Tag Archives: Financial Planning
What are asset portfolios?
By Robert Wright /March 07,2023/
Building your wealth for the long term starts with a sound investment strategy; but with so many options outside your superannuation fund, from bonds to managed funds, where should you begin?
Understand your risk profile and timeframe
Almost every type of investment comes with some level of risk. There’s a risk you could lose money, as well as the possibility your investments won’t achieve your financial goals within the timeframe you need. As a general rule, the higher the risk the greater the potential return and the longer you should consider keeping that investment.
So first you need to understand what type of investor you are and recognise that this may change as you get closer to retirement.
When time is on your side, you may decide you can afford to take some calculated risks with your investment portfolio. That might place you at the ‘aggressive’ or ‘moderate to high growth’ end of the risk profile spectrum but if you’re planning to scale back on paid work soon, you may feel more ‘defensive’ or ‘conservative’ with your investment approach, to protect the value of the capital you’ve already built up.
To work out your risk profile, think about how you feel about short term fluctuations in the value of your investments. Would it keep you awake at night or would you be comfortable riding it out?
A market correction when you’re close to retirement could have a disproportionate impact on a larger portfolio so it’s also worth considering two risk profiles, one for your superannuation and one for your other investments.
What are asset classes?
An asset class is a type of investment – broadly speaking, these are cash, fixed interest, property or shares. Each has a different level of risk and return.
| Cash (defensive asset) | Fixed interest (defensive asset) |
| Investing in cash (such as term deposits) provides stable, low risk income (usually as interest payments). Traditionally, around 30 percent of assets are held in cash and term deposits[1]. It’s a good idea to have some cash available at short notice and these investments usually have a short timeframe. | Investing in government or corporate bonds, mortgages or hybrid securities operate like a reverse loan – they pay you a regular interest payment over a fixed term. You usually hold fixed interest investments for one to three years. |
| Property securities (growth asset) | Australian and international shares (growth asset) |
| You can invest in property that is listed on share markets, including commercial, retail, hotel and industrial property. The potential returns can be medium to high but you may need to hold these investments for three to five years. | Shares (or equities) give you a part ownership of an Australian or international company. Your potential returns include capital growth (or loss) and income through dividends, which may be franked. Depending on the type of share, these are considered medium to high growth assets and you may need to hold them for up to seven years. |
All about diversification
Spreading your investments across a range of assets to reduce your risk is known as diversification – basically it lets you avoid putting all your eggs in one basket.
Diversification can reduce the volatility within your portfolio and the risk of a large drop due to any market downturn. Given it can also take time to sell certain investments (such as property), it’s smart to have short term as well as long term investments within your portfolio. There are no guarantees – diversification won’t fully protect you against loss but it can even out your returns.
Other ways to invest in shares
Investing in a managed fund gives you access to different equities, bonds and other assets, with a focus on a specific investment objective. Pooling your money with a group of investors lets you invest in opportunities that would otherwise be out of reach and diversify your risk. There are many different types of managed funds, with different risk profiles and investment approaches, including single sector or multi sector funds or index funds.
Review your investments regularly
It’s important to keep an eye on your investments to make sure your portfolio is balanced and you’re on track to meeting your financial goals. If you invest in a managed fund, you may only need to review it once a year. If you are investing directly, you’ll need to monitor market changes much more frequently.
It’s also worth getting advice from a financial adviser before you change your investment allocation, as selling assets may result in a tax liability. They can also give you an independent perspective on your investment goals and risk profile.
Source: Colonial First State
[1] http://www.afr.com/personal-finance/why-its-time-to-rebalance-your-portfolio-20160321-gnnbrt
Can super secure a woman’s future?
By Robert Wright /March 07,2023/
Here are some stark numbers on the difference between men and women at the point when they retire:
- 80% of women are retiring without the super balance they need to fund a comfortable lifestyle.
- On retirement, women’s average superannuation account balance is around $70,000 less than men.
To be balanced, we should remember there are many situations where the shortfall in a woman’s super balance is offset by them sharing their partner’s super but that assumes away a lot of life possibilities – particularly divorce and the early death of a male partner – and also a woman’s sense of financial independence.
