For share investors the past week has been akin to a surfer turning up at a long-term favourite beach to see waves that offer appealing rides one minute and are downright scary the next.

Dramatic price plunges followed by record rebounds is the sort of thing you might enjoy at the movies or the racetrack but would rather not see played out in your portfolio.

A sense of balance is essential for people wanting to avoid falling into the trap of making short-term decisions driven by emotion rather than long-term investment strategy.

Looking for a sensible perspective on the market gyrations this week, it was a good time to remember the words of one of the great investment thinkers of the past 100 years – Benjamin Graham – who wrote what many people regard as the blueprint for modern value-based investment approach in the 1940s titled The Intelligent Investor.

Graham said that “in the short-run the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will in the long run be reflected in its stock price)”.

In the past week we have seen the voting machine in full flight.

During rebound Tuesday, what was changing in the underlying businesses of our major banks or our major mining companies? The obvious answer is nothing, except investor sentiment – primarily driven from offshore – had shifted significantly and investors were looking to trade out of risk.

Market volatility like we have seen this week is a strong test for even the most balanced of investors. Doing nothing goes against almost every behavioral instinct we are hard-wired with. Yet that may well be the best approach for people who have a well-diversified portfolio that lines up with their individual risk profile.

It is also a time when the discipline of having a written financial plan can prove an invaluable navigation tool. Being able to pull the long-term financial plan out of the filing cabinet – or perhaps sitting down with your financial planner and doing a portfolio review – can help remind you of the long-term course you set in a less frenetic time.

Certainly markets may have blown things off course in the short-term, but the key question to answer is has anything fundamentally changed in terms of your goals or portfolio risk levels? If it has then perhaps it is time for a portfolio review and rebalance.

Rebalancing your portfolio is often underrated – both in terms of the need to do it and the degree of difficulty in putting it into practice. It is also one of the clear differences between so-called “professional” investors like super fund investment committees or trustees and individual investors. Super fund investment committees do have one clear advantage – regular cash flow from super guarantee contributions that enables them to divert cash into the asset class that is out of the asset allocation target ranges.

For individual investors rebalancing a portfolio can have tax consequences if it means selling out of one asset class to buy more of another, so if it is possible to use cash flow in a sensible way – particularly for investors with a self-managed super fund – that removes one of the hurdles to effectively managing the rebalancing process.

A critical argument for regular rebalancing is that it keeps the risk level of your portfolio within the bounds that you are comfortable with. That said do not underestimate the emotional challenge of sticking to a rebalance plan.

Good asset allocation practice is to set realistic tolerance ranges for the respective asset classes. For example this may mean setting a tolerance level around plus or minus 3 percent to allow room for normal short-term market movements. If the band is set too tight you may trigger excessive short-term trading to stay within the target allocations.

In August 2011 a portfolio review is more than likely to show that the respective movements of growth assets like shares and defensive fixed interest assets have moved outside asset allocation weights potentially triggering the need to rebalance given the sharemarket is down around 10 percent in the year to date. Rebalancing in this case would mean either investing new cash flow into shares or selling down fixed interest securities to provide the funds to rebalance with. This is where rational investment approach meets emotional behavior influence head on.

Rebalancing restores your portfolio balance – and most importantly keeps risk levels in line with your long-term objectives – but you can see the emotional challenge that needs to be overcome to do that. Selling winners to buy losers is a disciplined act, not one that will give you a warm inner glow.

This is why at times like these a dispassionate third party like a trusted financial adviser can play the valuable role of financial “coach” to help keep the focus firmly on the long-term and be a steadying influence to ensure that balance is maintained.

* Written by Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.

Unfortunately, this urge to act often leads to hasty, poorly-informed and emotionally-driven decisions that are to the investor’s detriment.

“The temptation to do something, anything, is overwhelming when stock prices are falling,” writes personal finance columnist Ron Lieber in The New York Times this week.

