All posts by Robert Wright

Volatility Bites: How Retirees can manage Jumpy Markets

By Robert Wright /May 25,2022/

The 2020 COVID-19 share sell off and recent equity market volatility shows just how quickly share prices can move.

Volatility can have different meanings for different investors, those with a long-term horizon can be less concerned, knowing they have time on their side. But what about retirees? How can they manage the mental challenge of watching their hard-earned capital shrink before their eyes? And do it without becoming so conservative they have to downgrade their lifestyle?

It’s a pertinent question right now because higher inflation, rising interest rates and the Russian invasion of Ukraine are making markets nervous.

Perpetual Private’s Associate Partner, Daniel Elias says volatility is more tangible for retirees. “The numbers on your portfolio spreadsheet aren’t theoretical – they pay your bills. Because that capital is so important, the challenge for retirees is reining in the fear and anxiety that can lead them to irrational decisions.”

In the years around retirement, the risk that a market downturn occurs right before you retire, or soon after, is called sequencing risk. To manage sequencing risk, having a diversified portfolio of assets can help dampen the effect on your portfolio when markets fall.

That’s when things go V-shaped

When COVID-19 lockdowns first hit in March 2020, markets fell, quickly and sharply. As people stayed at home and started upgrading their Netflix accounts, economists and analysts were arguing about the shape of a potential recovery.

Would markets fall even further, then bump along the bottom before gradually rising again (U-shaped)? Or stay down for years (the dreaded L-shape)?

Ultimately, we surfed a dramatic V-shaped recovery. Writing in January 2022, Mano Mohankumar from superannuation researcher Chant West said, “Since the market low-point at March 2020, growth funds have surged an astonishing 31%, which now sees them sitting 16% higher than the pre-COVID-19 crisis peak.”

Investors who looked through the dramatic market falls associated with COVID-19 were rewarded for sticking to their strategy. But many who reacted emotionally paid a price.

In May 2021, the McKell Institute estimate that those who redeemed via the Early Release of Super scheme at the nadir of the COVID-19 crisis gave up nearly five billion dollars in lost returns during the markets’ rebound.

Remaining rational in times of crisis is a difficult challenge for all investors, but ensuring you listen to the financial advice and don’t react with emotions is the key to not making the wrong decision during times of market stress.

Ask yourself – how much risk is right for you?

The key to investment selection and portfolio management is optimising ‘risk efficiency’ by choosing the right mix of assets to give you the maximum return for the level of risk you’re able to absorb.

Before making any changes to your investment strategy, ask yourself, “Am I still comfortable with the level of risk I originally implemented in my portfolio.”

Understanding your risk tolerance will help you find the right mix of assets that will have enough risk to grow your portfolio, but not so much that you can’t sleep at night or you are led to sell at the wrong time.

As you approach retirement, you have fewer years of earnings to save and invest and may need to draw down on your savings. This shorter time horizon limits the ability to overcome a market downturn. As a result, the amount of investment risk in your portfolio matters.

Diversification – your best defence

The other great weapon retirees can wield against market volatility is diversification. Whilst the volatility in January and February 2022 was felt in the majority of retiree portfolios, losses would have been lower than the broader equity market because many retiree portfolios are diversified across other asset classes including bonds, credit assets, property and increasingly, alternative assets.

Diversification helps to smooth returns across different economic conditions. This is because of the low or negative correlation between certain asset classes, so if one asset class falls in value in response to an economic or geopolitical event, another might rise.

Bonds can also play an excellent role in protection against equity market risk in times of market volatility and help to minimise sequencing risk.

There are alternatives

In times of ultra-low interest rates and share market volatility, alternative assets can add another source of income and an additional layer of diversification to an investor’s portfolio.

Alternatives include things like private equity, venture capital, opportunistic property and private debt. They can add returns to clients’ portfolios but must be considered in context of each retiree’s overall investment goals, portfolio size, time horizon and their appetite and tolerance for risk.

Investors must clearly understand the risks associated with investing in alternative assets as they can have long lock up periods, and are less liquid than more traditional assets, meaning they can’t be sold as quickly and converted into cash.

Building a resilient portfolio

Volatility will persist while the world adjusts to a changing economic and geopolitical order. That could mean a wider range of returns – but not necessarily a poorer real-life outcome if you stick to a robust, diversified strategy that’s attuned to your needs.

Remaining diversified across asset classes can help ensure you have the optimal blend of assets in your portfolio to weather a variety of market conditions. When it comes to ensuring you don’t let your emotions influence your investment decisions, your financial adviser can really help.

Source: Perpetual

Investment Market Outlook: Volatility Rises, Value Emerges

By Robert Wright /May 25,2022/

With war in Eastern Europe, inflation surging and Covid lockdowns inhibiting industrial production in parts of China, investment markets faced a rising tide of volatility over the past quarter.