Women also live longer than men. A woman who was 45 in 2020 could expect to live till 86 – that’s three years longer than her male counterpart. So female retirees are more exposed to the dreaded FORO – fear of running out.
Why the shortfall?
Why do women have less super than men? There are multiple often intertwined answers.
More women work in low paid fields like hospitality and care services. They’re also more likely to work part time. That’s one reason the lockdowns of the past two years did more damage to female balance sheets.
Many women take time out of the workforce to have children and act as principal caregiver, especially during the early years of their children’s lives. The ASFA (Association of Superannuation Funds of Australia) estimates women accumulate a ‘super baby debt’ of up to $50,000 – they have $50,000 less in their super because they’ve prioritised children. Compulsory super is based on a percentage of your earnings being saved for retirement. So the less you earn over your lifetime the less you save.
Women are also more likely to have time away from work to care for their parents. If Generation X is the ‘squeezed generation,’ looking after the generation before and after, then Generation X women may be the ones squeezed hardest.
Expanding knowledge, shrinking the gap
Closing the knowledge gap is nearly as important as closing the contribution gap.
The first step is understanding where you stand – so checking with your super fund or adviser to understand exactly how much super you have and how much you’ll need to support a comfortable lifestyle.
Many super fund managers have easy to use calculators that answer those questions. For a rule of thumb, ASFA suggests single people need $545,000 in retirement savings to fund a comfortable retirement. Couples need around $640,000. Obviously these numbers are only guides and assume that you fully own your own home at retirement. It’s important you consider your own situation and expectations.
The calculators we discuss above can give you an individual view of the return difference between different investment strategies. Historically, funds that invest more aggressively (i.e. with more in shares and property and less in cash) have tended to outperform over the long term* and that means more money to retire on.
The more you put in…
Women seeking to set themselves up for a truly comfortable retirement need to first get a handle on their super and their retirement objectives, then accustom themselves to taking a little more risk in the investment strategy.
Given that it’s highly tax effective, many would argue that women should be pouring as much money into super as they can afford. Obviously that decision is a highly personal one that must take account of a whole range of factors. Fortunately, Australian governments, left and right, are committed to making super work, so there are some excellent strategies women of all income levels can use to get more gold into their pot. Here’s a very concise look at some of those opportunities.
How you can retire with more
1. Make additional contributions
Simply put, women who are likely to take time out of work should weigh up the benefits of putting more money into super when they can to build up a retirement savings buffer.
Firstly, make sure your employer is contributing in line with their Superannuation Guarantee responsibilities – currently, they need to contribute 10.5% of your income to super on your behalf. (There’s a cap of $27,500 a year on these so called concessional contributions). You can also make salary sacrifice contributions, where you forgo income and direct it into your super. Those contributions also count towards the $27,500 limit.
If you don’t reach the cap in a given year, you can accumulate those unused portions for up to five years. When you have the funds available you can then ‘catch up’ by investing up to your annual $27,500 cap and any unused cap from previous year(s). You can’t use this catch up approach if your super balance is over $500,000 but for many women it’s an excellent way to consider adding to their super even if they’ve had a few years out of the workforce or on part time income.
2. Bring forward contributions
You can also make non-concessional contributions of up to $110,000 a year into your super. These are contributions you make after tax, for example from your savings. For younger women in high paying jobs, putting extra money into super, perhaps by investing a bonus, inheritance or proceeds from a property sale – may be an effective way to load up your super. Or if you do it later in your career, it’s another way to catch up.
The government also allows you to ‘bring forward’ some contributions investing up to three times the annual non-concessional contribution in one year – that’s $330,00. Again, if you have the funds, it may be a good way to make a focused push at increasing your super balance. As of July 2022, this option is available to any women under 75 (previously it was 67). So even women very close to retirement can use this strategy to improve their super situation.
3. Spouse contributions
Couples working together on their super strategies can make up for some of the inherent disadvantages women face when saving for retirement.