“Watching the market decline while you’re just standing there feels overwhelmingly foolish [to some investors],” he adds.

But in reality, having an emotional response to rollercoaster movements on sharemarkets can be foolish in the extreme.

Fortunately, investors facing that urge to act can take several actions which do not necessarily involve selling a share or locking in any losses.

Such actions include consulting a good financial planner to discuss the appropriateness of your long-term asset allocation, your tolerance to risk and whether any rebalancing of your portfolio is desirable.

Other positive actions an investor can take include reviewing the tax-efficiency of their investment portfolio and ensuring that unnecessary investment management costs are not being incurred.

This is the right time to focus on your long-term investment goals and to think about how you are going to reach them.

* Written by Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.

The dislocation seen in asset markets globally in recent days, while not unprecedented, is (thankfully) unusual. The catalyst for this most recent bout of risk aversion amongst investors has been variously attributed to US political gridlock, S&P’s decision to downgrade the US government’s credit rating and heightened concern surrounding the solvency of various European sovereigns and banks. While these events have clearly played a pivotal role in undermining investor confidence most recently, the fundamental causes of market behaviour in recent days are broader and relate to leverage and its consequences and have been a decade in the making.

It is not my intention in this (brief) note to dissect the causes in too much depth, but rather to identify the root cause of this instability and concern, discuss the key issues that this presents as well as identifying the way forward including how we are approaching investing in this environment.

In summary:

We believe that the US fiscal policy response is critical. Easier (not tighter) fiscal policy is

needed near term

A more comprehensive response by the ECB and European governments is essential

The market is effectively forcing policy makers to respond appropriately

Certainty of return has a premium (there are merits in moving up the capital structure)

Structural headwinds will (and have) created cyclical opportunities (equities are cheap and

government bonds (in Australia and the US anyway) are expensive

In this environment – managing absolute risk is more important than relative risk (capital

preservation is paramount, maintain tail risk hedges).

What’s happened!

The fundamental change in investor thinking over the last week or so relates to expectations surrounding growth, in particular economic growth in the US and Europe over the medium term. Why? Firstly, because some of the higher profile economic news has been soft. More importantly though, the US political debate culminating in S&P downgrading the US’s credit rating has raised the spectre of a prolonged period of fiscal austerity against a backdrop of weak underlying demand (that’s why recent weaker economic data is important) and a Federal Reserve that has already fired most of its bullets. The level of interest rates and the supply of money in the economy are not impeding growth.

In Europe, concern that France would be next economy to be downgraded prompted a severe response in European markets. A key issue here being that if France were downgraded, that the EFSF1 would also be downgraded impeding its ability to effectively bail out member states in difficulty. Compounding concerns were also fears that the size of the bailout package would be insufficient.

In Australia, well not much changed. A few weak data points (retail trade, housing approvals and confidence) coupled with broader concern about the global economy was enough to ensure we were carried away in the enveloping tsunami. The prospect of an emergency easing by the RBA emerged which, when coupled with Australia’s relatively healthy fiscal/public sector debt position prompted “flight to safety” buying of Australian government bonds (with I suspect little regard for the monetary policy response).

1 European Financial Stability Facility was created by Euro area member states as part of the European rescue package and is able to issue bonds (currently up to €440 bn to Euro area member states in difficulty). It is rate AAA by S&P.

The investor response

With tepid growth under further downside risk (recession risk is rising), investors dumped risk assets and piled into the “perceived” safe havens of US and Australian government bonds and gold. Daily volatility aside, equities are substantially lower in price than they were only a week or 2 ago, US bond yields are yielding just above 2%, Australian bonds now have a 1.5% reduction in the official cash rate effectively priced and the gold price has reached a further record price (at one point above USD 1800/oz.)

Where to now?

S&P downgraded the US for 3 key reasons:

Government debt levels were inconsistent with a AAA rating;

the Government lacked a credible plan to bring the deficit back to a sustainable trajectory;

and

the debilitating US political situation which lacked confidence that a credible fiscal plan

could be achieved.

