Tag Archives: Investment Strategy

Where to seek advice in uncertain times

By Robert Wright /April 14,2020/

With the ongoing escalation of the COVID-19 crisis many people are struggling. Huge changes are happening and we’re all being affected, socially, emotionally and financially.
If your ability to work and earn an income has already been affected, you’re likely to be worried about how you’re going to cover your bills and mortgage and pay for the essentials your family need.

Take care of the present first
Depending on your life stage, you may also have slightly longer term – but still important –financial concerns on your mind.

If you’re close to retirement, you may be anxiously watching how your superannuation balance has been affected by volatile financial markets. If you’ve saved a deposit and have been house hunting, perhaps you’re wondering if now is the right time to buy.

Your long-term goals and strategies can only be built on strong financial foundations. If you can maintain a strict budget and really rein in your cash flow for the duration of this extraordinary period of uncertainty, then you’ll be preserving that stability you need to make methodical progress towards your goals when we all come out the other side of this crisis.

Review your budget and strip out as many non-essentials as you possibly can. Look at deferring your mortgage repayments for three months or asking your landlord to take rent payments out of your bond. Talk to your credit card, mobile phone and utilities providers and see what you can negotiate.

These steps can help you hold onto any cash you have saved for longer. Not only does this give you a greater sense of security, it can turn those savings into enough to last you for months instead of weeks.

It’s now even more important to feel confident in the choices you’re making about money. Getting advice and taking action on your finances can help you experience less stress as things keep changing from day to day. When so many other things seem to be spiralling out of control, you can make a difference to your state of mind by being realistic about what you can change, and what you can’t.

There is no other time when professional advice is more valuable than it is now. So if you have a financial planner, talk to them. Ask them whether now is the right time to go ahead with that property you’re buying or how to manage your retirement plan if your investments have taken a hit. And if you don’t have that professional support, make sure you’re doing lots of research and thinking things through.

Source: FPA Money & Life

The ups and downs of superannuation

By Robert Wright /September 02,2019/

Many of us like to keep an eye on our superannuation balance. It’s only natural, as we all want to retire in relative comfort, and for many people super is their second largest asset, after their family home.

If you’ve been checking your super over the last few months you might have noticed your balance going up and down. The first thing to know is this is quite normal. Share markets around the world naturally go through phases of volatility – where the value goes up and down. If your super is invested in growth assets, like Australian or international shares or property, there is going to be a bit more fluctuation in the short term than you would expect with defensive assets, like cash or bonds.  But there could also be the reward of higher returns in the medium to long term.

The amount of fluctuation you experience depends on where your super is invested. In fact, your balance changes daily. How it changes depends on all kinds of things, like which option you’re invested in and what asset classes the option invests in. Many things will impact your balance. The thing to keep in mind is that a dip in your superannuation balance is normal, as is a rise. You will also see the impact of your contributions going in and the fees for your fund coming out. It is not static!

What should I do?

Just remember your super is designed to be a long term investment – for when you retire. This means reacting over short term changes could see your retirement balance negatively impacted in the long term. Here’s some quick tips you can consider:

• Keep calm
• Do you know where your money is invested?
• Decide how you’ll invest in super
• How comfortable are you with risk?
• Have a plan
• Get help

Keep calm

Super balances go up and down. Well, it is a long term investment after all and there will be fluctuations from time to time. Reacting to short term market changes before speaking to a financial adviser or understanding how it could impact you, could mean missing out if it goes back up down the track. Trying to pick the time to make a change is hard for many investors.

Do you know where your money is invested?

Some options might be invested in riskier (more volatile) assets (such as shares and property) vs lower risk assets (such as cash and fixed interest). When you understand where your money is invested, you’ll better understand fluctuations.

Decide how you’ll invest your super

Don’t forget, you can take your super any direction you want. As our Head of Wealth, Cathy Duncan, suggests: “If you want to be a bit more hands on and are confident to make some of your own decisions, consider things like when you want to retire and your current financial situation, and ask your super fund about investing in things that mean something to you. Create your own portfolio but make sure you do your research first”. By doing this you could create diversity in your portfolio, which may help reduce your risk. If you are not confident with these matters, you should get financial advice before making any changes to your portfolio.

How comfortable are you with risk?

Generally speaking, the higher the risk, the greater the opportunity for high returns over time. If seeing your balance go up and down regularly concerns you, you may want to look at your investment options and your level of risk. Knowing this can help set your expectations. You also need to consider how long you are investing for – your retirement may be 25 or 30 years away so some short term ups and downs for a longer term reward might be something you can live with. You can also look to diversify your super investments further which may help reduce volatility.

Have a plan

As we mentioned earlier, super is a long term investment so having a plan about how much you want to retire with, and what steps you need to take to get there, helps you track your superannuation balance over the long term.

Source: ING, May 2019

Buy, sell or hold: How to deal with market movements

By Robert Wright /May 31,2019/

When share markets fall, every investor has a different emotional response. Some investors get anxious and sell up at the first drop in value, whereas others are happy to ride out short term fluctuations to realise the long-term benefits of their investments down the track.

One of the reasons for these different reactions is that all investments carry some level of risk, and we all have different perspectives on how much risk we’re willing to accept. This is because many personal factors can impact our investing style – from our financial situation and investment timeframe to our lifestyle goals and even our personality.

But when markets are in flux, how do you know if it’s time to change your strategy? Here are some things to keep in mind.

How do you react to market fluctuations?