Yet while this may feel like the worst of times, it may really be that the 14 or so years since the GFC are the outlier and the new market environment is more normal than it looks.

What’s influencing the outlook?

Ukraine and China

The cruelty of Russia’s ‘special military operation’ has shaken the world but history tells us war does not always derail investment markets. Strikingly, global shares fell over 30% when the world locked down for Covid (February 2020 to March 2020). But they’ve risen slightly since the fighting started in Ukraine.

There are more specific forces at play that will influence markets. There are widespread attempts to shun Russian energy sources, which constrains supply and means oil and gas prices are rising. Higher energy prices are a major economic blow because they suck cash from consumers’ pockets. Meanwhile, the loss of Ukraine’s harvests will add to food costs.

Somewhat lost in the fog of war is another Chinese Covid crisis – as we write there are over 20 million people locked down in Shanghai as Chinese policymakers stick to a futile zero-Covid policy. That has implications for Chinese industrial production, keeps the pressure on global supply chains and curtails Chinese consumer confidence and spending.

Inflation and interest rates

For investors today, inflation and interest rates are the terrible twins: inseparable and inexorably influencing investment assets. Hopes that supply chain pressures would ease as the world recovered from Covid have been dashed by the Ukraine crisis and China’s decision to slam the doors on large chunks of its population. That means inflation is now at rates unthinkable a year ago – 7.9% in the US, 6.2% in the UK, 7.5% in the Euro area. And around the world rates have started to rise in response. There are more rises to come, with the US response stretching to a potential seven rates hikes.

Who’s going to drop the ball?

This confluence of events throws up another risk – major policy error by governments or central banks. A recent IMF bulletin sums it up: “There are already clear signs that the war and resulting jump in costs for essential commodities will make it harder for policymakers in some countries to strike the delicate balance between containing inflation and supporting the economic recovery from the pandemic.”

What’s normal anyway?

According to Andrew Garrett, Investment Director at Perpetual Private, markets are now dealing with geopolitical risks and inflation pressures they haven’t experienced for over a decade. Yet while Perpetual Private does expect higher volatility and lower overall returns, that doesn’t mean well-diversified portfolios can’t deliver solid results for investors. Instead, a more nuanced market environment places a premium on specific investment skills.

“The long-running, low-rate environment that’s just ended inflated investment markets and made growth assets, especially ‘promising young tech stocks,’ more attractive,” says Andrew. “To use a Buffetism, it lifted all boats.”

By contrast, a rising-rate environment is one where active investors with a nose for quality can do well. We’re likely to see better results from value stocks (ie profitable companies with predictable earning whose full potential is not built into their ticker price). And from value managers – like Perpetual – who specialise in the deep research needed to unearth those opportunities.

Recent results in Australia may be a sign of things to come in this growth/value shift. Value shares were up 11.7%. Growth shares lost 4%. (As measured by the MSCI Australia Value and MSCI Australia Growth indices for the March quarter).

Source: Perpetual

Five ways you can start to bridge the super gender gap today

By Robert Wright /February 18,2022/

In terms of gender equality, we’ve come a long way over the past few decades. Australian homes and workplaces are very different places than they were in previous generations.

But there’s still a long way to go. When it comes to superannuation there isn’t a level playing field for Australian men and women.

Before we look at the gender super gap it’s worth looking at the gender pay gap. In May 2021, women working full-time earned $1,575.50 a week on average while men earned $1,837.00 – a gap of $261.50 or 14.2%

Not only do women tend to be paid less, they’re usually the main caregivers, with a staggering 93.5% of all primary carer leave taken by women. In 2018-19, among parents of children aged five and under, only 64.2% of women were in the labour force, compared with 94.6% of men.

And women can suffer long-term financial effects from starting a family. Women with a child aged two or younger in 2001 experienced an average 77.5% reduction in earnings over the next 15 years, compared with those without children. Men with young children on the other hand faced no significant earnings penalty.

This all adds up to a significant shortfall in retirement savings. The average super balance for a 60-year-old Australian man is $198,482, compared with $165,986 for a woman.

The Federal Government’s Retirement Income Review sums it up: “On average, compared with men, women have lower wages, are more likely to work part-time, take more career breaks, and experience worse financial impacts from divorce. These factors contribute to the gender gap in superannuation balances at retirement.

Different strokes for different folks

Of course, we’re all different and everyone’s situation is Getting your retirement plans back on track unique. There are many households in which the woman earns more and the man takes on the bulk of the domestic responsibilities. And many Australians are happily single or childfree.

But the facts speak for themselves. On average, Australian women tend to earn less, spend more time out of the workforce raising a family and have less retirement savings as a result.

