Tag Archives: Financial Happiness

Learning the lessons of 2020: An extraordinary year

By Robert Wright /June 11,2021/

When the COVID-19 pandemic hit Australia in March 2020 it brought immediate and severe financial gloom. Shares plunged 37% and the economy slumped to its first recession in nearly 30 years. However against that backdrop, 2020 turned out far better for diversified investors than initially feared.

The development of vaccines became the good news of the second half of 2020 and offered hope of a return to life as normal. The anticipation of economic recovery, paired with ultra-low interest rates, drove a rebound in many investment markets and we did see a strong growth rebound in the second half of the year.

In 2021, we expect to see solid returns as markets shift from pandemic winners to cyclical investments, but the gains will likely be slower than seen coming out of the March pandemic lows of 2021.

For investors, 2020 was better than feared

The list of negatives brought about by the COVID-19 pandemic cannot be ignored. Unemployment surged, with severe disruption to industries like airlines, retail and the office sector. Globalisation took a further blow and tensions rose with China. Public debt skyrocketed. However there were a number of key positives.

The massive fiscal support provided by governments shielded businesses from collapse and saved jobs and incomes. Debt forbearance schemes headed off defaults, while plunging interest rates helped borrowers service loans.

Economies began to reopen after social distancing helped contain the virus, with nations like Australia, New Zealand and Asian nations doing better on this front than the US and Europe.

The November 2020 election of US President Joe Biden offered the prospect of less global policy uncertainty and reduced international tensions in 2021 and beyond.

Disruption caused by the pandemic massively accelerated a number of broader productivity gains. These include the faster take up of technology like virtual meetings, e-commerce and use of the cloud to cut costs and boost output for business.

As a result, the pandemic has shown it is possible for people to work from home and enjoy a more balanced lifestyle – increasingly in regional areas where property prices are generally more affordable.

The benefits of science – typified by the rapid development of vaccines – has also served as a rebuke to populist politicians and offers hope for better management of issues like climate change in the future.

The lessons of 2020

• Timing market moves is hard – getting out at the top of the share market in February 2020 was hard, but getting onboard again for the rally in March last year was even harder.
• Don’t fight the central banks – while they could not prevent the magnitude of the fall in share markets, their massive money easing was a key driver of the recovery.
• Investment valuations need to be assessed relative to interest rates – low rates make shares relatively attractive.
• Depressions can be avoided – 2020 showed that a large, rapid, well-targeted economic policy response can protect an economy from a significant shock and enable it to rebound quickly.
• Turn down the noise – stick to a long-term investment strategy.

Reasons for optimism through the remainder of 2021

Recent bumps in the road of vaccine roll out has not stifled the overall goal of achieving herd immunity in many developed countries by the second half of this year. Fiscal stimulus and easy monetary policy continue to work through the system, with even more fiscal stimulus being injected into the US economy. Continuing high saving rates indicate significant spending potential as confidence improves. Low inflation, and hence low interest rates, mean we are still in the “sweet spot” of the investment cycle.

After having run up so hard since early November 2020, shares are still vulnerable to a short-term pull back. We are likely to see a continuing shift away from investments that benefitted from the pandemic and lockdowns (technology, health care stocks and bonds) to investments that benefit from recovery (resources, industrials, tourism stocks and financials).

We expect global shares to return around 8% this year, but we anticipate there may be a rotation away from tech-heavy US shares to more cyclical markets in Europe, Japan and emerging countries.

Australian shares are likely to be relative outperformers returning around 12%.

Australian home prices are likely to rise 10-15%, boosted by record low mortgage rates and government incentives, but the pause in immigration and weak rental markets will likely weigh on inner city areas, and units in Melbourne and Sydney.

Nine things for investors to remember

• Harness the power of compound interest – under the principles of the ‘Rule of 72”, it takes 144 years to double an asset’s value if it returns 0.5% p.a, but only 14 years if the asset returns 5% p.a.
• Don’t get thrown off by the cycle – investors can often abandon a well thought out strategy at the wrong time during falling markets – as some may have done in March last year.
• Invest for the long term – get a plan that suits your wealth, age and risk tolerance and stick to it.
• Diversify – don’t put all your eggs in one basket.
• Turn down the noise. As discussed earlier.
• Buy low, sell high – the cheaper you buy an asset, the higher its prospective return, and vice versa.
• Beware the crowd at extremes. Don’t get sucked into the euphoria or ‘doom and gloom’ around an asset.
• Focus on investments that you understand. It’s probably best to avoid companies that have complex and hard to understand valuations or business models.
• Accept it’s a low nominal return world. Historically, when inflation is around 1.5%, the average return of 7% for super funds begins to look pretty good.

Source: AMP Capital

How to save for retirement in your 50s

By Robert Wright /April 16,2021/

For many people, your 50s are your golden years, a time when you may be at the pinnacle of your career and some of the big expenses you needed in your 20s, 30s and 40s have levelled out. But, while it may be easy to slip into a comfortable pattern of splurging on yourself and your children, this is the final stretch towards reaching your financial goals – a time when you should be maximising your financial know-how.