The critical question now is the fiscal policy response. If the response is to escalate fiscal policy tightening (fiscal policy is already being tightened in 2012), then the risk of recession will increase markedly. The reason US public sector debt levels have increased is because the US government in the first instance stepped up to bail out the US banking sector, and subsequently the US household sector as it dramatically de-levered following the collapse in US house prices. Until the US household sector has repaired its balance sheet, the US economy requires fiscal support (or stimulus) not a withdrawal of this support. Ultimately, the best way to reduce public sector debt is to facilitate robust growth in the private sector – but structurally this won’t be achievable until households feel they are in a position to spend again. Near term austerity will effectively ensure recession in the US within the next 12 months.

The Japanese experience in the mid 1990’s is instructive here. The Japanese government tried to get its fiscal house in order (eight years after the bubble burst) by raising the VAT, plunging the Japanese economy into recession and unleashing deflation. When policy was tightened the private sector in Japan had not completed its deleveraging process.

In short, how the US government respond is critical. In our view the better approach is to:

? accept that they are not a AAA borrower (hard for the ego, but good for the economy);

? ease fiscal policy in the near term – providing direct stimulus for the creation of investment

and jobs; and

? match this with a credible, long term plan to structurally address the US fiscal imbalance

The question remains as to whether this can be achieved. Political differences both between and within the major parties remain severe. However, 2 things give us some hope. Firstly, that next year is an election year. Fiscal austerity and elections don’t usually go hand in hand. Secondly, surveys show that 82% of American’s disapprove of how Congress has handled the debt ceiling debate and that creating jobs should take priority over spending cuts.

In the near term, there are some positives that have gone largely unnoticed. Some of the higher frequency, second order indicators of the US have picked up a little. Jobless claims have declined, chain store sales have strengthened, while declines in the oil price and mortgage rates will provide further near term stimulus. In short we think US growth might actually strengthen a bit as we run into year end. Unfortunately it’s not all about the US.

In Europe, there are three key issues: solvency, liquidity, and politics.

? Greece is insolvent, and at some stage this needs to be addressed.

? Italy and Spain are suffering liquidity issues. Sovereigns, like banks, have long term assets

(the power to tax being the largest) but short term liabilities. This mismatch can see

liquidity issues become solvency issues, if not managed carefully.

? European politics is also making it hard for authorities to provide a pre-emptive response.

The key issue here is how effectively Europe deals with its current liquidity issues. We need to see the ECB step in and act as a lender of last resort to the liquidity challenged sovereigns, to stabilise the crisis. The longer this takes the more risk the current liquidity problems become a much more threatening solvency problem. However, if sovereign credit downgrades spread into Europe (particular into the larger economies like France) while it would add to negative sentiment, it would not in our view limit the ECB’s ability to provide stability.

Implications / Our Response

The market events of the last week are symptomatic of the broader structural headwinds faced by markets and economies in the post GFC world. Leverage and deleveraging are ongoing, high sovereign debt levels retard growth over the medium term, volatility will remain elevated and investors skittish. None of this will go away soon.

Viewing the current investment climate in this way has several implications. There is a very fine line between successful navigation of the challenges faced by key global economies and failure. A policy mistake (such as overzealous attempts at fiscal austerity) could bring disaster to the US economy with subsequent effects on global growth which in our view would likely trigger deflation. The odds of a policy mistake are not low. Assets that appear cheap based on normal metrics (ie. equities), may not look such good value in a deflationary environment. Furthermore, US treasuries look appalling with yields in the low 2%’s. While the market is pricing a much weaker global growth scenario than it was 2 weeks ago, it is not contemplating deflation just yet. We think deflation is likely to be avoided and are backing a muddle through for now, but should politics intervene our thinking here would change quickly. On anything but the deflation scenario we find it increasingly difficult to justify owning Australian and US sovereign bonds and have moved (in general) short duration for relevant fixed income accounts. This is also consistent with our thinking that in the current climate where uncertainty is high and outcomes polar, capital preservation is paramount. Lending money to the US government for 10 years for a yield of 2.2% seems high risk to me. Likewise, the shift in expectations in Australia (whether intentional or not) at one point implied the RBA cutting cash rates in Australia by 150 bps (soon), and leaving them there for the next 3 years. While such a move is not implausible, to justify owning Australian 3 year bonds at current yields, a more pronounced and prolonged decline in official cash rates is required.