A study by Colonial First State Global Asset Management (GAM) examined how a recent period of market movements impacted people’s investment decisions.

The results showed that as confidence declined, portfolio activity increased as more investors moved away from the stock market. In fact, the group most likely to switch out of shares were investors aged 50 and over. This is perhaps because they were seeking to preserve their capital and minimise their risk exposure as they headed towards retirement.

While investors of all ages often respond to uncertainty in the market by taking a more active approach to their investments, this may not always work in their best interests. Not only is switching costly, but it can also mean missing out on opportunities when the market recovers.

What happens if you sell?

Before you withdraw from an investment, it’s important to make sure you understand all the implications, including the risks and costs involved. For one thing, if you sell your asset you may be liable for capital gains tax (CGT), which can reduce the profit you stand to make.

What’s more, even if you’re only planning to sell off part of an investment, it’s not just the face value you’ll be giving up. You’ll also miss out on the benefits of compounding, which means you won’t be able to earn further returns on the shares you sell.

But that’s not all: if the value of your investment is falling, this is only a hypothetical or ‘on paper’ loss. If share prices begin to rise again, your investment could soon return to profit without you doing anything. However, if you sell your investment while its value is down, you essentially crystallise your losses – making them real and irreversible.

Are there alternative options?

When tailoring your investment mix, it’s important to focus on the big picture and think long term. That way, you’ll be able to ride out short-term fluctuations and take advantage of growth opportunities.

If you’re investing for the long term – for instance, with your superannuation – it’s important to have a diversified portfolio. This means investing in a variety of different asset classes. GAM’s research revealed that Australian investors tend to react to uncertainty overseas by reducing their exposure to international shares. But while this may seem like a sensible move in theory, it also means your overall portfolio will become dependent on a smaller pool of asset classes.

On the other hand, a diverse portfolio allows you to spread your risk exposure across different asset classes and markets, rather than putting all your eggs in one basket. This provides a financial buffer whenever an individual asset class declines in value.

If you’re thinking about changing your investment strategy, your financial adviser should be your first port of call. They can review your portfolio to make sure you have the right investment mix, taking into account your financial goals, investment timeframe and risk appetite.

Source: Colonial First State

Incorporating alternative investments in self-managed super funds

By Robert Wright /May 17,2019/

It’s no secret a diversified portfolio may help to protect your wealth from market ups and downs.

Including investment alternatives in your self-managed super fund, may therefore provide additional diversification.

But what exactly are alternatives and what can they do for your portfolio? We take a closer look under the hood to find out more.

How alternatives could fit within your self-managed super fund

Alternatives cover a very wide range of asset classes that could be incorporated within your self-managed super fund, should you choose to. Their performance, as well as associated risks, can differ greatly.

As the name suggests, alternative investments fall outside of the traditional asset class sectors of shares, listed property, fixed income and cash. Broadly, the different types of alternative investments include:

• Commodities – which cover a wide range of assets such as live cattle, wheat, corn, soybeans, gold bullion, copper, aluminium, oil and coffee.
• Infrastructure – covers services essential for communities such as airports, roads, power, hospitals and telecommunications.
• Private equity – investments in unlisted companies that offer the prospect for increases in shareholder value. Also known as “venture capital”, which is an early stage private equity investment.
• Hedge funds – which aim to protect investment portfolios from market uncertainty, while providing positive returns during both upward and downward trends in the market.
• Real assets – Direct property such as retail or commercial premises or facilities.
• Other direct investments, such as artwork and antiques.

The benefits of alternatives in a self-managed super fund

The main attraction of alternatives is that they tend to be less correlated to the major asset classes of equities, bonds, property and cash.

Correlation refers to the relationship between the returns of two different investments. For example, if two different assets move in the same direction at the same time, they are considered to be highly correlated. On the other hand, if one asset tends to move up when another moves down, the two assets are considered to be uncorrelated.

So in periods when traditional markets trend downwards, allocations to alternatives may not move in the same direction, or may even move in the opposite direction which can potentially provide an extra layer of diversification for your self-managed super fund.

Importance of diversification in a self-managed super fund

The importance of diversification for self-managed super investors was highlighted in research conducted by Investment Trends and the Self-Managed Super Fund Association, where just one in five advisers considered their self-managed super fund client portfolios to be well diversified.

In addition, 64 per cent of self-managed super fund advisers acknowledged even a portfolio of 30 individual stocks many not provide sufficient diversification – particularly when combined with a strong bias of investing domestically.

And the drawbacks

While alternatives can be an attractive diversification method, they also carry some risks. In addition, as they’re often not traded on an open market such as the ASX, it may be more difficult for investors to sell these investments and cash out. But just like any investment, the potential for a higher return or complexity of the investment strategy generally carries a higher level of risk.

Getting access to alternatives for your self-managed super fund

While alternatives have been historically used by institutional investors such as super funds, pension funds and government sovereign funds (e.g. our own government’s Future Fund) their higher initial investment served as a barrier for many self-managed super fund investors. For example, investing in an infrastructure project such as a new airport could cost hundreds of thousands, or even millions of dollars.

But gaining exposure to different markets and asset classes, including alternatives within your self-managed super fund has now become easier. Thanks to managed investments and exchange-traded funds, you can gain diversification across asset classes, locally and globally.

In summary

Alternatives may be a useful diversification tool in a broader self-managed super fund due to their lower correlation to traditional sectors. But like all investments, they’re not risk free so you may find it worthwhile to speak to your financial adviser about your current portfolio to determine if investing in alternatives is suitable for you.

Source: BT