Tips to Bank Better

In order to minimise costs and make your life easier, it is well worth checking over how your accounts are set up and having a look at other services available through online banking. Here are a few things to consider to make your banking better.

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Check your accounts

On-call accounts

These accounts should be your "busy" accounts, where money frequently flows in and out. They typically have low transaction fees but low interest. Things to look out for:

  • If you have more cash in your on-call accounts than is needed for spending each month, transfer the surplus to a higher interest account or investment

  • Check if you have an overdraft set up and cancel if it is not needed

  • While most accounts do not charge for online transactions, many do charge "manual transaction" fees if you visit your branch

You will save money by doing the majority of your banking online with the appropriate account. However, if you prefer to visit your local branch, consider an account which charges less for manual transactions.

Savings accounts

Savings accounts are great for short-term goals or keeping an emergency fund. The interest rates are higher than on-call accounts but with penalties for transactions.

  • If you have much more in your savings than you will realistically need for your short-term goals plus an emergency, consider shifting the extra to a better investment

  • Check whether you are incurring costs or forgoing interest with frequent transactions. If so, consider keeping more cash in on-call accounts for these withdrawals

  • Compare interest rates between different account types for the amount you are saving and the time-frame

For your savings account, make sure you are limiting withdrawals. Also, instead of making payments from this account, it is usually better to first transfer to your on-call account to reduce fees paid.

Credit cards

Having a credit card is great for regular spending, if you are disciplined in paying the full balance each month. When choosing a card, consider the benefits against the costs.

  • Consider how much you spend each month and compare the expected rewards earned to the fees paid

  • Choose a sensible credit limit based on your monthly spending

  • Pay your balance! The interest on credit cards is extortionate. It is better to transfer from other accounts onto your balance than let interest accrue on the card

If you find yourself unable to pay the full balance at the end of each month, a debit card may be preferable. Debit cards work in the same way as credit cards, but you can only access your own money instead of credit from the bank. Your credit limit can also be used as a rough budget for monthly spending.

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Automate your finances!

Automatic bill payments

Setting up automatic payments for your insurance, utilities and other regular payments is easy with online banking. Not only will you never miss a payment, but many companies offer discounts for automatic payments! Power companies offer a prompt payment discount as high as 20% for paying on time, which you will never miss with an automatic payment.

Automatic payments help you stay on budget

As most banks do not charge fees for transferring between accounts, automatic payments can be great for budgeting. Here are some ways you can set up your automatic transfers to pay yourself first:

  • Set up a transfer on payday to your savings account(s) to make saving for a holiday easier

  • Automatically transfer from your regular account to a designated on-call spending account to better track your spending

  • Set up a regular transfer to your investment accounts to maintain discipline and benefit from dollar-cost averaging

Most importantly, set up your accounts and payments to work for you. Some of the strategies I've come across are:

  • Setting up payments to a spending account to budget better, anything left over is savings.

  • A friend of mine has a savings account with a separate bank, with automatic payments each payday. The one day delay dissuades him from dipping into his savings.

  • Another friend has separate accounts and automatic transfers for utilities, regular expenses and "luxury" spending, to help track his spending habits.

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Manage costs

There are fees and costs you may not realise you are paying or are not getting value from. Keep an eye out for:

  • Paper fees - Most banks now charge a fee for posting bank statements. Go paperless, receive statements via email and save yourself the cost.

  • Manual transaction fees - If you are frequently paying fees for payments and withdrawals, consider changing your account types or changing the way you move money around

  • Overdraft fees - You may be paying for overdraft facitilities you don't need. If you never go into overdraft, consider cancelling this service

  • Interest payments - If you find you are paying interest on your credit cards or overdraft, pay down your debts where possible. Otherwise, focus payments on high interest debt

  • Other account fees - As described above, there may be different account types that save you money

Most importantly, check your monthly statement! Even if you don't get around to it every month, you will often pick up on fees you didn't realise you were paying, subscriptions you don't use and spending habits you might have missed. Many free trials require you to enter your card details (Neon TV and Spotify come to mind) and start charging you when the trial ends.

