Tag Archives: Investments

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 much do I need to start investing?

By Robert Wright /March 10,2021/

While investing into traditional property might require a significant deposit, and a commitment to a long investment horizon, investing in shares, ETFs, managed accounts or managed funds can be accessed with a much smaller outlay along with the benefit of shorter term access to the value of your investment should the need arise.

It’s all about knowing where to start, which is quite often the hardest step. But we all have the potential to be successful investors – all it takes to get started is being armed with the right knowledge.

Taking the first steps

While some prefer to take the first few steps alone, others seek professional advice before investing. Either way, it’s important to select an investment type after you have done your research, determined your personal goals, and weighed up how you feel about risk.

Considerations such as your investment timeframe, current market conditions, expectations of future market conditions, and your tolerance to capital loss, and volatility (both positive and negative movement in returns) all need to be taken into account when choosing the right type of investment. This step alone is critical in assessing your propensity to take certain levels of risk to achieve an expected return over a given time-frame.  

As mentioned above, it doesn’t take a lot to get started. You can begin investing directly in shares, or a managed investment (offering a diversified range of investment assets including shares), with a lump sum of as little as $1000, or less when setting up a regular investment plan. You can also contribute regularly to steadily grow your investments and build a diversified portfolio – while taking advantage of the benefits of compounding returns.

Paying yourself first

If your budget isn’t quite working and you’re struggling to set aside funds to grow initial capital, there is an alternate strategy.

Called ‘pay yourself first’, instead of aiming to save whatever is left over after regular bills and expenses, consider setting aside a fixed percentage of your regular wage or salary as soon as you get paid. Better still, set up an online funds transfer with your bank timed with each pay day, so that this amount goes directly into your savings account – you may be surprised how quickly you can accumulate funds to start investing.

Doing the groundwork

Be sure to do plenty of research so you understand the market and assets in which you’ll be investing. You should also research the products you’ll use to invest in that market, such as a managed fund (you should always read the Product Disclosure Statement for the fund itself). For shares in a listed company, it might mean looking at companies’ annual reports, analyst research reports or on a stock exchange’s website.

The key point is, there’s a wealth of information you can, and should use, to help decide which investments to consider. This information should also provide insights into the risks and to some extent the tax implications of the investment you are considering.

Another critical piece of research and decision making driver when choosing the types of investments to use is looking at the costs of investing. Things such as brokerage when purchasing shares, management fees and buy/sell costs when purchasing managed funds are key when investing as when investing small amounts, fees can play a major part in impacting your initial outlay.  

Getting started

Having done your research, and formulated an investment strategy, getting started can require filling out a form, or applying digitally to purchase the investments you have selected (and paying some initial capital). From here, you might decide to set up a direct debit to steadily add to your investment portfolio.

Source: BT

How to save for retirement in your 40s

By Robert Wright /March 10,2021/

Let’s start with the good news: studies show that your income peaks between the ages of 45 and 54. You’ll potentially have more money than ever – but you may also have unexpected or unwelcome expenses, like divorce. At this age you might also put retirement planning on the backburner in favour of more pressing financial commitments, such as your mortgage and kids’ school fees. Use these potential life changes as the impetus to re-evaluate your assets and income, and look at how you can maximise savings for your retirement.

In your 40s, retirement age is still some 20 years away and, while that seems like plenty of time, your decisions now can help secure your financial future. Read on to find out how to save for retirement in your 40s.

Calculate how much you’ll need for retirement

According to the Association of Superannuation Funds of Australia, by the time you reach 49 you’ll have between around $87,500 and $145,000 in your super account. The same group estimates singles will need retirement savings of $545,000 for a comfortable retirement, while couples will need combined retirement savings of $640,000. Are you on track to getting there in the next couple of decades?

Set realistic financial goals

While your financial goals in your 20s and 30s may have been idealistic, as you get closer to retirement, they should become realistic. It’s time to develop a clear plan for your savings, with achievable short, mid and long-term targets in working towards your overall retirement goal.

Live within your means

Your 40s are typically peak earning years, but with Australia in the grip of a recession, many things aren’t typical right now. One thing that’s changed is where we do our work. At the start of the coronavirus epidemic, more than 10.5 million Aussies swiftly transitioned to working from home, and many people are yet to go back to the workplace. While there might have been some initial expenses to set up a suitable home workspace, there’s also a reduction in day-to-day costs like commuting. Consider funnelling any of this cash into your savings instead, to actively save for your retirement in your 40s

Become more mindful around spending on big-ticket items as well – before a splurge, try taking a day (or a week) to give yourself time to think about how much you really need the item. You’ll be surprised at how often you decide it’s not essential to your life, and the money you save can be added to your retirement savings instead.

Review your investments

Your super might be ticking along, but what about other investments? It’s not too late to start saving and investing. Work out what style of investor you are so you have a better understanding of how comfortable you are with risk. Then talk to a financial adviser about creating a portfolio that suits you, which might include property, shares and other investment classes.

Aim to be debt free

Entering retirement with debt means juggling repayments with a high interest rate, which will eat into your retirement income.