So whatever your personal circumstances – single or partnered, kids or no kids – you could be faced with a challenge when it comes to generating enough income to enjoy a comfortable retirement, particularly if you dipped into your savings to get you through COVID as part of the Federal Government’s early release of super scheme in 2020.

Getting your retirement plans back on track

But all is not lost… here are five ways women – and men – can start to rebuild their super balance.

Search for lost super. You may have a few old super accounts from previous jobs. Now’s the time to find them – and even look at bringing them together into one account if that’s right for you.
Personal contributions. Lockdown has been tough on everyone. And if you’re suffering the financial impact of continuing restrictions, super is probably the last thing on your mind. But if like many of us you’ve given in to the occasional bit of indulgence to help you through – with spending on home improvements, online gambling and food delivery soaring during the pandemic– then there might be ways to save a bit extra. If you’re able to curb your spending a little, even a small contribution to super could make all the difference.
Salary sacrifice. It might not sound too appealing but in the case of super, sacrificing can help you get ahead. Most Aussies will pay less tax on these super contributions than on their income, as well as enjoying the benefits of super’s tax-friendly environment on earnings and eventual withdrawals.
Spouse contributions. If your partner earns more, they could make a contribution to your super fund and claim a tax offset of up to $540, if eligible.
Low income super tax offset. If you earn $37,000 or less a year – like many women who work part time while looking after their children – and your employer makes super contributions on your behalf, the government may refund the tax paid on these contributions back into your super account, up to $500 per year.

Source: AMP

What happens to superannuation when you break up?

By Robert Wright /February 18,2022/

Depending on the situation, you might get some of your ex partner’s super, or they may get some of yours. See what you need to know.

A divorce from your husband or wife, or a separation from your de facto, could mean a division of your assets and debts, whether they’re held individually or together, and superannuation is no exception.

The agreement or decision to split super is part of the overall settlement process, which will consider all of the assets and liabilities of a couple.

Even if one of you hasn’t contributed to super for a long time, that person could still be entitled to a percentage of the other’s super.

Below we explain a few things you may want to know, noting that if you’re a de facto couple living in Western Australia, different rules may apply, as you’re not subject to the same superannuation splitting laws.

How is super split in a divorce or separation?

There are several ways superannuation can be split.

A super agreement can be put in place before, during or after your relationship, as part of a broader binding financial agreement, which can specify how super is to be split upon separation or divorce.
If you don’t have a binding financial agreement in place but have agreed how you’d like your super to be split, an Application for Consent Orders can be filed in court, without your attendance, to formalise the arrangement you’ve both come to.
If you can’t reach an agreement, you may instead consider applying for financial orders, where a court hearing will determine how super is to be split between the two of you, noting there are time limits in place to do this.

What’s involved in the process?

You may need to get information regarding the value of the super money that could be split between you. You can do this via your or your ex’s super fund, provided the request is for purposes related to the separation.

To get this information, you’ll need to provide various forms to the super fund, which you can locate in the Federal Circuit and Family Court of Australia’s Superannuation Information Kit.

Once the super splitting order is made, whether by consent or after a court hearing, you’ll also need to provide a copy of the order to the super fund for it to be effective.

Depending on the situation, if you want to defer making a decision around how super is to be split, or if you have an older style fund where splitting is not available until you’re eligible to start taking the benefit, you could establish a ‘flagging agreement’ where the super fund is unable to pay out super until the flag is lifted.

What potential costs might you come across?

Super funds may charge an administration fee for carrying out any requests around splitting super. These are separate to any costs for legal or financial advice, or court fees.

With that in mind, it’s worth checking what the super fund may charge for things like:

an application for information
a super split
implementing a flagging agreement
lifting a flagging agreement.

When will the money be paid?

Because there are rules around when super can be accessed, be aware that splitting super won’t necessarily result in an immediate cash payout, as super is treated differently to other assets and debts.

So, after the agreed amount has been transferred to your or your ex-partner’s super account, the money must remain there until a condition of release is satisfied. What that means is, generally, you can’t access super until you’ve reached your preservation age (which will be between 55 and 60, depending on when you were born) and you retire.

What other things should you consider?

Some couples choose to leave their super untouched. Instead, they factor in the value of their super accounts while dividing up their other assets.

With that in mind, it’s worth knowing the details of all your financial accounts, including your super, noting many Aussies have more than one super account.

You can search for lost or unclaimed super by doing a super search with your current super fund or by logging into your MyGov account.

Where can you go if you need more help?

Working out what you’re entitled to can be complicated which is why it may be a good idea to get independent legal advice, even if things are amicable.

You might also think about consulting with your accountant or financial adviser.

Source: AMP