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Time is money for self-directed investors

Glenn Freeman  |  05 Jun 2017Text size  Decrease  Increase  |  
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Company analysis and financial market research can optimise the time investors spend managing their portfolio and improve investment returns.


A 2016 study conducted by Investment Trends found SMSF trustees spend an average of 8.2 hours per week managing their fund, up from 7.4 hours in 2015. "We've been seeing an increase in the time spent on selecting and researching investments in their funds," says King Loong Choi, senior analyst, Investment Trends.

The 2016 study found SMSF trustees spend an average of 3.3 hours each week selecting and researching investments for their portfolio, up from 2.8 hours in 2014.

Other areas of administrative focus have also intensified, including the time required to stay up to date on relevant legislative changes, monitoring and reporting requirements, and general administration.

Morningstar quantifies the value of financial advice, which is referred to as "gamma". This sits alongside "alpha" and "beta" as different types of investment return.

In a Morningstar whitepaper Alpha, Beta and now…Gamma, gamma is shorthand for the extra income an investor can earn by making better financial decisions. Improved decision-making is highlighted as the primary benefit of working with a financial adviser.

The research demonstrated annual outperformance of 1.82 per cent for investors who receive relevant financial advice to improve their financial decisions.

Company and funds analysis is also considered to be gamma. For Australian SMSF trustees and investors managing their own portfolio, Morningstar's equity research on companies is particularly useful.

An investor who is looking for high-quality companies trading at a discount may seek out wide moat firms.

"We seek to answer two questions--is this company a quality company as measured by our economic moat rating and is this investment opportunity of the stock a high-quality stock as measured by the price to fair value ratio," says Adam Fleck, regional director of research, equity analysis, Morningstar Australasia.

A Morningstar fair value estimate is based on the future cash flows of a company discounted back to today. Fleck explains that this should mean Morningstar's fair value estimate should go up slightly over time, as stocks rise with their cost of equity.

Financial advice was another key area addressed in the study, which found that the demand for professional advice has increased as individuals have lost confidence in their ability to make the best decisions for their portfolio.

Though the uptake of financial advice has declined over the last decade, the rate levelled out between 2015 and 2016.

The study found around 37 per cent of respondents used a financial adviser--including a financial planner, accountant or specialist superannuation consultant--between 2015 and 2016. This figure was as high as 62 per cent in 2007, falling gradually over the years to a low of 36 per cent in 2015.

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Glenn Freeman is a senior editor at Morningstar.

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