If bonds are expensive (which we contend on our base case), equities are now cheap. While inherent day-today volatility makes the time of assessment critical. Our valuation measures which have historically been a good guide to major turning points indicate that market pricing (especially on the down days this week) throwing up valuation signals approaching those prevailing around the early 2009 lows in equity markets, that is the immediate aftermath of the GFC phase 1.

However, as I noted above equities are cheap, subject to muddle through prevailing. We have been cautiously reducing our underweight / increasing our relatively low aggregate exposure to equities on weakness, but would emphasise cautiously, and reducing bond exposure (again cautiously) to as a consequence. While this is a tactical opportunity, we remain cautious on the structural back-drop which is limiting our appetite for taking on too much additional risk at this time.

Given the precariousness of the global economy and the fragile state of investor confidence, tail risk hedges are paramount. This is particularly true where absolute levels of return are in focus. Tail risk hedges involving purchasing volatility are expensive as volatility has skyrocketed. Gold is expensive, in fact very expensive. Investors bought it when they were worried about inflation, now they’re buying it because they’re worried about growth. While I’m sympathetic to the logic – price ultimately matters – and gold will correct at some point soon.

This doesn’t leave a lot – Aussie cash still looks good and foreign currency cheap when you’re an AUD investor. These top the list as our preferred tail hedges at this point. Finally, in the current environment “absolute” risk matters more than “relative” risk. Reducing tracking error will not necessarily reduce risk, especially not the risk of losing money which ultimately matters most. Certainty of return therefore has a premium.

Disclaimer

Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 (“Schroders“) or any member of the Schroders Group and are subject to change without notice. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Schroders does notgive any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Exceptinsofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or anycompany in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise)for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential orotherwise) suffered by the recipient of this article or any other person. This document does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice.

With its current high unemployment rate and depressed housing market the US economy is struggling. While the US faces near term economic challenges, what is the outlook over the longer term.

Economic analysis from the Vanguard Group in the US suggests the current level of economic growth is not permanent and the long-term prospects for the world’s largest economy are brighter than they appear.

In a recent interview, Vanguard Economist Joe Davis said the current pessimism is understandable. Davis believes it will take the US economy three years to get back to where it was before the financial crisis in terms of job numbers.

There has been considerable restructuring in the last three years in both the housing and job markets. Davis said the large correction in housing prices has made it “cheaper to purchase a home than to rent one,” in some areas.

While it has been a painful process with many job losses, corporate profit margins have risen in many industries, which will help support future economic growth.

Davis says one of the positives to come out of the Global Financial Crisis is the increase in household savings. “The average American family is saving as much today as they were in the early 1980s,” Davis said.

“That does mean a more balanced growth model for the US which clearly, with the benefit of hindsight, was too much dependent on the consumer,” Davis said.

With the consumer playing a less important role in the economy, Davis believes future growth in the economy will come from growth in the labour force, demographics, innovation and productivity.

Davis points out that: “Economic history and economic theory tell us that during times of extreme economic stress, because of great dislocation and restructuring in the economy, that the seeds for future growth are the highest.”

To illustrate this point David analysed the S&P 500 and found that “80 per cent, 400 out of 500 companies, were started during precisely economic tough times.”

“History doesn’t necessarily repeat exactly, but I think we have to be careful of assuming that economic growth is permanently lower, because to say that, in my mind, is saying that those probabilities of future leaders and economic growth engines is closer to zero,” Davis said. And history shows that that is highly unlikely.

