All posts by Robert Wright
Active versus Passive Investing – What’s the difference and what’s the best?
By Robert Wright /September 08,2022/
Investing in shares is a popular way of helping people to achieve their long-term financial goals. These investments can generate favourable returns over time as companies grow and improve their profitability. Dividends paid by listed companies can also generate a useful income stream.
However, there are also risks associated with investments in shares. Companies (or stocks) that struggle are likely to see their share prices fall and share markets as a whole can be affected by periods of economic weakness or unexpected events.
All investments carry risk, including those in professionally managed funds. However, exposure to shares in such funds may be one way that investors can navigate the volatility in markets. These funds are usually well diversified, spreading investment risk across a wide range of companies. There are two distinct types of funds available to investors – active funds and passive funds.
What is Active Investing?
Most actively managed funds aim to outperform a particular index – for example, the S&P/ASX 200 Accumulation Index, which represents the top 200 stocks listed on the Australian share market. The intention is that the combined portfolio of shares will perform better than the relevant index, which is often used to ‘benchmark’ or measure the performance of stocks.
Investment managers of funds have access to the information and research necessary for completing detailed analysis on companies traded on the index. As qualified professionals, they can identify the stocks likely to outperform the market average over time. With robust investment processes not readily available to individuals, active investment managers draw from their industry experience and analysis to buy and sell shares in an effort to maximise returns for investors. They buy stocks that are expected to perform better than the broader market, sell winning stocks following a period of favourable performance, and avoid those that are expected to underperform.
Of course, investments can experience day-to-day fluctuations, and there is also a risk that active funds will underperform compared to the benchmark if the selected stocks do not perform as well as investment managers anticipate. While the value of a benchmark fluctuates from day to day, the extent to which returns vary from those of a benchmark can be an indication of a manager’s skill.
What is Passive Investing?
A passive investment manager tries to replicate a share market index, such as the ASX 200, by owning shares that make up the index. The quantity of each stock held is determined by the stock’s weight in the index. For example, if BHP Billiton accounts for 6.7% of the ASX 200, a passive fund manager will invest 6.7% of the fund in that stock, and so on, for every stock in the index. The investor should expect returns to be close to that of the market index.
Which Type of Fund is Right for You?
One approach is not necessarily better than the other. When deciding on a preferred style of investment, investors should first consider their investment objectives, return targets and how much they want to pay. Many investors expect to receive returns that are above that of a market index and may therefore prefer investing in an actively managed fund. In this case, choosing an active investment manager can be important and a key consideration for investors is their confidence in a manager’s ability to achieve their investment objectives. While past performance is not necessarily an indication of future performance, most investors will consider a manager’s long-term performance track record before making an investment in a fund.
Cost can be another differentiator of the two styles. Actively managed funds typically have higher management fees to cover the cost of research and to pay for the employment of experienced analysts as part of the fund management process. In contrast, management fees for passive funds tend to be much lower. That’s because no attempt is made to outperform a benchmark index through research or stock selection.
Source: Colonial First State
Tips for Managing Money in Retirement
By Robert Wright /September 08,2022/
Aussies are living longer than ever before, with men expected to live until age 80 and women until age 85.
However, an increased life expectancy also means Australians may spend longer in retirement than previous generations, and in turn, need more money to fund retirement during those extra years.
When you’re retired and no longer earning money, it can be difficult to know how much you can afford to spend and what you need to preserve for the future, without the fallback of a regular retirement income.
You may also have added pressures in the mix, such as paying off debt, healthcare costs, and dependants in the form of kids or elderly parents.
Striking the right balance between enjoying your retirement and having enough to live on can be tough. However, you don’t have to go without – you may just need to consider your budget a bit differently.
If you’re planning your retirement , here are some money management tips that may help you get off on the right foot.
Look into having a U-shaped budget
Rather than a linear budget, where your expenses remain the same year after year, it may be worth considering a ‘U-shaped’ budget in your retirement. This is where your spending over the period of your retirement resembles a ‘U’, with the highest expenses in the first years of retirement and your later retirement years.
When you first retire, your spending will most likely be higher as you take that trip of a lifetime, splash out on that caravan or boat, or pay off your home loan (or all of the above) and engage in an active, and possibly more expensive, social life.
Your spending is then likely to settle into a more regular pattern in mid-retirement, before increasing again in your later years when greater healthcare costs and aged care expenses come into the mix.
Tips for paying off debt in retirement
Carrying debt into retirement isn’t ideal, but it’s a reality for many of us. If you find yourself owing money on your credit card, a personal loan or home loan once retired, there are things you could look into to help manage your repayments and minimise the amount of interest you pay.
Consolidating your debts by bringing them together into one loan could mean you pay less in interest, fees and charges. You could also contact your providers to try to renegotiate your repayment terms.
How much super should I have, and can I use this to pay off debt?