Shift your mindset to your saving goals

You might have a regular income now (in fact, statistics say you’re likely to be earning your highest income between the ages 45 and 51). But how will your life change when you retire, and your finances are potentially reduced or more sporadic? What happens when you need to prioritise saving overspending?

An important tip for saving for your retirement in your 50s is to change your mindset early and focus on what’s essential, rather than nice. Now is the time to prioritise your needs over your wants so you can reach your savings goals. The first step is to use a retirement calculator to help get an idea of how much you’re likely to need.

Hold your nerve

If you’re like many Aussies, your retirement savings and other investments might have been hit by the effects of the coronavirus pandemic.

You may, however, need to re-evaluate some of your retirement plans and consider pushing back your retirement by a few years if you can.

Transition to retirement

Still keen to exit the workforce sooner rather than later? Another option to consider is transition to retirement, a stepped pathway into full retirement that lets you access some of your super funds while you’re still working.

This scheme is open to those aged between 55 and 60 who are still working and comes with a range of options that could help you leave full-time employment behind.

Aim to be debt-free

Your focus for the next decade should be on how you can enter retirement with as little debt as possible. The average mortgage in Australia is $384,7003, according to the Australian Bureau of Statistics.

Imagine if you were able to retire without having to make monthly repayments on sizable amounts like this? There are numerous strategies for shrinking your mortgage fast, from setting up offset accounts to making lump-sum repayments.

Don’t forget other, smaller debts as well. While your home loan likely comes with an interest rate of between 2.5% and 5%, credit cards and personal loans often have much higher interest rates attached to them. The sooner you get rid of this debt, the sooner you can channel money into your retirement finances to help you build a comfortable retirement income.

Teach your kids to be independent

A recent report found that more than five million Australians provide support to their adult children, and now is certainly a time that many parents will be thinking about it. If your children were among the 3.1 million people who withdrew money under the early super access scheme and you’re in a position to be able to help, consider working out a way that you can help them to repay the money over the coming months.

Source: AMP

Change your spending habits and boost your happiness

By Robert Wright /March 10,2021/

After living through a year when our collective mental health took a beating, 2021 has brought with it a fresh sense of optimism and relief about what the future may hold. Like many people, you may be planning to do things differently this year.

But before you work on a wish list of things to buy and changes to make, you might like to take a look at the growing body of research into what we should spend our hard-earned cash on to bring us happiness.

Experiences, not consumption

Dr Thomas Gilovich, a professor of psychology at Cornell University in the US, has been exploring the relationship between spending and happiness for more than 20 years. After publishing a number of studies and reports, he offers important insights about how much happiness we can expect from buying stuff compared with spending on experiences.

“There’s a lot of work in the area of well-being and happiness showing that we adapt to most things,” Dr Gilovich says. “Therefore, things like a new material purchase make us happy initially, but very quickly we adapt to it, and it doesn’t bring us all that much joy. You could argue that adaptation is sort of an enemy of happiness. Other kinds of expenditures, such as experiential purchases, don’t seem as subject to adaptation.”

Not only do experiences leave us with lasting happy memories, anticipation of an experience can substantially increase your happiness, often more than the experience itself.

What kind of experiences?

If experiences define who we are, how can we determine what sort of experiences we should be having to make us happiest?

Much of the recent research on happiness has revealed that it’s “inextricably linked to having strong social ties and contributing to something bigger than yourself – the greater good.”

So it makes sense that experiences you share with others bring you more happiness than solitary ones.

Author and leading expert in positive psychology Martin Seligman has another theory. He divides experiences that bring us happiness into two categories: pleasures and gratifications. Pleasures bring us immediate contentment and enjoyment – things like a delicious meal or glass of wine, a massage or relaxing in a warm bath. There’s no doubt we’ll enjoy these experiences in the moment and remember them with appreciation, but they won’t bring us an enduring sense of satisfaction the way gratifications can. By challenging and engaging us, things like rock-climbing, dancing or restoring an old armchair can have a much longer lasting impact on our happiness.

Getting the best from experiences on a budget

The good news is that many gratifications don’t cost much, especially when compared with pleasures like expensive restaurant meals and holidays.

In his more happiness bang for your buck blog, Chairman of the Australian Government Financial Literacy Board, Paul Clitheroe offers a couple of useful tips for discovering new ways to experience happiness without spending big:

The $50 test

Take time to plan three activities costing less than $50 each during the next month. Ideas include going to the movies, buying art supplies, doing a cooking class or planting a small vegetable garden. For each activity rate how happy you think it will make you, how happy it makes you immediately after and how happy it makes you a month later. You’ll soon start to learn which experiences are contributing more to your overall happiness.

Keep a happiness diary

During the next month write down everything you buy and do in a notebook. Include how much it costs and how happy it makes you both immediately after and a month later. Now look at what you’re spending most of your money on. Does it match up with what makes you most happy?

When you take stock of what you’re spending money on and how happy you end up being as a result, you’ll have the insights you need to make changes to your budget and invest more wisely in your happiness.

Source: Money & Life