To enter retirement debt free, look at paying off your home loan before you retire. Preparing for retirement in your 40s might mean getting a better deal on interest rates or creating a budget that allows you to make extra contributions to your mortgage, above your minimum monthly repayments.

Make sure you pay off your credit card balance in full each month so you don’t accumulate interest. Be cautious about borrowing money that you won’t be able to pay off in a short period of time.

Update your insurance

For many people, COVID-19 has been a strong reminder of how much we value good health and wellbeing – and how quickly things can change. Having the right kind of insurance can help create peace of mind when you need it.

Review your private health insurance to make sure it’s still right for your needs, particularly if your circumstances have changed or you have a growing family. Income protection and life insurance help to protect you and your family if you can’t work due to injury or illness, so you can continue to pay the bills without dipping into your savings.

Plan for your kids’ futures

Your kids mean the world to you – we get it. But their education doesn’t have to come at the expense of your retirement. As part of your retirement planning, consider setting up a separate savings account to fund things like your kids’ school and university fees, so you don’t have to dip into your retirement fund for their education.

Show your children how and why you’re cutting back on discretionary spending (meals out, trips to the movies) to make their long-term goals (like getting a job) a priority. You’re never too young to develop a healthy understanding of finances and budgeting.

Source: AMP

What is risk appetite?

By Robert Wright /February 18,2021/

For some people, risk means excitement and opportunity. For others, it invokes feelings of fear and discomfort. We all experience a degree of risk in our everyday lives – whether it’s simply walking down the street or having investments in the share market.

Everyone has a risk profile that defines their willingness to accept risk. It’s usually shaped by age, lifestyle and goals and is likely to change over time.

Risk is about tolerating the potential for losses, the ability to withstand market movements and the inability to predict what’s ahead. In financial terms, risk is the chance that an outcome will differ from the expected outcome or return.

It includes the possibility of losing some or all of your original investment. Often you may not be aware of your risk appetite until you’re facing a potential loss, so loss aversion becomes a significant factor when making decisions related to risk.

As an investor, you should have a good understanding of your attitude towards risk. If you take on too much risk, you might panic and sell at a bad time. But if you don’t expose yourself to enough risk, you may be disappointed with your returns and potentially unable achieve your objectives.

How do I work out my risk appetite?

Generally speaking, your age, income and investment objectives all help determine your risk appetite.

Age:

Generally younger investors with a longer time horizon to invest are more willing to take greater risk with their money to earn higher potential returns. Older investors with a shorter investment timeframe may be more cautious as they’ll need their money to be more readily available and have less time to recover from a loss.

Income:

People who earn more money and have a higher disposable income can typically afford to take greater risks with their investments.

Investment objectives:

Be clear about why you’re investing and when you think you’ll need to withdraw your money, as well as how long you need the money to last. Saving for a holiday or a deposit on a home is quite different from investing for your retirement.

Risk and Return

The relationship between risk and return underpins all financial decisions. The more risk an investor is willing to take, the greater the potential return. However, investors expect to be compensated for taking on this additional risk and should realise that taking on more risk doesn’t guarantee higher returns.

Whatever your risk appetite, you should always consider both risk and return before making decisions about what to do with your money. Although shares and property are generally considered to be higher-risk investments, even more conservative investments like bonds can experience short-term losses. No investment is completely risk free.

This explains why smart investors typically have a diversified portfolio that includes several different types of investments.

Risk and Diversification

Don’t think that just because your friends invest in shares you should too. If you don’t have a lot to invest or you’ll want to access your money in a few years, shares may not be the right type of investment for you.

By understanding your risk appetite and being honest about what you want to achieve, you’re more likely to be comfortable with your investment decisions.

The simplest way to minimise investment risk is through diversification. A well-diversified portfolio will usually include different asset classes, like shares, property, bonds and cash, with exposure across different industries, markets and countries.

The idea is to reduce the correlation between the different types of investment and have a good balance of assets which move in different directions and at different times. So, if some of your assets perform poorly, others may be performing well, offsetting the poor performers.

Although diversification doesn’t guarantee you won’t suffer a loss, it’s an effective way to minimise risk and help investors realise their financial goals.

Make informed decisions

You should monitor both your risk appetite and your investment portfolio over time. Your risk appetite is likely to change as you get older, and as your income or family situation changes.

Similarly, you should review your portfolio to ensure the risk level is still suited to your overall investment objectives. Financial markets are constantly changing, which means the underlying assets you’re invested in could change too.

If you’re a confident investor, you should check that it’s still on track to generate the level of return you want and importantly, at a comfortable level of risk. If you prefer to speak with a financial adviser, they too can help you undertake regular reviews and rebalance your portfolio, as necessary.

By understanding your risk appetite, you’re in a better position to make well-informed and transparent financial decisions. It will help you identify opportunities to take on more risk where appropriate or see where you’re exposed to unnecessary risk and adjust accordingly. You’ll also avoid being caught up in the emotion of market activity, where panic can lead to a poorly timed and costly decision.

Source: BT