Some Australians withdraw their superannuation as a lump sum once they reach their super preservation age and use it to clear their debts, to avoid having any repayments and interest during retirement.
If you’re considering this, think about whether you’ll still have enough to live on in retirement, and the tax implications of doing this. In this case, it’s a good idea to speak with a financial adviser to weigh up your options.
Consider where you can save money
Although you may not have a steady income like before, it’s still possible to save money so you have more to spend on what’s important to you during your retirement. You can do this by leveraging some of the government’s benefits and subsidies, or by reducing your expenses.
Here are a few ideas to get started:
Consider selling your second car (if you have one), and take advantage of public transport concessions available to seniors instead. You may be able to save on car registration, insurance and maintenance costs, plus you’ll be doing a bit for the environment.
Take a look at government websites to learn about benefits and payments you may be able to access, such as pensions, allowances, bonuses, concession cards, supplements and other services.
Consider bundling your phone and broadband to save on technology bills, and your electricity and gas to save on energy costs. Compare providers’ rates through comparison websites and ask if they offer a seniors discount.
Think about ideas to entertain more at home instead of going out, such as dinner parties, game nights or movie nights. It also may be handy to subscribe for newsletters to your favourite restaurants and shops, or invest in a coupon book like the Entertainment Book, so you can take advantage of any offers and special deals when you do go out.
It may be worth putting your bills onto direct debit rather than paying them month by month. This way, you may be eligible to qualify for the pay on time discounts and avoid late fees if you forget a payment.
Groceries are a necessary expense, but it’s possible to save money here as well. Consider researching online for sales ahead of time, buying seasonally for fruits and veg, or buying in bulk and sharing with family or friends.
Tips if you’re helping your family financially
If you’re part of the ‘sandwich generation’, with elderly parents who are dependent on you and adult kids who are still at home or continue to need a bit of financial assistance, it’s still possible to have a good quality of life in retirement.
In order to do so, it’s all about finding balance. It’s important not to lose sight of your own goals during retirement, while still helping the ones you love. You may consider having some conversations with your children on the limits of what you can provide, and spend more time to help them understand the benefits of financial independence: for example, instead of financial assistance, perhaps you can help them with some invaluable financial education.
Tips if you’re estate planning
Estate planning is also an important part of your financial planning in retirement. Estate planning goes beyond just making a will. It can also be valuable to think about who your super beneficiaries are, and how you want to be looked after (both medically and financially) if you can’t make your own decisions later in life.
If you get your estate in order during the early years of retirement, it means more peace of mind in the long term and could potentially help prevent some family tensions in the future.
When planning your estate, here are some key things to think about.
Who will get your assets?
Making a will plays a big part in estate planning. A solicitor or estate lawyer can help you draw up a legally binding document that advises who should receive your assets after you pass away. If you don’t have a valid will, your estate will be distributed in line with the law in your relevant state.
Who is your executor?
An executor is the person responsible for making sure your assets are distributed according to your wishes, as well as paying bills, closing any banks accounts, and so on.
Who are the beneficiaries for your super?
Your super is often treated differently to the other assets in your will, so it can be useful to think about this as a separate aspect. Consider how you want your super to be distributed after you’re gone and try to keep your super beneficiary nomination up to date. If you don’t, there’s a risk that your super money may end up in different hands.
Who is your enduring power of attorney and/or guardian?
If you have an enduring power of attorney, you are allowing someone to make financial decisions on your behalf. In some states, your power of attorney holder can also make lifestyle decisions, such as health and medical choices and where you live, while in others you’ll need to appoint a separate guardian to do this.
Source: AMP
Five Questions to ask before Plunging into an ETF
By Robert Wright /September 08,2022/
Exchange Traded Funds (ETFs) have been available on the ASX for over 2 decades, but in recent years, this category’s variety and representation within Australian portfolios have grown rapidly.
By offering exposure to different global markets, industry sectors and strategic themes, as well as non-equities asset classes like bonds and commodities, ETFs can provide relatively low-cost “building blocks” for a diversified portfolio.
However, as with any investment, it’s very important to understand what you are putting your money into, and to ensure that it suits your specific needs. Here are five questions to ask yourself, or your financial adviser, before you purchase an ETF.
Question 1: Does it accurately capture the market exposure that I want?
You wouldn’t judge a book by its cover, so make sure to look beyond the ETF’s name to properly assess the underlying exposure of the product. Common misunderstandings include:
- Mistaking a “picks and shovels” exposure, through owning suppliers and supporters of a sector, for that sector’s output. For example, a portfolio of cryptocurrency miners and exchange operators is not the same as a direct investment into cryptocurrency;
- Confusion between ETFs linked to a commodity’s spot price, which is the price for immediate delivery, and those representing a futures curve, which will move with expectations for longer-term pricing; and
- Overlooking exchange rate movements, which can influence your returns from anything not priced in Australian dollars. This impact can be neutralised with a currency-hedged ETF.