The federal government is not in the business of providing financial advice.
But when the government sets superannuation contribution levels at 9% of average salary by implication that becomes an anchor point for millions of Australians when thinking about how much to save for retirement.
Yet industry analysis has repeatedly shown that while 9% is a good start for many people it may fall a long way short of providing a replacement income stream for many people – in particular those who have not enjoyed super for their full working life.
This makes the debate that is gathering steam at the moment over the federal government’s proposal to raise the super contribution level from 9% to 12% in 2013 timely.
It also highlights the risk that millions of investors may be taking – unintentionally perhaps – with their retirement lifestyle.
The question for investors is around the decision to save more today in order to have more to spend in their retirement years. The adequacy question revolves around how much will be enough to provide (say) around 75% of your salary at the time of retirement.
The adequacy issue has been widely canvassed and discussed but perhaps the other side of the debate – the risk factor – has not been spelt out as clearly.
If you choose to save more today then budgets and lifestyle can generally be adjusted to accommodate that – the notion of cutting today’s cloth according to tomorrow’s needs.
The idea of denying yourself today in order to ensure you are in super’s comfort zone may be unappealing – but the alternative could be a lot worse.
By opting to save more you build in some increased protection against the vagaries of investment markets. If markets deliver strong returns then you will find yourself at the point of retirement with more money than you had expected. That is a risk most people would happily accept.
But the reverse has a much harsher outcome. If you arrive at the time to retire and markets have not delivered average rates of return – like the last three years for example – then you are in a much tougher situation because the ability of most people at that time of life to make up the shortfall is limited.
There are many things to do with investing that are either uncertain or simply unknowable – such as future returns. But the thing that is completely certain (and irreversible) is the ageing process.
You know with absolute clarity when you will turn 65 – or whatever age you have decided to retire at.
As we emerge from the global financial crisis it will be important to remember the lessons markets have taught us over the past three years. One of the key points is simply that very few things – Australian house prices included – can be taken for granted.
Consider the case of a 50-year-old man who has $150,000 in super today. He wants to retire at the traditional age of 65 and is contributing the minimum 9% from a salary of $75,000.
Celebrating his 50th birthday has turned his attention to retirement and the question of how much he will have at age 65.
He uses an online superannuation calculator** to model his current portfolio at average rates of return for a balanced portfolio until age 65 and then lowers the risk profile in retirement with a conservative asset allocation. Rates of return for a balanced portfolio are assumed to be 8% while the conservative portfolio is projected to return 6.5%**.
He estimates he will need a retirement income equal to 75% of his current salary in today’s dollars (i.e. adjusted for inflation).
The outcome seems reasonable – he will have enough money to live on until age 92.
But what if the rates of return are lower? By dropping the balanced portfolio projected return to 6% and the conservative portfolio to 5% his retirement savings will run out 10 years earlier at age 82.
Small adjustments clearly make a big difference over longer time periods because of the compounding effects.
However, if he was to begin making salary sacrifice contributions of 6% even at the lower rates of return his retirement pension would again be expected to last until he was 91.
Other people may be comfortable with the idea of a reducing income level as they get older but the key point is that the right level of superannuation contribution is dependent on your individual needs and lifestyle.
So while the government may be suggesting 12% is a good level don’t take it as free financial advice. A contribution level of 15% is what many actuarial studies suggest is more appropriate simply because it builds in a wider safety margin in the event that markets experience an extended period of lower returns.

If the Australian investor was a car it would be going nowhere fast.

It seems sentiment – that most fickle of indicators is firmly stuck in neutral.

A key investor sentiment survey for the third quarter of 2010 was released this week by the Financial Services Council. The research done by CoreData showed that despite the goals that the Australian economy has been scoring on the GDP growth and employment fronts investor sentiment remains stuck in neutral to slightly negative territory.