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Useful banking tools

Tracking spending

If you don't like budgeting, you can still glean useful information from basic tools on your online banking login. For example, with ASB's "Track My Spending" option, just choose the account(s) you want to look at and you will get a summary of total income and total spending each month for the past year. You can easily see your average monthly income/spending and whether you are running a surplus or deficit. Most banks will also have the option to "code" past transactions into categories, so you can also look at how much you spent on different areas, such as utilities or eating out.

Budgeting and net worth

If you want to take a deeper dive into budgeting, there are work sheets where you can estimate your monthly spending in different categories. Also, you can track your assets and liabilities to estimate your net wealth. While understanding your net incomes vs net spending helps for planning ahead, having a budget helps identify and manage bad spending habits to save you money.

Save the change

A new feature offered by many banks is "Save the Change", where purchases are rounded up to the nearest $1 or $10 and the extra is transferred directly to your savings account. It works in the same way as a digital piggy bank. This is a great way to squirrel away a bit of savings each time you spend.

The World Cup of Investing

Jim Parker, Outside the Flags

It’s been a banner year for New Zealand sport, with a world championship win in women’s netball, the narrowest of world cup losses in men’s cricket and an upcoming attempt by the All Blacks to win an historic third consecutive rugby world cup.

It’s fair to say that just as NZ punches above its weight in global sport, its share market has been an outperformer in recent years. But it’s also worth keeping a sense of perspective, both in terms of history and the size of the opportunity.

In sport, the women’s netball team, the Silver Ferns, waited 16 years to win the world cup, and then defeated Australia by just a single goal. Even the All Blacks, historically the world’s best rugby team, took 24 years to repeat their 1987 world cup triumph.

NZ shares aren’t world beaters every year either. It’s true the Kiwi share market has been the developed world’s second-best performer in four of the past 10 years. In fact, it has posted positive annual returns for every year since the GFC.

But you only have to cast your mind back a little bit further to find years when the Kiwi market was a relative struggler. In 2000, it was the worst performing developed market in the world. In 2005 and 2006, it was the third worst, albeit with positive returns.

If you go back even further, the NZ market was hit harderthan most by the 1987 crash and its aftermath. The market, as measured by the S&P/NZX All Index fell by nearly 50% in 1987 and did not turn cumulatively positive till nearly a decade later.

Such was the pain generated by the 1987 crash in New Zealand that an entire generation of investors was turned off equities. The tragedy is that so many sought solace instead in poorly performing and illiquid property finance schemes.

There are a couple of lessons from all this for investors. Firstly, just as World Cup winners are hard to predict, there is no evidence that you can consistently outguess prices and pick which country will be the best market performer from year to year.

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The table in Exhibit 1 ranks annual stock market performance in NZ dollar terms for 22 different global developed markets, from highest to lowest, over the past
20 years. Each country has its own colour (NZ is in black). Can you see a predictable pattern?

The conclusion is that if you can’t predict which country is going to perform best from year to year, it’s better to be broadly diversified across all of them. That way, you are more likely to capture the returns wherever they happen to occur.

The second lesson is you need to be mindful of how much your international portfolio is biased to your home market. Remember that NZ accounts for a tiny proportion of the global share market, at around 0.1% or one tenth of one per cent.

Of course, there are rational reasons for having a greater weight to your home market than its natural size in global terms might demand. These can include tax benefits, familiarity with local names, and the possible higher costs of investing abroad.

But in sticking close to home, you can also forfeit the benefits of global diversification, such as improving the reliability of outcomes and getting exposure to sectors either not available or only sparsely represented in your domestic market.

You can also end up with a handful of individual stocks representing a significant part of your portfolio, which exposes you much more to the idiosyncratic factors related to those companies than if you had been more diversified.

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Exhibit 2 shows the impact, as of June 2019, for New Zealand investors with 60% of their equity allocation in their home market. In this case, a single company, A2 Milk, represents 7.5% of the portfolio – or more than all the emerging markets (China, India, Russia, Korea etc.;) This one company has a greater weight in this home-biased portfolio than the United Kingdom and Japan together!

But it’s not just A2 Milk. Exhibit 3 shows that with a 60% home bias to New Zealand, just five stocks – A2 Milk, Auckland International Airport, Fisher & Paykel Healthcare, Spark, and Meridian Energy – would account for just under 30% of your portfolio. That’s more than for the entire US market or for all other countries outside NZ and the US.