Question 2: Is the exposure active, passive, or somewhere in between?
Early ETFs were purely passive, usually linked to an equities index like the S&P/ASX 200, but now, there are also actively managed portfolios within an ETF structure. “Smart beta” portfolios which apply rules-based investment strategies are becoming more common too, for example, one might invest in a basket of stocks which screen well on quality factors. The exposure type affects fee levels and return potential, with passive ETFs tending to be the cheapest, but lacking the potential to outperform an index benchmark.
Question 3: How liquid is this product?
It is possible for the price of an ETF to diverge from that of its underlying exposure, particularly in volatile market conditions such as the COVID-19 panic in early 2020. To ensure that investors can get in and out of a product when they want to, ETF providers often employ a Market Maker, an institution which quotes separate prices to buy and sell units.
Generally, ETFs with a smaller pool of units on issue are more likely to have poor liquidity, and this can show up in a wide spread between the buy and sell prices. Using “at-limit” orders when trading ETFs can help ensure that you receive the price you expect.
Question 4: How does the fee compare to alternatives, and what are the trade-offs?
Low cost is a major benefit of ETFs, but when you have several to choose from, it’s worth understanding why one’s management fee is cheaper. Active management usually costs more, and ETFs linked to a major market benchmark are sometimes priced higher because the index provider takes a cut of the total fee. Unusual products may carry a scarcity premium, while new or smaller-scale offerings may have lower fees, both to compensate for their initially poor liquidity, and also to entice more patronage over time.
Question 5: How does it fit with the rest of my portfolio?
Any new investment should be considered in the context of your existing portfolio. ETFs can provide valuable diversification, but they can also be a source of inadvertent overlap or concentrated exposure to certain sectors or factors. For example, ETFs linked to the S&P 500 index, the NASDAQ 100 and an actively-managed global growth strategy might overlap in high exposure to the Big Tech stocks, so this combination might not provide adequate diversification.
Source: Lonsec
Investment fundamentals to consider in volatile times
By Robert Wright /September 08,2022/
Sharp share market falls are stressful for investors as no one likes to see their investments fall in value. But at times like these, there are number of key things for investors to bear in mind.
Compounding
Compound interest is magical! The value of $1 invested in 1900, allowing for the reinvestment of dividends and interest along the way, by the end of May this year would have been worth $243 if invested in cash, $901 if invested in bonds, and $757,136 if invested in shares. Of course, this is pre-tax and fees but the relativities remain the same. The higher end point for shares reflects their higher long term return. So, to grow our wealth we need to have a long term exposure to growth assets like shares.
It’s cyclical
Sharp falls in share markets as we are now seeing are not nice, but they are a regular occurrence and the price we pay for the higher returns they provide over the longer term compared to assets like cash and bonds. The key is to recognise that these setbacks are part of the cycle. So, the key is to not get thrown off by the higher returns that shares and other growth assets provide over the longer-term by cyclical falls.
Diversify
The best performing asset class each year can vary dramatically. Last year’s top performer is no guide to the year ahead. So it’s important to have a combination of asset classes in your portfolio. This particularly applies to assets that have low correlation, i.e. that don’t just move in lock step with each other. A well-diversified portfolio is less volatile.
Understand risk and return
Put simply: the higher the risk of an asset, the higher the return you should expect to achieve over the long-term, and vice versa. There is no free lunch, and you should always allow for the risk and return characteristics of each asset in which you invest. If you don’t mind short-term risk, you can take advantage of the higher returns growth assets offer over long periods.
Time-in, not timing
In times of uncertainty like the present it’s tempting to try to time the market. But without a proven asset allocation or stock picking process, it’s next to impossible. Market timing is great if you can get it right, but without a process, the risk of getting it wrong is very high and can destroy your longer-term returns. Selling after big share market falls can feel comfortable given all the noise is negative but it locks in a loss and makes it much harder to recover.
Time is on your side
Since 1900 there are no negative returns over rolling 20-year periods for Australian shares. Short-term share returns can sometimes see violent swings, but the longer the time horizon, the greater the chance your investments will meet their goals. When it comes to investing, time is on your side, so invest for the long-term.
Remove the emotion
Emotion plays a huge roll in amplifying the investment cycle, both up and down. Avoid assets where the crowd is euphoric and convinced it’s a sure thing. Favour assets where the crowd is depressed, and the asset is under-loved. Don’t get sucked into the emotional roller coaster.
The wall of worry
It seems there’s plenty for investors to worry about at the moment. While this is real and creates uncertainty, in a long-term context it’s mostly noise. The global and Australian economies have had plenty of worries over the past century, but they got over them. Australian shares have returned 11.8 per cent per annum since 1900.
So, it’s best to turn down the noise around the short-term movements in investment markets.
Source: AMP