Spouse contributions can be part of that approach. They allow one member of a couple to contribute up to $3,000 into the super fund of their spouse and receive a tax offset of up to $540 for doing so. The offset works on a sliding scale depending on the income of the ‘receiving’ spouse. To get the maximum offset the receiving spouse must earn less than $37,000 and there’s no offset once they earn over $40,000, but for many women, beefing up their super via extra contributions may be even more valuable than a tax offset.
Playing as a team
Couples that work together to accumulate the maximum possible super balance can have more flexibility and options in retirement.
One way couples can do this is through managing their individual $1.7 million super balance cap. The cap limits the amount of super you can transfer into a tax-free retirement income stream such as a super pension or annuity.
A twisty path to a beautiful place
As you can see from this list of contribution strategies, there are numerous ways in which women can maximise their super balance and therefore improve their chance of a comfortable retirement lifestyle. But there are also a plethora of limits, caps and complexities to navigate.
*Past performance is not indicative of future performance.
Source: Perpetual
Economic and market overview
By Robert Wright /November 28,2022/
Pleasingly, global share markets fared well in October and recovered most of their lost ground from September. Locally, the S&P/ASX 200 Index returned 6.0%.
The sharp reversal in sentiment was typical of this year; market volatility has picked up meaningfully over the past few months, resulting in substantial swings in equity prices.
Fixed income performance was mixed. Yields drifted lower in Australia, resulting in modest positive returns from the domestic bond market. Yields continued to rise in the US, however, which resulted in negative returns from Treasuries and from global bond indices.
Investors remained focused on the persistence of inflation and, in turn, the outlook for interest rate policy in key regions.
Australia
Headline inflation quickened to an annual pace of 7.3% in the September quarter; the highest level for more than 30 years. The trimmed mean – central bank officials’ preferred measure – also increased, to 6.1% year-on-year.
The Reserve Bank of Australia continued to tighten policy settings against this background, raising official interest rates again on 1 November, by 0.25 percentage points. This could be an indication that official borrowing costs will not be raised as meaningfully as previously thought.
Official interest rates are now 2.85% and may be raised again in December. Consensus forecasts currently suggest interest rates could peak at around 3.75% in mid- 2023.
New Zealand
As expected, interest rates were increased by a further half percentage point, to 3.50%, as policymakers remained focused on bringing down inflation. Headline inflation quickened to an annual pace of 7.2% in the September quarter.
Substantial rate hikes in the year to date appear not to have had their desired effect, suggesting further policy tightening may be required. Forecasts currently indicate that interest rates could be 5%, or higher, by mid-2023.
US
The latest data showed the US economy expanded at an annual pace of 2.6% in the September quarter. This represented a sharp rebound from the June quarter, when the economy contracted slightly.
Headline inflation remained above 8% year-on-year, although the Federal Re- serve did not meet in October and interest rates were therefore unchanged over the month. That said, further policy tightening is anticipated.
The labour market remains buoyant. More than 250,000 new jobs were created in September, taking the total in the year to date to nearly four mil- lion. A low unemployment rate – currently just 3.5% – means firms are typically required to pay up to attract new employees. Wages are rising at an annual pace of 5.0%.
Europe
The European Central Bank raised interest rates by a further 0.75 percentage points, as officials continued to battle persistently high inflation. Borrowing costs have been raised to their highest level since 2009.
CPI in the Eurozone remained around 10% year-on-year, partly reflecting the impact of elevated energy prices.
Political developments continued to dominate attention in the UK. The new chancellor swiftly reversed the mini-budget that had been proposed by his predecessor. This saw the UK currency and bond market claw back their lost ground from September.
The new leaders must address a slowing economy and spiralling inflation. CPI is currently running above 10% year-on-year, resulting in sharp falls in real wages for most workers and clouding the outlook for spending.
Asia
It seems Chinese officials are likely to persevere with their ‘zero Covid’ policy, which is dampening growth prospects. President Xi tightened his grip on power during the month, by appointing various loyalists into key government positions.
The Chinese yuan remained un- der pressure, owing to the deteriorating economic outlook. The currency depreciated to a 15-year low against the US dol- lar during October.