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It isn’t just the stocks that you hold through a home bias; it’s also about what you’re missing out on. Exhibit 4 compares sector exposures with a 60% home bias (in blue) compared with a global weighting (in green). For instance, a home biased portfolio gives you just a~7% allocation to technology, compared to ~16% in the global portfolio.

In other words, a New Zealand investor with a strong home bias would have been underweight one of the global market’s top performing sectors in recent years.

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Think of it this way: The All Blacks have nearly always fielded great teams, but they don’t win the World Cup every time. Other countries occasionally come to the fore, and by all accounts, the 2019 competition will be among the most evenly contested on record.

Likewise, while the NZ share market has been a strong performer in recent years, history shows there is no pattern to country-by-country returns and there will be years when the local market lags the rest.

NZ is a tiny market in international terms and while there are reasons for holding a greater weight in your home market than its natural weight, too much of a domestic bias can leave you with a highly concentrated portfolio.

We’ve seen that countries can go from top-of-the world to the bottom from year-to-year, so it makes sense to spread exposure. That way, you better positioned to capture the performance of global markets, where and when it occurs.

Being globally diversified also makes you less reliant on a handful of local stocks, with all the idiosyncratic risks they pose, and sets you up to capture the returns of other opportunities and sectors that you might not find at home.

At the end of the day, while there’s no World Cup for investing, this would be the best way to win it if there were.

Benchmarking - Birdie or Bogey?

We understand investment returns are uncertain and short-term returns vary widely. So how can we evaluate short-term performance?


Investment benchmarking is the best choice to track how well your portfolio is doing.

Birdie or Bogey?

Australian adviser David Haintz, founding director of Shadforth Financial Group and consultancy firm Global Adviser Alpha, often uses a golf analogy when discussing portfolio returns.

What sort of professional golfer couldn’t tell you whether they are getting birdies, pars or bogeys?”
— David Haintz; Australian Adviser

He raises an important point; most investors, when asked how their portfolio is doing, respond with "pretty well" based on a number at the bottom of a sheet. But is it a birdie, par or bogey?

David Haintz goes on to say:

"Portfolio benchmarking can answer the following questions: How has your portfolio performed?"

"What returns have you achieved? How concentrated is your portfolio? How much risk have you taken? Is this an efficient way of investing? Is there a better way?"

A Tale of Two Managers

Imagine we are comparing two fund managers. Maybe you have already invested with them or maybe you are considering doing so. How do we identify the superior manager? Surely the one with the higher returns? Do we need more information?

Consider the two managers below. Manager 2 has outperformed their peer by 5% over the past year.

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Let's add one important piece of information. Manager 1 invests only in Australian shares while Manager 2 invests in NZ shares. A market benchmark for Australia is the ASX 300 Index (i.e. a good approximate for the whole share market). For NZ we can use the NZX 50 Portfolio Index.

Now we can compare each manager's performance to the market they participate in. Manager 1 has outperformed by more than 3% while Manager 2 has underperformed by about 2.5%. In other words, within their respective markets, Manager 1 added value while Manager 2 detracted value.

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Taking into account the markets which each manager targeted adds context. If we are looking only at the past year, Manager 1 is clearly superior; they scored a birdie, Manager 2 scored a bogey.

We produce quarterly benchmark reports which compare all of our approved funds to their benchmark indices. In doing so, we hope to add context and nuance to our understanding of investment returns.

Planning for Uncertainty

Continuing on the themes of uncertainty, we wanted to explore how we can still plan for the future with such a large range of possibilities. We will be boiling down all outcomes of the past 27 years into something we can use for investment planning.

A wide range of outcomes

Looking at all the 12 month outcomes from July 1991 to now

The tangled mess below shows every possible 12 month outcome, by quarter, over nearly 28 years for a globally diversified portfolio of shares. We can see the majority of outcomes are positive, with a few years of very strong performance and a few with very weak performance.

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Truly average outcomes

No smooth rides in any "average" year

The average outcome for all periods is a gain of 10.5%. The chart below compares an "average" period from January 2014 to December 2014 to the average of all outcomes. We see it is far from the smooth ride investors may wish for.