The investor sentiment index is now lower than in December last year despite the fact we have been basking in the economic sunshine compared to the rest of the developed world.

Perhaps what is missing is not so much a shift in sentiment gears but rather a sense of direction.

Australians have always had a good sense of where we sit in the world and there is no doubt that the main players in the world economic game – the US and Europe – are still ailing and threatening to stall the rate of recovery after the global financial crisis.

Apart from the CoreData sentiment survey there is no shortage of other research material telling the same story. Investors are sitting on cash. That is understandable as short-term term deposit rates are reasonably attractive and, perhaps more importantly, the capital is secure.

But it does underscore and perhaps over emphasize the short-term.

Uncertainty fosters inertia and despite the economic good news Australians have had to deal with a lot of uncertainty recently. There was a disruptive debate over a controversial resource tax, an election without a clear winner and let’s not forget a raft of proposals to overhaul our superannuation system and then there is the global economic news overlay.

Even the strong performance of our residential property has been a cause of some concern and been called into question by leading international financial experts who warn us that it is an asset price bubble waiting to burst.

So it seems we are at a cross roads without a satnav system to tell us which way to turn.

Investors surveyed by CoreData thought the outlook for the Australian share market for the next 12 months was more positive – 37% believing shares will outperform versus 36% fr residential property.

But when asked how likely they are to invest in the next 3 months only slightly more than 20% answered in the positive. More than 65% o investors saying they were unlikely to invest in the near term.

This raises the question of what would get people comfortable with the idea of committing hard-earned money into investments – or more basically when will taking on more risk in the expectation of higher rewards seem a reasonable course to take?

The study of behavioural finance focuses a considerable amount on the notion of framing. Perhaps you are uncertain about what will happen in the next three months. But what about the next three, five or 20 years?

A simple thing like widening out the time frame you are considering can alter your perspective considerably. Do we expect the Australian economy, property and share markets to stand still for the next three to five years?

That is where a well thought through financial plan can be a valuable tool. Think of it less as a street directory or satnav with precise directions and more as a compass that helps keep you heading broadly in the right direction.

But it can provide the right mental accounting framework to think about money and investing in short term, medium term and long-term buckets.

A good financial plan has at its heart risk management so perhaps at the moment the uncertainty means you want more short-term security – particularly if approaching a key life stage like retirement.

But be aware that risk of a different kind emerges if there is an obsessive focus on the short-term.

A recent life-expectancy study of retirees receiving superannuation pensions from large public-sector super funds suggests that higher retirement incomes can mean greater life expectancy.

The core argument why people should try to maximise their retirement savings is, of course, that this will improve their standard of living in retirement. But a perhaps overlooked part of the case for saving more is the life-expectancy factor.

“Mortality for these [public-sector superannuation] pensioners is less than the projected general population mortality,” reports the Mercer study, which covers from 2005-2009.

“Mortality rates for retired public-sector pensioners immediately following retirement are significantly lower than for the general population,” the study adds. “Male [mortality] rates are about half of the general population.” Female rates were about 60 percent among recent retirees.

And the study’s conclusion is fundamentally that retirees with high super pensions will “generally live longer”.

For the record, the Mercer study gives the life-expectancy for a 65-year-old receiving a public-sector pension as 86.9 years for men and 89.4 years for women. These projections are on the basis that assumed continuing improvements in life expectancy will eventuate.

A facet regarding public-sector pensions that cannot be ignored – particularly in regard to current retirees – is that the public service had gained superannuation coverage a long time before the general population.

The “R” word – retirement not recession – is being redefined around the world in the wake of the global financial crisis.

Retirement was such a straightforward concept a couple of decades back – you worked until your 65th birthday, picked up the gold watch, loaded up the four-wheel drive and headed off for well-earned leisure time.

But as is their wont the baby boomer generation rewrites each generational rulebook as it passes through the next phase.

