Tag Archives: Financial Planning

A guide to active and passive investing

By Robert Wright /August 17,2020/

Investment funds can be broadly split into two categories – active and passive. And while both options play a part in an investment portfolio, it’s important to understand how each works before allocating money to them.  

Basics of passive investing

Passive investing has gained momentum in Australia, and beyond, over the last decade. It could be because this style of investing aims to replicate the returns of a particular market index (for example, the S&P ASX 200 Index). This means, that when the value of the index rises, so too will the value of the fund. On the flip side, as the value of the index falls, so too does the nature of the fund.

Exchange-traded funds (ETFs) are some of the most popular passive investments. They are similar to managed funds, in that they involve a trust structure which holds a basket of securities.

As described above, the investments in the fund replicate the make up of the relevant market index. For example, if the index is made up of stocks that include banks, mining businesses, retail companies and supermarkets, the ETF will also hold these stocks.

Units in ETFs are listed on stock markets and can be traded just like shares.

It’s important to note, that while there are also actively managed ETFs, passive ETFs are most common of the two.

Basics of active investing

In contrast, an active approach to investing involves a fund manager choosing the assets in the fund, depending on the manager’s view of markets and the type of fund it is.

Like passive investments, there are many types of actively managed funds which offer exposure to different asset classes and industries. Rather than track an index, an active fund will target a return above a particular benchmark. An example of this is, every year, an actively managed fund might aim to achieve the same return as the S&P ASX 200 plus two per cent.

Another common way of measuring the performance of an active fund is for it to target a premium above the rate of inflation. For example, a fund might aim to achieve inflation plus two per cent per year.

Cost benefit analysis: fees

Cost is one of the major differences between these two styles of funds. Typically, passive investments are lower cost, as investors are not paying for the fund manager’s expertise in choosing the investments in the fund.

Active funds, on the other hand typically charge a base fee and a performance fee, to incentivise the fund manager to produce the highest possible return. 

Market conditions

It’s important to remember that markets will always go up and down, and actively managed funds still have many benefits (as well as risks) while factoring:

• Funds that track an index only produce the return of the index
• Fund manager skills can be used to pick investments that have the potential to do well when economic growth is slow and markets are falling
• Active managers can also avoid stocks and sectors that are not doing well.

It’s very difficult to get a true picture of whether actively managed funds perform better over time versus passive funds. It’s probably more instructive to think about how each style of investing is used in a portfolio.

A balanced perspective

There’s really no right or wrong approach when it comes to investing in active and passive investments. Many investors choose to invest in a combination of the two styles to achieve a level of diversification in their portfolios and to get access to a broad range of asset classes across the risk spectrum.  Source: BT

Financial counsellor or financial planner: What’s the difference?

By Robert Wright /August 07,2020/

Ok we get it, knowing where to turn to for financial advice can be confusing sometimes! Financial planners and financial counsellors are both types of financial experts, so which one is right for you?

To answer this question, start by considering why you’re seeking financial advice. Is it to improve your financial wellbeing? Plan for retirement? Manage your debt? Or something else entirely?

What is financial planning?  

Financial planning is all about developing strategies to build your wealth and reach your financial goals, such as achieving financial independence or having a comfortable retirement.

A financial planner, sometimes called a financial adviser, will work with you to develop a financial plan and make suggestions on how to achieve it. Some of the areas they can provide advice on are:

• Investing
• Superannuation and retirement planning
• Estate planning
• Insurance

Importantly, they must hold, or work for a company that holds, an Australian financial services license, which is granted by the Australian Securities and Investment Commission (ASIC).

How is it different to financial counselling?

Financial counselling, on the other hand, is a free service that exists to support people in financial difficulty. It is usually offered through community organisations and some government agencies.

Financial counsellors are qualified professionals who provide advice and advocacy to people struggling to manage debt, or unable to meet their ongoing expenses. They aren’t licensed to provide investment advice or invest funds on your behalf.

Some of the services a financial counsellor can provide are:

• explore your financial options and advise you on the pros and cons
• develop a budget or money plan
• prioritise your debts
• speak to creditors on your behalf and negotiate repayment arrangements
• help you access government grants or concessions
• advise you on credit, bankruptcy and debt collection laws.