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We can also consider an average outcome over 5 years, a gain of about 60%. The period from October 1993 to September 1998 starts with a year and a half of no returns, includes a one month drop of 13.5%, but ends nearly exactly in line with our expected average.

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Creating realistic models

How we account for uncertainty when planning ahead

Let's revisit the ball of yarn chart from earlier, over five years and take useful information for our plans.

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Instead of considering every possible outcome, we can consider instead the probabilities. For example, let's add a line which 15% of outcomes fall beneath, and another which 15% of outcomes fall above. This gives a range covering 70% of outcomes surrounding the average. We have also included the "average" five years from above.

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Now we have a basic framework we can use in our plans. We can adjust the range between our boundaries to reflect the chance of success we believe is needed for our goals (maybe 25% instead of 15% for the bottom range). If the portfolio value falls below the bottom 15% range, we could increase contributions or reduce withdrawals to improve our expected outcome. If it rises above the top 15% range, we may consider taking on less risk in the future.

This is an simplified version of the Monte Carlo analysis we complete for our clients. A Monte Carlo analysis includes a few more statistical inputs and accounts for cash flows, inflation etc. However, the foundations remain the same and show how we account for uncertainty in returns to plan for the future.

Year On Year - How Annual Returns Vary Over 27 Years

We all want to be prepared for the future, investing is part of our preparation. When making our plans, we typically have expectations of what reward we should receive for the risks we take. But share performance is inherently uncertain, so how can we plan ahead?

Let's look at the year-by-year performance and try to gain some insights.

An Uncommon Average

How often is any given year an average year?

When investing in shares, the range of outcomes for a single year is large. Each year is rarely close to the average. To illustrate this, we used the calendar year returns from 1992 - 2018 (27 years) for a portfolio of shares. We used long-term benchmarks for our current portfolio models.

The average annual return for this period was 9.9%. But of the 27 years, only 5 were within +/-2% of this average (between 7.9% and 11.9%). This means more than 80% of outcomes were 2% above or below the average. The following graph shows the returns for each year.

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For a balanced portfolio, with 60% shares and 40% bonds, the average return was 8.2%. We can see the range of returns is narrower, but still only 5 out of 27 years fall between 2% above or below the average.

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Time is Your Friend

The range of returns narrows over time

We expect returns will get closer to the average over time. Within the time frame above, we can look at the best and worst returns over a variety of time periods. Below is a graph of the range of returns over 1 year, 3 years, 5 years and 10 years for our portfolio of shares.

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For the balanced portfolio, the ranges are narrower. Again there is a less uncertainty over time.

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Long-term Perspectives

Accepting year-to-year volatility for long-term results

While we use long-term averages to plan for the future, we also accept short-term returns seldom fall close to these averages. Years of poor performance are a part of investment as much as years of strong performance. Looking at performance over longer time frames, the results speak for themselves.

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Performance of Premiums

As both investment markets and our recommended funds have been volatile lately, we thought it would be useful to describe how portfolios are built and how they perform.

The following only scratches the surface, but covers the decisions which drive the majority of returns.

Asset Allocation

Asset allocation is what you invest in and where. The split between growth assets like shares and defensive assets like cash or bonds is the most important decision.

In the investment world, risk = returns. More specifically, risk = long-term returns. While including more shares in your portfolio increases the average return, the value will also fluctuate much more. After all, in any given year, shares typically do be better than cash about 60 - 70% of the time. Over time the odds improve; the charts below show the frequency shares outperform cash in four different markets, over 1-year, 5-year and 10-year periods.

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We can see the trade-off between risk and return below. There are five hypothetical portfolios, each split between cash (S&P/NZX 90-Day Bank Bill Index) and NZ shares (S&P/NZX 50 Index). The more shares, the higher the return but the bigger the drops.

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The countries you invest in make a large difference in short-term returns. For example, from 1997 - 2000, a poor manager buying US shares would probably earn you more money than a good manager buying NZ shares. For the following 3 years, the poor manager in NZ would do better! This is why we must evaluate each manager against the relevant benchmark. Below is a chart showing performance of NZ, US, Australian, European and UK shares respectively.

