Tag Archives: Investments

Investment fundamentals to consider in volatile times

By Robert Wright /September 08,2022/

Sharp share market falls are stressful for investors as no one likes to see their investments fall in value. But at times like these, there are number of key things for investors to bear in mind.

Compounding

Compound interest is magical! The value of $1 invested in 1900, allowing for the reinvestment of dividends and interest along the way, by the end of May this year would have been worth $243 if invested in cash, $901 if invested in bonds, and $757,136 if invested in shares. Of course, this is pre-tax and fees but the relativities remain the same. The higher end point for shares reflects their higher long term return. So, to grow our wealth we need to have a long term exposure to growth assets like shares.

It’s cyclical

Sharp falls in share markets as we are now seeing are not nice, but they are a regular occurrence and the price we pay for the higher returns they provide over the longer term compared to assets like cash and bonds. The key is to recognise that these setbacks are part of the cycle. So, the key is to not get thrown off by the higher returns that shares and other growth assets provide over the longer-term by cyclical falls.

Diversify

The best performing asset class each year can vary dramatically. Last year’s top performer is no guide to the year ahead. So it’s important to have a combination of asset classes in your portfolio. This particularly applies to assets that have low correlation, i.e. that don’t just move in lock step with each other. A well-diversified portfolio is less volatile.

Understand risk and return

Put simply: the higher the risk of an asset, the higher the return you should expect to achieve over the long-term, and vice versa. There is no free lunch, and you should always allow for the risk and return characteristics of each asset in which you invest. If you don’t mind short-term risk, you can take advantage of the higher returns growth assets offer over long periods.

Time-in, not timing

In times of uncertainty like the present it’s tempting to try to time the market. But without a proven asset allocation or stock picking process, it’s next to impossible. Market timing is great if you can get it right, but without a process, the risk of getting it wrong is very high and can destroy your longer-term returns. Selling after big share market falls can feel comfortable given all the noise is negative but it locks in a loss and makes it much harder to recover.

Time is on your side

Since 1900 there are no negative returns over rolling 20-year periods for Australian shares. Short-term share returns can sometimes see violent swings, but the longer the time horizon, the greater the chance your investments will meet their goals. When it comes to investing, time is on your side, so invest for the long-term.

Remove the emotion

Emotion plays a huge roll in amplifying the investment cycle, both up and down. Avoid assets where the crowd is euphoric and convinced it’s a sure thing. Favour assets where the crowd is depressed, and the asset is under-loved. Don’t get sucked into the emotional roller coaster.

The wall of worry

It seems there’s plenty for investors to worry about at the moment. While this is real and creates uncertainty, in a long-term context it’s mostly noise. The global and Australian economies have had plenty of worries over the past century, but they got over them. Australian shares have returned 11.8 per cent per annum since 1900.

So, it’s best to turn down the noise around the short-term movements in investment markets.

Source: AMP

All about Wills and Probate

By Robert Wright /May 25,2022/

Probate is the legal process that occurs when dealing with a loved one’s will after their death. It can be difficult to know what’s involved with the process and the questions to ask.

What is Probate?

Probate is the process that makes sure the instructions in a will can be followed. It involves proving and registering a will in the Supreme Court and, if successful, will result in a ‘grant of probate’.

What’s a grant of probate?

A grant of probate means the will is recognised as legally valid and enables the executor (the person dealing with the estate) to distribute assets to the beneficiaries named in the will. Most financial institutions require a grant of probate before they can release accounts and funds to anyone other than account holders.

What to do if a family member passes

When a family member passes away, if you’re the next of kin then you need to determine whether they made a will. If they haven’t, they are said to have died “intestate”.

In this situation, an application needs to be made to the court for “Letters of Administration” authorising a person to distribute the assets of the deceased family member’s estate, the law will set out how their estate can be distributed, if not, there’s no guarantee that your loved one’s wishes will be honoured.

What’s a will?

A will is a legal document that outlines what happens to a person’s possessions and assets when they die. However, a will isn’t legally binding on its own — there are steps that must be taken to make sure the will is valid, just as there are steps that family members can take if they want to contest the will.

At its most basic a will must be:

  • in writing
  • signed by the will maker
  • witnessed by at least two adults (a beneficiary should not witness a will. If they do, they may lose their entitlements under that will)
  • made by someone of testamentary capacity.

Ensuring a will is properly made and signed can be very complex and it is always a good idea to ensure a lawyer is involved.

What’s testamentary capacity?

Testamentary capacity means that someone’s in a fit state of mind to legally understand what they’re doing. If these things are all done, then the will can be used to help divide up the estate.

Life Insurance and probate

Provided you have a named beneficiary with your policy, your life insurance should be easily accessed by your loved ones when the time comes. Life Insurance should be paid directly to the beneficiary and avoid having to be distributed through the deceased’s will.