In Brazil, left wing candidate Lula da Silva was elected as the new President; a remarkable turnaround in fortunes given the former leader was in prison for corruption three years ago. His victory was welcomed by environmentalists given his pledge to address soaring de- forestation rates in the Amazon rainforest.
Australian dollar
The Australian dollar briefly fell below 62 US cents in mid-month, but clawed back loss- es and closed October little changed from its end-September levels (around 64 US cents).
The AUD was similarly flat against other major currencies. The dollar trade-weighted index declined just 0.3% over the month.
Australian equities
Australian shares added 6.0% in October, recouping most of September’s losses.
A fall in domestic bond yields supported a ‘risk-on’ attitude among investors and enabled nine out of the 11 industry sectors to generate positive returns.
The Financials (+12.2%) sector was the strongest performer, led by strong gains among the major banks. Shares in all of the ‘big four’ banks enjoyed gains of between 12% and 17%.
Oil prices rose following OPEC+’s decision to lower production quotas and after the European Union announced further sanctions against Russia. This added 9.3% over the month in the Energy sector.
Stocks in the Materials sector (-0.1%) struggled as Chinese officials reiterated their commitment to a ‘zero-Covid’ policy. Stocks in the Consumer Staples sector also struggled, resulting in the sector returning -0.2%.
Small caps outperformed their larger peers and all sectors in the S&P/ASX Small Ordinaries Index posted positive returns.
Listed property
Global property securities benefited from the general improvement in sentiment to- wards equity markets, with the FTSE EPRA/ NAREIT Developed Index adding 3.6% in Australian dollar terms.
There were particularly strong inflows into western markets. France (10.1%), Australia (9.9%) and Spain (7.3%) all enjoyed strong gains, for example.
More defensive Asian property markets such as Hong Kong and Singapore fared less well, declining by 11.4% and 6.0%, respectively.
Global equities
According to a recent report, inflows into global share markets picked up sharply following September’s weakness.
The influential S&P 500 Index in the US rose 8.1%, while the MSCI World Index closed the month 7.8% higher.
In the US, releases of quarterly financial results from tech gi- ants disappointed investors and meant returns from the NAS- DAQ failed to keep pace with the broader S&P 500 Index.
Asian indices performed poorly, partly due to significant weak- ness among Chinese shares. The CSI 300 fell 7.8%, while Hong Kong’s Hang Seng slumped 14.7%.
Japanese stocks fared quite well in contrast, with the Nikkei adding 6.4%.
European shares also registered solid gains. The Euro Stoxx 50 closed the month 9.0% higher.
Finally, the world’s richest per- son – Tesla founder Elon Musk – bought Twitter for US$44 billion.
Global and Australian fixed income
The federal funds rate was unchanged in October, remaining in a range between 3.0% and 3.25%.
Money markets have priced in the likelihood of a 0.75 percent- age point increase in the federal funds rate when policymakers meet in November, and an additional rate hike in December.
In October as a whole, 10-year Treasury yields rose 22 bps, closing above 4% for the first time since before the Global Financial Crisis in 2008. In fact the whole yield curve rose. These moves resulted in negative performance from the Treasury market, as well as from global fixed income indices.
Government bond yields were little changed in either Germany or Japan over the month.
In the UK, gilt yields fell back sharply from their September highs after the previous chancellor’s proposed tax cuts were abandoned by the incoming government. This resulted in favourable returns from UK bonds and helped ease pressure on pension funds in the country.
Australian Commonwealth Government Bond yields also trend- ed lower, closing the month down 13 bps.
Reserve Bank officials slowed the pace of their policy tightening, raising official interest rates by 0.25 percentage points.
Global credit
Investment grade credit spreads were little changed in the month as a whole.
With spread movements providing a neutral performance contribution, returns from corporate bonds were dominated by the receipt of regular coupon income. This steady flow of income supported positive returns from the asset class.
Returns for mixed-grade credit portfolios were also boosted by much-improved performance from high yield securities. Spreads in this part of the market had widened meaningfully over the past few months; seemingly sufficiently to help attract value-oriented investors.
Source: This was prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (FSI AIM), which forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group.