Social researchers began to pick up the signals early that baby boomers were looking at retirement differently – indeed the big attitudinal shift was that baby boomers were rejecting “retirement” of the stereotyped gold watch ilk as something their parents did but they were not signing up for. Seachange was a remarkably popular TV series for a good reason – it resonated with the idea of opting out of the mainstream and slowing things down while not stopping productive, stimulating work.

In a week when the unemployment rate in Australia fell to 5.1% is therefore interesting to read some US investor research that offers a new definition of retirement. Recent research in the US shows that many people now define retirement as “when I’m unemployable”.

That suggests the twin impacts of the global financial crisis on people’s retirement plans – the dramatic fall in portfolio values means people are realising they simply cannot afford to retire so need to keep working for as long as they can.

A leading financial adviser provided an interesting case study recently. In his experience over more than 20 years he has seen a shift from where financial plans were built around a “hard” stop at retirement age – and the questions of adequacy at that point drove key financial goals that went into the financial plan – to today where increasingly the income projections are tapered down say from 60 to 70 and perhaps do not stop totally until mid-70s or even past age of 80.

That he sees is driven as much, if not more, by lifestyle choices and desires as the need to preserve or rebuild superannuation balances.

Clearly health issues are an important factor in this type of planning and become a greater risk if people do not have adequate savings and are reliant on ongoing employment income to sustain their lifestyle.

But at a time when the employment numbers suggest the Australian economy is getting close to what economists regard as “full” capacity the notion of part-time and more flexible working arrangements for older workers looks like it will become an increasingly important component in people’s financial planning for life-after full-time work – just don’t call it retirement.

September is the season when biases of the sporting kind are given full rein as the respective winter football codes gear up for the season-defining grand finals.

But while our sporting biases are openly celebrated (or commiserated with) our biases as investors are often less well-defined or understood.

A good investor trivia question is to ask how much home country bias resides within your portfolio?

Some level of home country bias – which is how much of your portfolio is invested in Australian assets versus international markets – makes complete sense. As an investor building wealth, paying taxes and in retirement using superannuation and other investments to buy (mainly) Australian goods and services to provide a lifestyle it is not just sensible but essential to be aligned with local market values

Looking around the world investors in developed economies all exhibit – to greater or lesser extent – home country bias.

But like most things in investing it comes down to a question of balance – and in the current market perhaps a discussion around where Australia sits versus the rest of the world.

The good news is that Australia escaped the worst of the global financial crisis and is enjoying economic growth at a rate the rest of the developed world can only be envious of.

We should all be thankful for our resources and the burgeoning demand from developing nations like China. When combined with a strong banking and financial sector you have the two ingredients required to emerge relatively unscathed from the worst financial crisis in 70 years.

And as human beings our default wiring according to several behavioural finance studies is to assume today’s good times will continue to roll.

But there are no guarantees and from an investment portfolio perspective the Australian economy looks like a concentrated bet. Economies – like investment markets – can be in or out of favour at various times. The same things that are driving growth today were being derided in the late 1990s, early 2000 technology boom. Remember the derogatory labels being handed out back then – Australia was an “old” economy being left behind by the technology age.

That period of overt negative sentiment certainly didn’t play out the way the pundits expected but perhaps that should also make us cautious about times of rampant optimism.

When you consider performance numbers it is easy to understand why Australian investors look at international share markets and question why they would bother.

Looking at the returns of the MSCI World ex-Australia share market index on an unhedged currency basis the return over seven years to end of July 2010 is a paltry 0.30%. Key away the currency movement and it is a more respectable 5.8%. Investors are entitled to ask why not stay at home with the Australian market delivering 9.8% or the same seven-year period.

It comes back to two well-worn arguments. One is that what happened in the past is not a reliable predictor of the future and two being the benefits of diversification in terms of managing risk.

Being biased towards our home country is a sensible thing on many levels but not if it makes us blind to the inevitable shifts in economic and market cycles and opportunities to diversify risk.