Having your life insurance beneficiaries up to date can help ensure your loved ones are taken care of financially if something were to happen to you.

What happens once probate or the court process are completed?

Once the court process, or probate, is completed and settled, there is then the process of the administration of an estate by the executor or administrator, after the grant of probate or letters of administration have been provided.

This process of administration is something that needs to happen when a family member passes away. This process starts when probate or letters of administration are granted, and finishes when the assets listed in the will are formally handed over to the executors of the estate and distributed.

An estate can be made up of many things, including:

  • Real estate
  • Shares
  • Loans
  • Income or capital allocated by the will maker
  • Cash investments
  • Personal property

But doesn’t usually include these items:

  • Jointly owned assets that are held as joint tenants – e.g. family home (If the owners are tenants in common, the deceased person’s portion can become part of the estate)
  • Super pensions or annuities (except when directed by the member to be paid to the estate)
  • Life Insurance where the benefit is paid directly to one or more nominated beneficiaries

Here’s what you need to get started with probate:

  • The current and original will
  • Original death certificate from the relevant state registry
  • The probate application
  • Income or capital allocated by the will maker; and/or
  • Lodgement fee

Probate runs through the court system in each state, and executors or administrators of the estate need to swear to the court that they’ll distribute the will as instructed. It is important to consider getting a lawyer who can help you with the probate process.

What happens if someone contests a will?

If a family member wants to contest a will because they feel that it isn’t fair or feel that something has been left out, they need to do it in the probate stage. If someone challenges the will then the court will hold off on granting probate until the contest is sorted.

As the law in this area is very complex and can be different depending on where you live, when dealing with a will and estate planning it is always recommended to talk to a lawyer to make sure that the whole process is managed correctly, and the deceased’s wishes are most likely to be fulfilled.

They can guide you through the process, ask questions you may not have considered, and recommend arrangements for a range of scenarios. They can help you prepare your own will, or manage the affairs of a family member.

It also ensures you are getting the right advice from a professional. Being prepared can really save you time and headaches down the line.

Source: TAL

Volatility Bites: How Retirees can manage Jumpy Markets

By Robert Wright /May 25,2022/

The 2020 COVID-19 share sell off and recent equity market volatility shows just how quickly share prices can move.

Volatility can have different meanings for different investors, those with a long-term horizon can be less concerned, knowing they have time on their side. But what about retirees? How can they manage the mental challenge of watching their hard-earned capital shrink before their eyes? And do it without becoming so conservative they have to downgrade their lifestyle?

It’s a pertinent question right now because higher inflation, rising interest rates and the Russian invasion of Ukraine are making markets nervous.

Perpetual Private’s Associate Partner, Daniel Elias says volatility is more tangible for retirees. “The numbers on your portfolio spreadsheet aren’t theoretical – they pay your bills. Because that capital is so important, the challenge for retirees is reining in the fear and anxiety that can lead them to irrational decisions.”

In the years around retirement, the risk that a market downturn occurs right before you retire, or soon after, is called sequencing risk. To manage sequencing risk, having a diversified portfolio of assets can help dampen the effect on your portfolio when markets fall.

That’s when things go V-shaped

When COVID-19 lockdowns first hit in March 2020, markets fell, quickly and sharply. As people stayed at home and started upgrading their Netflix accounts, economists and analysts were arguing about the shape of a potential recovery.

Would markets fall even further, then bump along the bottom before gradually rising again (U-shaped)? Or stay down for years (the dreaded L-shape)?

Ultimately, we surfed a dramatic V-shaped recovery. Writing in January 2022, Mano Mohankumar from superannuation researcher Chant West said, “Since the market low-point at March 2020, growth funds have surged an astonishing 31%, which now sees them sitting 16% higher than the pre-COVID-19 crisis peak.”

Investors who looked through the dramatic market falls associated with COVID-19 were rewarded for sticking to their strategy. But many who reacted emotionally paid a price.

In May 2021, the McKell Institute estimate that those who redeemed via the Early Release of Super scheme at the nadir of the COVID-19 crisis gave up nearly five billion dollars in lost returns during the markets’ rebound.

Remaining rational in times of crisis is a difficult challenge for all investors, but ensuring you listen to the financial advice and don’t react with emotions is the key to not making the wrong decision during times of market stress.

Ask yourself – how much risk is right for you?

The key to investment selection and portfolio management is optimising ‘risk efficiency’ by choosing the right mix of assets to give you the maximum return for the level of risk you’re able to absorb.

Before making any changes to your investment strategy, ask yourself, “Am I still comfortable with the level of risk I originally implemented in my portfolio.”

Understanding your risk tolerance will help you find the right mix of assets that will have enough risk to grow your portfolio, but not so much that you can’t sleep at night or you are led to sell at the wrong time.

As you approach retirement, you have fewer years of earnings to save and invest and may need to draw down on your savings. This shorter time horizon limits the ability to overcome a market downturn. As a result, the amount of investment risk in your portfolio matters.