Why staying invested matters when markets fall
By Robert Wright /November 28,2022/
It’s natural to feel nervous when markets fall. News about inflation and rising interest rates may prompt you to make an emotional investment decision. But history tells us that markets trend upwards in the long run – and switching investment options at the wrong time can have a negative impact on your overall long-term investment return.
If you feel anxious when you see your balance drop and worry about your retirement savings, know that it’s a common reaction. And it’s natural to consider switching your super into a more defensive portfolio mix to avoid market turmoil. But doing so could mean locking in losses and missing out on the recovery which follows.
A year with a negative return can be stressful, although the general long-term trend is for markets to grow, not contract. The Australian share market has only recorded five negative years in the three decades since compulsory superannuation was introduced in 1992.
Here are three examples of market falls, and their following recoveries.
The COVID Crash 2020
Why did this happen?
In March 2020, the world started to realise how serious the rapid spread of COVID-19 really was. Governments enforced lockdowns, air travel was all but outlawed and investors desperately sold off their shares fearing these restrictions would hurt companies’ growth plans and profit margins.
What did it mean for investors at the time?
It all came to a head on 16 March 2020, when the ASX 200 recorded its worst day ever (down 9.7%)while in the US, the S&P500, Dow Jones Industrial Average and NASDAQ indices all lost 12% or more.
What was the best thing investors could do at the time?
Investors who switched to cash at the end of March, hoping to protect themselves, were 22% to 27% worse-off on average than those who held on through the drop. Share markets didn’t just recover – they grew to new highs. And people who stayed invested benefited from that growth.
Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 31 August 2017 to 30 June 2022.
Global Financial Crisis 2007 – 2009
Why did this happen?
The mid 2000s was a prosperous period for developed countries and mortgage lending became a lucrative business for banks. With house prices rising and regulators unworried about the potential risks, banks in the US began lending increasingly large sums to borrowers. included lending to borrowers with a high risk of default. US banks packaged up and on-sold those risky loans to investors.
Then in 2007 interest rates rose and house prices fell. Homeowners found themselves unable to make the repayments on their mortgage and owed more than their homes were now worth. As people walked away from their obligations, banks quickly racked up massive losses. The investors who’d bought the risky loans also lost money. The interconnectedness of global finance meant banks around the world experienced significant losses with some collapsing.
The resulting fallout remains one of the worst economic downturns since the Great Depression of the 1930s.
What did it mean for investors at the time?
The Australian share market fell 54% – a painful, drawn-out decline over 16 months from November 2007 to March 2009. But by 2013, US markets had returned to their pre-crisis highs. Australia took a little longer to regain its losses, finally breaking back above its pre-crisis levels in 2019. This may be because Australian companies pay a greater share of their earnings as dividends to investors compared with US companies.
What was the best thing investors could do at the time?
Staying invested during the Global Financial Crisis proved the best strategy, despite testing investor nerves. Yet anyone who switched their investments to cash locked in those original losses and missed out on the multi-year gains that followed.
Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 31 January 2007 to 31 December 2012.
September 11 attacks 2001
Why did this happen?
Almost 3000 lives were lost when four planes were deliberately crashed into strategic locations around the US on 11 September 2001. Almost all of these deaths were in New York, where al-Qaeda destroyed the World Trade Centre towers which sat at the heart of the financial district.
What did it mean for investors at the time?
In the days after the attack, markets dropped. The S&P500 fell 11% (extending the losses from the tech wreck earlier that year) while in Australia, the ASX200 lost 4.11% in a single session, before reaching a bottom on 24 September, 9.79% below its pre-attack level.
What was the best thing investors could do at the time?
Both the US and Australian share markets recouped all these losses only a month later. By taking a long-term view of investing, you can ride out any short-term dips in the market and take advantage of growth opportunities over the long term.
Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 30 June 1997 to 31 May 2002.
So, what’s the key thing to take away from these three examples? When markets fall sharply, it’s only natural to be concerned and think about moving money to less risky investment options – with a plan to switch back later. Yet as history has shown, it is important to consider staying invested at times of market volatility to enable your investments to benefit when the market rebounds.
Source: Colonial First State