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Investment Strategy

Once we have decided on what and where, next is how. Within each market, how do we pick the companies themselves?

You could choose an active manager, who claims to pick the best companies and avoid the worst, while charging a fortune for the service. However, research by Standard and Poors shows how these managers have done poorly for their clients. Below is the percentage of managers who underperformed the markets they trade in.

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Another option is index funds, a cheap way to invest in the markets where active managers have failed. This is clearly (as shown above) a better option, but we can do better. In standard index funds, companies are arranged and purchased based on their size. But we can rearrange how capital is invested to tilt towards areas of higher returns without resorting to stock-picking or limiting diversification. We tilt towards dimensions of higher expected returns.

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We mentioned how shares don't always outperform cash. The same applies to these dimensions; small companies don't outperform large companies each year, but the odds increase over time. The charts below show the frequency with which small companies outperform and, below that, value companies.

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Like shares, there are times when these "premiums" are negative. Long-term, the results speak for themselves.

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Sharks in the Water

It wouldn’t be the start of beach season without the papers’ nearly daily headlines of a shark attack or sighting. As soon as we think about getting in the water, sightings start making headlines. Yet we still venture in to the water, knowing the risks and enjoying the rewards.

Much like shark headlines, financial markets have been getting a fair (or unfair depending how you look at it) share of column inches. Yes, world markets are down from where they were in late September, and yes it could be down even more by the time you read this……..but we knew this could happen, in fact we need it to happen. Much like swimming at the beach, we invest our money understanding the risk but enjoying the rewards.

No one knew how the market would perform this year. No one knows how the market will perform next year. No one knows if stocks will be higher or lower. Indeed, even though the probabilities favour a positive outcome, no one knows if stocks will be higher or lower in 5 years.

We DO know that, according to Forbes, “since 1945…there have been 77 market drops between 5% and 10%...and 27 corrections between 10% and 20%” We know that market corrections are a feature, not a bug, required to get good long-term performance. A single dollar invested in the US market in January 1945 would have grown to $2,658 (!) by the start of December (S&P 500 index).

We do know that during these corrections, there will be a host of “experts” in the paper, on business TV, blogs, magazines, podcasts and radio warning investors that THIS is the big one. That stocks are heading dramatically lower, and that they should get out now, while they still can. Yet we survived the GFC, Dot Com Bubble, 1987 Crash and other seemingly catastrophic events.

We know that given the way we are wired, many investors will react emotionally and heed these warnings and sell their holdings, saying they will “wait until the smoke clears” before they return to the market. This often leads investors to forget the #1 rule of investing “buy low, sell high”.

We know that over time, most of these investors will not return to the market until well after the bottom, usually when stocks have already dramatically increased in value.

We know that, no matter how much stocks drop, they will always come back and make new highs. That’s been the story since the late 1700s.

We know that this cycle will likely repeat itself, with variations, for the rest of our days, and probably many following.

While it is understandable to be wary of sharks in the water, we know the risks are low and keep diving in. While it is understandable to be anxious about drops in the market, keep perspective, stick to a plan and consider the long-term outcomes.

So instead of reading the headlines about things you can’t control, why not tune out the noise, focus on what you can control and enjoy Christmas secure in the knowledge that we’ve seen these things before and have always made it out the other side.

Merry Christmas from all of us at Strategic Wealth Management

Ten Years, Twenty Headlines

Jim Parker, Outside the Flags

Have you read the news today? Chances are there’s something happening in the world with the potential to keep you awake at night. But it’s one thing to follow the news, it’s another to act on it in a way that can backfire on you as an investor.

Journalists define news as what’s novel, startling, eye-catching, unusual or conversation-starting. Media companies use news to maximise attention and help their clients, the advertisers, to sell their products and services to you.

While news coverage also unquestionably plays a civic function, much of what is given prominence in the media day-to-day is consciously workshopped by editors to trigger an emotional reaction and build engagement.

For long-term investors, this presents a challenge. How do you differentiate between genuinely important, far-reaching and reliable information on the one hand, and cynically chosen clickbait and inconsequential beat-ups on the other? Put another way, how do you tell the difference between signal and noise?

One approach is to look at past headlines in an historical context and ask yourself how you would have fared if you had acted on those in your own portfolio.