Unlike financial planners, financial counsellors are not required to hold a financial services license from ASIC, provided they meet strict conditions. This includes not charging clients any fees or accepting any third-party payments or commissions. They are also required to be a member of Financial Counselling Australia.

You should never pay for financial counselling services. Anyone charging fees is, by definition, not a financial counsellor.

When should I see a financial planner?

Many people believe financial planning advice is only for the ‘wealthy’. However, it can help people of all ages prepare for the future and achieve their financial goals. If you’re looking for strategies to build and protect your wealth, a financial planning professional can assist you.

Financial planners work with people at all stages of life, from those in their 20s and 30s, right through to those in retirement, so it’s never too early to get started. Ideally, your relationship with your financial planner will last a lifetime.

Often, people seek out financial advice around major life events. If you’re thinking about buying your first home, starting a business, having children or nearing retirement, it could be a good time to get professional financial advice.

When do I need to see a financial counsellor?

If you’re struggling with debt, at risk of being evicted or having your electricity, gas or phone cut off, we recommend speaking to a financial counsellor as soon as possible.

So, which one should I see?

Going back to our earlier question, what are your reasons for seeking financial advice? If it’s to build, grow and sustain your wealth, and you’re not in financial hardship, then a financial planner is the right professional for you.

If you’re experiencing any financial difficulty, then a financial counselling service is the best option to get you back on your feet. Once your financial situation has stabilised, you should definitely consider seeing a financial planner to help you reach your long-term financial goals.

Source: Money and Life

Give yourself a new financial year check-up

By Robert Wright /August 07,2020/

Financial year 2019-20 is now behind us and there’s nothing like closing a chapter to inspire thoughts of a fresh start. But global challenges persist: Australia is officially in a recession while also bracing for a post-Job Keeper economy in September.

While it’s impossible to anticipate future changes to the global economy, there’s plenty you can do to help prepare your personal finances for an unpredictable future. A new financial year is a great time for a check-up and to set yourself new financial goals.

Know your current financial position

The best way to know where you’re headed is to understand exactly where you are. Getting a clear financial picture of your current position – even if it’s one that you’re hoping to improve – is key to unlocking a financial future that you can control.

Start by totalling your monthly expenses and looking at your income. By looking at these two things in detail, you might uncover some unnecessary costs that could be trimmed from your budget. One of the quickest ways to do this is with an automated budget tracker, which automatically tracks and organises all your spending into relevant categories.

Don’t forget to look at your liabilities, too. How much is your credit card debt? Do you have a car loan that’s eating into a possible savings plan and stopping you from achieving your long-term financial goals?

If you have similar information about your finances from last year, use this time to make an annual comparison of your income, expenses and liabilities. Maybe you’ve done better than you think, in which case, it’s cause for celebration. If not, you’ll have an idea of how much you need to recoup or alter in order to improve your situation this year.

Once you’ve got a grasp of your starting position, don’t just forget about it. Keep it somewhere you can refer back to this time next year – or even more frequently – to measure your progress.

Shift your mindset around money

Although we tend to think of money in dollars and cents, there’s a significant psychological component to personal finance. Recent research has found that 81 % of Australians ‘comfort spend’ to try to improve their mood; this is a staggering combined total of $25.5 billion a year.

In addition to simply crunching the numbers, it’s worth taking a closer look at your mindset around money. Renowned psychologist Carol Dweck has spent decades exploring the importance of embracing a ‘growth mindset’, an approach that honours effort and perseverance in reaching goals, as opposed to the ‘fixed mindset’, which suggests our circumstances are unchangeable because our traits are predetermined.

What does this have to do with your money? Dweck’s research suggests we can stay motivated by focusing on what is within our control: knowing that the changes we implement have a real effect on the outcome constitutes a growth mindset and is more likely to serve us in planning our financial future.

Focus on what you can control

Some spending, such as utility bills and groceries, are inevitable and a necessary part of life. But it’s still possible to focus on those things that are within your control, linking back to Dweck’s research. For example, you could take some time to research ways to save money and switch to a cheaper energy plan, purchase home-brand groceries rather than more expensive options or wait for certain items to go on sale.

