Tag Archives: Investments

Make Your Super Last

By Robert Wright /August 17,2020/

Australians enjoy one of the highest life expectancies in the world, which means you can look forward to a long and comfortable retirement.

While that’s fantastic news, it also makes saving for retirement more important than ever. Indeed, the majority of Australians over age 40 who are yet to retire are concerned about not having enough money to live on, with many recognising they need professional assistance to reach their retirement goals.

But by getting good advice and planning ahead now, you can take control and enjoy the peace of mind that comes from knowing your future may be secure.

The first step is to figure out how much income you want to receive each year in retirement, and how much you may need to save in order to get there. It’s also important to think about how your spending patterns may change during your retirement, and to plan ahead accordingly.

For example, in the early stages when you’re at your most active, you’re likely to need more funds for travel, sports and recreation. Then, as you enter a more relaxed phase of retirement, you’re likely to need to be ready for possible health issues, so you can afford the care you need as medical treatments are becoming more sophisticated and more expensive every year.

You may also want to keep your options open for the later years when you may need more intensive health support, including specialised accommodation.

Also don’t forget to factor in lump sum spending on big ticket items, such as home renovations or a new car. Because, as retirements grow longer, our cars and appliances are increasingly likely to fade away before we do.

Boost your super

When you crunch the numbers, you may find you’re facing a super gap. An effective way to boost your super savings while potentially paying less tax may be via salary sacrifice.

Even a small contribution can make a big difference over time, as you earn concessionally taxed returns on your contributions. When you invest pre-tax income through salary sacrifice, you may also benefit from the 15 per cent concessional tax rate on super contributions (rather than your marginal income tax rate), putting you even further ahead.

As of 1 July 2017, you can contribute up to $25,000 in concessional super contributions before additional tax applies. Concessional contributions include compulsory super guarantee from your employer, other employer contributions such as salary sacrifice, and personal tax-deductible contributions.

Finally, if there is a large sum you would like to contribute to super, for example, if you plan to sell a non-super asset, such as an investment property, you can do this by making a non-concessional personal contributions of up to $100,000 a year from your after-tax income.

You may also utilise the bring-forward rule which allows for members aged 64 or less to bring forward three years’ worth of non-concessional contributions and contribute up to $300,000 at any time over a three year period.

As of 1 July 2017, your total super balance (across all funds) may further limit your non-concessional cap – your cap is Nil if your total super balance is $1.6 million or more, while the amount of bring forward cap you can use is reduced once your total super balance is $1.4 million or more.

Review your investment options

Our super is one of our most valuable assets, so it’s not surprising many of us seek to protect it by investing in a low risk option.

But it’s also important to remember that trying too hard to avoid risk today could expose you to a greater risk — running out of money tomorrow, when your savings don’t produce the returns you need for a comfortable retirement.

So it’s important to choose the right investment option for your goals and investment time-frame. That’s where personalised advice from a professional financial adviser can make a difference.  Source: Colonial First State

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

Unintended consequences of Government COVID-19 Policies

By visual /May 13,2020/

For every action there is a reaction. And while we’re not criticising the government’s policy response to COVID-19, we recognise that such intervention often has unintended consequences. 

Take lower interest rates for instance. Central banks intended to make the cost of investment cheaper and be stimulatory. Instead, Australian households borrowed more money to buy bigger and better houses and US corporates levered up to buy back shares. Both actions have contributed to the economy’s current precarious situation.

One needs to think laterally when considering unintended consequences, something we apply our collective minds to. Why? Unintended consequences can impact the long-term prospects of companies and industries, both positively and negatively.

A costly decision

Providing a payment holiday seems like the right thing for banks to do given the unique circumstances. However, is it simply delaying the inevitable?

While a payment holiday means you don’t have to pay principal or interest over a six-month period, interest still accrues. In other words, after the payment holiday you have more debt. Imagine if the asset against that debt, maybe your family home or investment property, is worth less in six-12 months’ time. That leaves you with a higher liability and lower asset value.

If the servicer of the loan cannot find a job and is forced to sell in a depressed market, this becomes permanent financial damage. The unintended consequence of a payment holiday for SMEs and households could be a bigger problem down the track.

Credit rationing

Banks are experiencing significant demand for credit from existing customers. SMEs and households are getting payment holidays and larger corporates are drawing down any credit line they can. This is extremely capital consumptive for banks.

While the RBA is providing adequate liquidity and the government is providing motivation to extend credit to SMEs, there’s little motivation for banks to take on new customers, either consumers or SMEs. We believe credit rationing for new customers is likely, with non-bank lenders pulling back at the same time. This will provide a headwind for the economy, with a reduced number of business start-ups in the short to medium term.

Commercial property 

SMEs are most likely to use retail and office properties. To keep SMEs afloat, the government is addressing the two biggest costs, one of which is rent. The government has set up rules for a Mandatory Code of Conduct which helps tenants with turnover up to $50m. Essentially, the commercial landlord must take the same revenue hit as the tenant. At least half of this rent is waived completely, and the rest is deferred.

This is a smart move politically because there’s a perception that commercial landlords are rich, so there’s little sympathy from the public. However, unintended consequences are likely.

Commercial property is an attractive investment for two reasons; the stability of cashflows and the ability to borrow large sums of money against the asset. Landlords generally don’t get to participate in the upside when a tenant’s sales are going through the roof, but on the flip side, when the going’s not so good, they still get paid or can replace the tenant.

Banks traditionally liked lending to commercial property owners because of stable cashflows, the security of a hard asset and there wasn’t that operating leverage as is the case in most businesses. A precedent has now been now been set.

Commercial landlords now must cop the downside being felt by their tenants. There is even a six-month moratorium on evictions; so this asset, which was generating cash and servicing a debt, is generating no cash and there is nothing the landlord can do about it.

When the dust settles, banks are going to want more collateral and will likely lower loan to value ratios at a time when values could be under pressure. Given the importance of debt finance for most commercial property investors, this is likely to negatively impact valuations in the medium term.

The unintended consequences could include landlords hiking rents to take this new risk into consideration. If unable to increase rents, the result could be an accelerated downcycle in commercial property valuations, which would provide a further headwind for credit providers, which in turn could lead to further credit rationing.

Policies being implemented today have numerous unintended consequences that may impact the long-term prospects of many industries. This includes changes to supply chains from global just-in-time inventory systems to relying more on domestic supply chains. Immigration may slow to a trickle which, in turn, will impact economic growth.

Source: Perpetual