The 20 headlines below are drawn at random from a Google search from the past 10 years, starting with the global financial crisis of 2008. Notice how many of them use dramatic, emotively-loaded adjectives and how many are purely speculative.

• ‘Stocks Plunge Worldwide on Fears of Recession’, 23 Jan, 2008; NY Times

• ‘Markets Braced for More Economic Turmoil’, 6 Oct, 2008; Telegraph UK

• ‘WHO Declares Swine Flu Pandemic’, 11, June, 2009; BBC News

• ‘Asian Economic Outlook “Bleak”’, 30 March, 2009; CNN

• ‘Housing Market a “Time Bomb”’, 15 June, 2010; The Australian

• ‘Stock Markets Face “Bloodbath”’, 26 Aug, 2010; Telegraph UK

• ‘Europe’s Money Markets Freeze as Crisis Escalates’, 2 Aug, 2011; Reuters

• ‘Europe’s Debt Crisis Puts Australia at Risk’, 10 Nov, 2011; News.com.au

• ‘Australia Faces Growing Risk of Recession’, 21 Aug, 2012; The Australian

• ‘Bloodbath to Hit Australian Real Estate’, 19, Jan 2012; News.com.au

• ‘Australia May Be on the Brink of a New Collapse’ 18, Aug, 2013; Guardian

• ‘For Stocks, Last Six Months Could be Tough to Match’, 1 July, 2013; CNBC

• ‘Are We Facing Another Financial Crisis?’, 18 Nov, 2014; The Conversation

• ‘Australia on Road to Recession as Car Industry Closes’, 11 Feb, 2014; SMH

• ‘Australia Faces 50% Chance of Recession By 2017’, 25 March 2015; SMH

• ‘Why China’s Stock Market Meltdown Could Hurt Us All’, 8 July, 2015; Time

• ‘RBS Cries “Sell Everything” as Crisis Nears’, 11 Jan, 2016; Telegraph UK

• ‘Brexit to Bring Recession and Contagion’, 27 June, 2016; Business Insider

• ‘A Trump Win Would Sink Stocks’, 24 Oct, 2016; CNN

• ‘Storm that May Cause the Next Crash is Brewing’, 16, Oct 2017’; The Street

To be fair, many of those headlines accurately reflected concerns in some corners of the market at the time they were written. For instance, swine flu may have turned into a global pandemic. The Euro Zone crisis of 2011 and 2012 generated real fears of a break-up of the single currency zone.

But we need to put these into events into a wider context. Here are six observations:

• First, understand how markets work. Breaking news is quickly built into prices. Often by the time you read about an event, the markets are worrying about something else. (To illustrate this danger, look at global shares over this 10-year period. In 2008, the MSCI World Index delivered a negative return of just over 25%. But it rose in seven of the next nine years to deliver an annualised positive return for the decade of just under 7%.1 )

• Second, understand how media works. Competition for eyeballs has intensified in recent years as online news and the mobile devices have put real-time information on tap for everybody. With the facts already known, news coverage increasingly becomes dominated by speculation and opinion.

• Third, ponder on the motivations of, journalists and instant pundits. Noise is their currency. What’s important in their world is not so much what is happening, but that there is always something happening. Otherwise, they feel like the fire brigade without a fire to put out.

• Fourth, accept what you can and can’t control. News can be diverting and interesting, it’s true. And there’s nothing wrong with taking an active interest in world events. But as long-term investors, acting on news that is already priced into markets can be counter-productive. The risk is something else then happens and all you’ve achieved is to realise a loss.

• Fifth, focus on what you can control – like how your assets are allocated across and within shares, bonds, property and cash, the degree of diversification in your portfolio, what you pay in costs and taxes and the regular rebalancing of your portfolio.

• Finally, all of this is easier if you have a financial advisor who can keep you disciplined and true to your original intentions. Because they know you, understand your risk appetite and are aware of your goals, the story always starts with you and not with what’s in the headlines.

None of this is to downplay the tragedy of real events or to deny the magnitude of whatever is happening in the world, but taking a human interest in global affairs and looking after your own welfare need not be incompatible concepts.

Source: https://my.dimensional.com/insight/outside...