Alternatively, you could commit to a more conscious approach to purchasing, such as mindful spending, as a way of curbing expenses and heightening awareness of where your money is heading. Try the seven-day rule as an easy way to cut down on impulse purchases and gain more control over every dollar in your budget.

Make clear plans

Getting clear on a plan for the future is a great way to achieve objectives for the financial year ahead. Setting goals that fall under the SMART category (that is, they are specific, measurable, attainable and realistic goals that adhere to a timeframe) is a popular way to approach your financial objectives. Some studies have found a 76% success rate for those who write their SMART goals down.

You could also try the ‘if-then’ strategy, which links a certain outcome with actionable behaviour. For example: ‘if I don’t pay off my credit card by November, I’ll stop buying my morning coffee for a month’. People who implement this strategy are up to 300% more likely to tick things off their list.

Celebrate your financial success

A common problem with the concept of a budget is that it seems prohibitive. It’s all about what you can’t spend, which can have a negative connotation. Switch things up and make an effort to celebrate those times when you’ve made strides in your financial situation, whether it’s paying off debt or getting closer to that savings goal.

Keeping track of your starting position at the outset of the financial year can also help with this as you can measure your progress and goals in facts and figures.

Source: AMP

5 common financial mistakes to avoid during a crisis

By Robert Wright /August 07,2020/

The economic impact of the COVID-19 pandemic is playing havoc with finances for many households. In an ideal world, the financial boost should be enough and assumes that everyone was financially prepared for tough times. But in times of crisis, it can all be a little overwhelming.

Here are 5 common financial mistakes to avoid during a crisis and help you get to the other side with minimal money stress:

1. Not paying attention to the household finances

According to a study by Deloitte Access Economics, a worrying 14 per cent of Aussies struggle to pay their bills (including rent, mortgage, utilities and credit cards). The study found that 26 per cent are spending more than they earn and live from pay cheque to pay cheque. Taking time to pay a little more attention to your household budget will help you stay afloat financially and not fall into unnecessary debt.

Start by listing all discretionary spending and reduce non-essential spending as much as you can. Identify those recurring direct debits to subscription services you no longer use. Perhaps home cooking will do rather than Uber Eats. Schedule a payment plan with essential providers such as utilities and rates. Discuss holiday repayment options with your bank or landlord.

Try using a spreadsheet or budgeting app to make it easier to track your spending during this time. You’ll quickly get a true picture of your financial health.

2. Not building up emergency funds

The Deloitte study also found 13.4 million Aussies don’t have emergency savings to fall back on if they are out of a job. While we could not have predicted a pandemic, it certainly has exposed the financial vulnerability of not ‘saving for a rainy day’. A general rule of thumb is keeping aside three to six months of living expenses.

With banks letting borrowers hit pause on their home loan repayments, and as many as 375,000 individuals applying for the repayment relief, saving any excess surplus into an emergency fund to cover delayed repayments will see you in a stronger financial position.

3. Making emotional investment decisions

Share market volatility has seen global markets bounce around, resulting in lower investor confidence. With markets falling as much as 37 per cent, you may be thinking of abandoning your long-term investment strategy and cashing in your portfolio. However, share markets have proven that a recovery follows a crisis. The Global Financial Crisis of 2007 and the Black Monday Crash of 1987 are good examples. So, it makes sense to stay the course with a quality investment strategy whilst reviewing it regularly in line with financial goals.

4. Assuming your estate is in order

Half of Australians do not have a will. Of these, 34 per cent said they ‘haven’t got around to it.’ Without a valid will, your estate affairs end up in chaos. In light of the current pandemic which can have fatal consequences, setting up your estate affairs should be high on your list. A simple will can be drafted up by a lawyer for as little as the cost of smart TV.

5. Not seeking professional advice

In times of financial crisis, it might seem more affordable to take a ‘Do-It-Yourself’ approach to save on costs, rather than seek the advice of a financial advice professional. During COVID-19 crisis, the Australian Government eased the rigid regulatory requirements to allow more access to professional advice. Working alongside a subject matter expert such as a financial planner, may help you achieve a better financial outcome as well as putting your mind at rest about the future.

Source: Money and Life