Diversification – your best defence

The other great weapon retirees can wield against market volatility is diversification. Whilst the volatility in January and February 2022 was felt in the majority of retiree portfolios, losses would have been lower than the broader equity market because many retiree portfolios are diversified across other asset classes including bonds, credit assets, property and increasingly, alternative assets.

Diversification helps to smooth returns across different economic conditions. This is because of the low or negative correlation between certain asset classes, so if one asset class falls in value in response to an economic or geopolitical event, another might rise.

Bonds can also play an excellent role in protection against equity market risk in times of market volatility and help to minimise sequencing risk.

There are alternatives

In times of ultra-low interest rates and share market volatility, alternative assets can add another source of income and an additional layer of diversification to an investor’s portfolio.

Alternatives include things like private equity, venture capital, opportunistic property and private debt. They can add returns to clients’ portfolios but must be considered in context of each retiree’s overall investment goals, portfolio size, time horizon and their appetite and tolerance for risk.

Investors must clearly understand the risks associated with investing in alternative assets as they can have long lock up periods, and are less liquid than more traditional assets, meaning they can’t be sold as quickly and converted into cash.

Building a resilient portfolio

Volatility will persist while the world adjusts to a changing economic and geopolitical order. That could mean a wider range of returns – but not necessarily a poorer real-life outcome if you stick to a robust, diversified strategy that’s attuned to your needs.

Remaining diversified across asset classes can help ensure you have the optimal blend of assets in your portfolio to weather a variety of market conditions. When it comes to ensuring you don’t let your emotions influence your investment decisions, your financial adviser can really help.

Source: Perpetual

Investment Market Outlook: Volatility Rises, Value Emerges

By Robert Wright /May 25,2022/

With war in Eastern Europe, inflation surging and Covid lockdowns inhibiting industrial production in parts of China, investment markets faced a rising tide of volatility over the past quarter.

Yet while this may feel like the worst of times, it may really be that the 14 or so years since the GFC are the outlier and the new market environment is more normal than it looks.

What’s influencing the outlook?

Ukraine and China

The cruelty of Russia’s ‘special military operation’ has shaken the world but history tells us war does not always derail investment markets. Strikingly, global shares fell over 30% when the world locked down for Covid (February 2020 to March 2020). But they’ve risen slightly since the fighting started in Ukraine.

There are more specific forces at play that will influence markets. There are widespread attempts to shun Russian energy sources, which constrains supply and means oil and gas prices are rising. Higher energy prices are a major economic blow because they suck cash from consumers’ pockets. Meanwhile, the loss of Ukraine’s harvests will add to food costs.

Somewhat lost in the fog of war is another Chinese Covid crisis – as we write there are over 20 million people locked down in Shanghai as Chinese policymakers stick to a futile zero-Covid policy. That has implications for Chinese industrial production, keeps the pressure on global supply chains and curtails Chinese consumer confidence and spending.

Inflation and interest rates

For investors today, inflation and interest rates are the terrible twins: inseparable and inexorably influencing investment assets. Hopes that supply chain pressures would ease as the world recovered from Covid have been dashed by the Ukraine crisis and China’s decision to slam the doors on large chunks of its population. That means inflation is now at rates unthinkable a year ago – 7.9% in the US, 6.2% in the UK, 7.5% in the Euro area. And around the world rates have started to rise in response. There are more rises to come, with the US response stretching to a potential seven rates hikes.

Who’s going to drop the ball?

This confluence of events throws up another risk – major policy error by governments or central banks. A recent IMF bulletin sums it up: “There are already clear signs that the war and resulting jump in costs for essential commodities will make it harder for policymakers in some countries to strike the delicate balance between containing inflation and supporting the economic recovery from the pandemic.”

What’s normal anyway?

According to Andrew Garrett, Investment Director at Perpetual Private, markets are now dealing with geopolitical risks and inflation pressures they haven’t experienced for over a decade. Yet while Perpetual Private does expect higher volatility and lower overall returns, that doesn’t mean well-diversified portfolios can’t deliver solid results for investors. Instead, a more nuanced market environment places a premium on specific investment skills.

“The long-running, low-rate environment that’s just ended inflated investment markets and made growth assets, especially ‘promising young tech stocks,’ more attractive,” says Andrew. “To use a Buffetism, it lifted all boats.”

By contrast, a rising-rate environment is one where active investors with a nose for quality can do well. We’re likely to see better results from value stocks (ie profitable companies with predictable earning whose full potential is not built into their ticker price). And from value managers – like Perpetual – who specialise in the deep research needed to unearth those opportunities.

Recent results in Australia may be a sign of things to come in this growth/value shift. Value shares were up 11.7%. Growth shares lost 4%. (As measured by the MSCI Australia Value and MSCI Australia Growth indices for the March quarter).

Source: Perpetual