium and very long-term. How do we deal with this challenge?

What are the keys to financial security?

  • You must live within your means. Simple.

    What does living within your means really mean? It means that to enjoy financial security, you must pursue a financial strategy something like the following.

  • Save.

    Before you retire, you must demonstrate good savings habits. You must save. Very simplistically, the more you save, the higher the standard of living you are likely to be able to enjoy in retirement. You can control your saving. You cannot control what investment returns you will experience.

  • In retirement, adjust your spending to the size of your investment portfolio.

    For example, one effective strategy is to calculate the size of your investment portfolio each year, and spend no more than 4% of the balance. If you can do this, then you can survive the tough periods so you can enjoy the good periods which usually follow.

  • If you learn how to become a good investor, this is the icing on the cake. We can help you with that part.

  • Discipline.

    There is no escaping that to be financially secure, you must demonstrate the discipline of saving and also keeping your cost of living within your means.

    The rest of the material on this page provides some of the historical evidence behind the above views.


    The long-term variability of investment returns can pose a threat to your financial security.

    This is very unfortunate because it would make life so much easier if we could count on the markets.

  • You might get a 10%pa real return from your share portfolio over the next 30 years. That would be a total real return of 1600% over 30 years.

  • Equally, you might get minus 2%pa real return over the next 30 years. That would be a loss of 45% of your portfolio in real terms over 30 years. The range of potentials is huge. Luckily really bad periods do not seem to happen too frequently.

  • Unfortunately, we are in a period of historic extremes, from a 200 year perspective, and therefore you should expect the unusual. This can be readily recognised by looking at 100-year charts such as Debt-to-GDP charts and also Price/Earnings Ratio charts.

  • But even if we were not at a period of economic extreme, 200 year history shows that 30-year investment returns are highly variable. Therefore you can never count on any particular outcome from your investment portfolio. Yes, it is true that long periods of good returns do happen such as in Australia from 1982 to 2007. This was the longest secular bull share market in Australia's history. Secular bull markets are followed by secular bear markets.

Bottom lines keys to financial security:

Some of the things I have learned about investments.

  • You can have negative real returns over 30 years.

    For example, in the UK at the beginning of the 1900s, there was a period that had negative real returns compounded over 30 years. So a strategy of "Time in the market rather than timing" can at times be dangerous to your financial health. Some times it works. Some times it does not.

    Another example that you might look to, is Japanese shares 1990 to 2009.

  • Unfortunately timing does matter a lot.

    This is unfortunate because it makes the challenge of investing far more difficult.

  • Not only should we not try to ignore market timing, if we want great investment returns we need to make market timing work for us.

  • Market timing is a challenge.
    • Market timing is a percentage game. You are not going to get market timing right all the time, because among other things, the unexpected keeps happening. There are different issues around short-term market timing as compared to long-term market timing. Market timing requires discipline.
  • Long-term (eg 30-year) investment returns vary dramatically

    • Long-term investment returns vary dramatically from one country to the next, and from one century to the next. While US, UK and Australia might have experienced approximately 6%pa real returns from shares over the last 50 years, history suggests that a country might experience a real return of less than 3%pa over 100 years as some Europeans countries like Belgium and Italy have over the last 100 years.

  • Share markets tend to have 20 exceptionally good years followed by 15 years of bad returns - on broad averages.

    But there is a lot of variability between cycles.

  • Big crashes in share markets tend to coincide with big crashes in real estate markets

    This is from a study by the US Federal Reserve, looking at last 200 years. And in these big real estate crashes, real estate tends to fall as far as shares.

  • Long-term buy-and-hold investors never make money by buying during a bubble.
  • Economic depressions are a normal part of the investment cycle.

    They are a behavioural effect relating to very long debt bubble cycles.

  • Gearing takes you forward half the time, and backwards half the time

    . This is true even if you ignore transaction costs and taxes. So if you want to gear into markets, you need to learn how to time markets first. Otherwise you are gambling with your future.

The 2 charts below illustrate the normal long-term variability of real share market returns.

To illustrate normal medium-term variability of share market returns, below we have the 3 and 5 year real returns since 1820.

To illustrate normal medium-term variability of share market returns, below we have the 3 and 5 year real returns since 1820. These charts show the very high variability that exists around the 100-year average real returns (which by the way vary considerably from century to century.

3 year real US share market returns since 1820 - Total real returns and average real returns.

5 year real US share market returns since 1820 - Total real returns and average real returns.

  • Shares are not a sure thing.

    History indicates that at the end of the regular 20 year bull market in shares, "investors come to believe that investing in shares is a SURE THING."

  • It is important the consider the big emerging trends

    . Emerging Asia is a very important trend now.

  • Long cycles are important.
  • The investment herd tends to buy at the top and sell at the bottom.

    Don't be part of the herd. Investors prefer travelling with the herd because it feels more comfortable because by being part of the herd, the investors behaviour is reinforced by their peers. Contrarian investing can be smart investing.

  • Markets tend to go through periods of over-optimism followed by periods of over-pessimism

    During the periods of over-optimism, markets tend to be excessively expensive. During periods of over-pessimism, markets tend to be excessively cheap). These cycles can be 20 years long. Make this work in your favour.

  • No sure thing when it comes to investing.

    There is no such thing as an absolutely certain thing when it comes to investing. Therefore, don't bet everything on a single outcome because the unexpected regularly happens.

  • Always consider the downside risk?

    What if you have got it wrong? Since the unexpected regularly happens, always ponder on what will happen if the investment outcome you are looking for does not occur, or worse, if the reverse occurs.

  • Government bonds also have risk.

    There are many, including myself, who believe that western government bonds are in a bubble that will burst at some point over the next few years.

  • Don't pay more tax than you need to.
  • Learn how investment markets work

    It is important to learn about investment markets, so you can make them work for you. Learn how to live with market volatility - it can work for you. Can you master your emotions when markets are emotional?

  • Money is not everything

    Money is not everything in life, but it gives you choices in your life. It is a means and not the ultimate end-goal.

  • Do not let your emotions get tangled up with your investment decisions.

    The best investment decisions are made when you are emotionally dispassionate (ambivalent) to the outcome. If you find your emotions are inflamed when making an investment decisions, read this is a warning that you may be about to make a bad decision.

  • It is generally better to sell your dogs and let your winners run.

    Unfortunately human beings are emotionally wired to do the reverse. If you can change your behaviour, you are likely to do better. (Behavioural Finance).

The above points might sounds easy, but it is hard to get these right in practice.

Puzzle's guidelines for managing overall portfolio volatility.

The following guidelines are based on simple direct observation of the very-long-term historical experience.

  • if your portfolio is 100% invested ungeared into shares and property in pursuit of higher returns, investment history suggest that your portfolio may fall in value by 50% every 10 years or so, sometimes much more and with no guarantee that it will recover its lost value over the next 30 years.

    • Remember:

      • The US share market fell 89% from 1929 to the bottom in the 1930s Great Depression.

      • The Japanese share market fell 80% over 20 years from 1989.

      • Also in the beginning of the 1900s, the UK had negative real return over 30 years.

    • So when it comes to investing there are many uncertainties we have to live with.

    • So to the extent that this degree of volatility is more than you can bear, then you need to keep cash in your portfolio. For example, a portfolio with 50% cash and with the remainder in shares and property will have half the volatility of a portfolio which is entirely invested into shares and property.”

The following charts are some of those mentioned in the volatility guidelines.


  • These charts below that you should not necessarily expect share markets to revert to a new high any time soon after a major crash.

  • These charts also suggest that investors also need to learn about secular bull markets and secular bear markets - and also about asset price bubbles (and debt bubbles).

On risk - what is investment risk:

  • Investors see risk as the potential to lose money.

  • Fund managers and investors define risk differently.

  • Risk to a fund manager is volatility. Most fund managers also focus on the risk of under-performing a chosen index. Therefore to a fund manager, losing less money than the index can be seen as good performance.

  • Risk is far more than volatility. Sometimes a very stable investment suddenly loses a lot of money.

  • The vast bulk of investors are not emotionally equipped to deal with the NORMAL volatility of a fully invested portfolio eg 100% into shares.

One of the best definitions of risk that I have seen was that which was on the US Security Exchange Commission (SEC) web site in May 2004. It said as follows:

  • 'When you "invest," you have a greater chance of losing your money than when you "save." You could lose your "principal," which is the amount you've invested. But then, how "safe" is a savings account if you leave all your money there for a long time, and the interest it earns doesn't keep up with inflation? The answer to that question explains why many people put some of their money in savings, but look to investing so they can earn more over long periods of time, say three years or longer. Though there are no guarantees, investing means you may earn much more money than by relying upon no-risk savings. Investors are not promised a return, but they do get the potential of making money that more than offsets the cost of inflation.'

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