Super success for women

Super success for women

Updated on Retirement, Superannuation

While women earn less and spend less time in the workforce than men, sharply reducing their super contributions throughout their working lives, there are some simple steps women can take to boost their retirement savings. The Simple Facts This inequality is simply due to women earning and working less. Women in full-time work earn on average 18 per cent less than men, while almost half of all women in the workforce work part-time with an estimated 220,000 women missing out on any super contributions each year simply because they earn less than $450 a month – the lower threshold for super guarantee contributions. Women also miss out on super contributions because they are often absent from the workforce for extended periods while on maternity leave or looking after loved ones, be they children or other family relatives. When they do return to the workforce, it is frequently in casual positions or working for themselves, where the need to make super contributions is so often overlooked. Check your super fund fees and charges The solution lies with women taking control of their super and choosing the best possible super fund, which typically means low fees and good, low-risk investment options. Regularly check what, if any, personal insurance premiums are paid from your precious super savings. While insurance is essential while you are raising a family, as you get older, you might find your need for insurance diminishes. You may be able to reduce your coverage and with it the cost of premiums from your super. (Remember to always check with your adviser before cancelling any insurances.) Make sure you take the time to consolidate your super accounts into one low cost super fund. Visit the Australian Tax Office website to consolidate your super or ask your adviser to do this for you. Wherever possible, ensure you continue to make contributions throughout your working life, starting as early as possible and not neglecting your superannuation during periods when you are out of the workforce, working on a part-time basis or self-employed. Maximise Your Contributions Make sure you speak to your adviser to maximise your contributions, and in doing so, minimise your tax bill at the end of the financial year. If you expect your income to be less than $52,000 in a financial year, make sure you take advantage of the Federal Government’s co-contribution scheme. By putting just $20 a week of after-tax income into super, you will receive up to $500 from the Government directly into your super account as soon as you lodge your tax return. That’s a guaranteed 50 per cent return on your money and the best investment you will ever make. If you are earning less than $37,000 a year, you should receive the Federal Government’s low-income superannuation tax offset of $500. Both payments happen automatically, meaning you don’t have to apply or complete additional paperwork to receive them. Still, you should check your superannuation account to make sure these payments are there. If you need more advice about your super, talk to us today.   The information provided in this article is general in nature only and does not constitute personal financial advice.

Turbo boost your retirement savings

Turbo boost your retirement savings

Updated on Retirement, Superannuation

Once your mortgage and other financial commitments are manageable, it is usually time to put the pedal down on your super. Those prime income years, between age 40 and 50 in particular, should be used constructively. However, the task may not always be easy. Many couples choose to have children later and as a result, parents’ financial responsibilities can now often extend well into their 50s, even 60s. Furthermore, the earning opportunities for many people over age 50 often begin to decline. Other factors can also disrupt retirement savings planning – time out of the workforce to raise a family, periods of unemployment or extended illness are but a few. Is there a logical solution? Usually, the least painful (and most disciplined) option is to use a superannuation salary sacrifice arrangement. For most employed people on high incomes this can represent a useful and straightforward method of bolstering retirement provisions. It works like this You agree to forego a specified amount of future salary and in return your employer makes additional future super contributions for an equivalent amount. This means your extra long-term saving starts to accrue faster, pay by pay. “Sacrificing” salary to super is also a tax-effective form of remuneration because if the arrangement is put together correctly, no personal income or fringe benefits tax is payable on the extra amount of contribution. You do need to keep in mind the impact of superannuation contribution limits however we can provide guidance on this issue. Consider this case study: Michael is 45 and he and his wife Marie have been working away at their mortgage for some time. Now they are beginning to see light at the end of the tunnel. Michael’s employer has been contributing 10% of his $110,000 remuneration package to superannuation ($11,000 per annum). Michael thinks that he may now be able to afford more, but he is not all that happy with the employer’s fund investment options. He discusses the situation with Marie and their adviser. Together they agree that Michael should set up a new super fund with a different provider and increase his contribution to 15% of salary. From the next fortnightly pay, Michael’s pre-tax salary is lower by $211.54 but the amount he actually receives will be lower by only $129.04 (since he will pay $82.50 less personal income tax as well). The $211.54 pre-tax amount was paid directly into Michael’s new super account. This means that his total after-tax super contributions for the next year will be $14,025 net instead of $9,350 and he has been able to select a fund that meets his needs. Salary sacrifice to super is just one way in which you can enhance your retirement provisions. If you would like more information about the options, talk to us today and we can assist you in determining what is right for you.   The information provided in this article is general in nature only and does not constitute personal financial advice.

What is money… really?

What is money… really?

Updated on Economy, Finance

That $50 note in your pocket. What’s it worth? “$50,” you say, probably thinking it’s a dumb question. But is it really? Or a sheet of plastic and a bit of ink that likely cost the note printer less than a cent? Your $50 note only has value because the government declares that it does. This lack of intrinsic value means your $50 note, and the balances of bank accounts that represent most money in circulation, might better be described as currency rather than ‘real money’. Over the past few thousand years all sorts of items have been used as currency, from shells and cocoa beans to soap and cigarettes. But to be considered real money, several key criteria need to be met. The most important are that it is: Recognised as a medium of exchange and accepted by most people within an economy. Durable. Portable, having a high value relative to its weight and size. Divisible into smaller amounts. Resistant to counterfeiting. A store of value over long timeframes. Of intrinsic value, i.e. not reliant on anything else for its value. Throughout history gold and silver have come closest to meeting these and other criteria, though nowadays you’ll have difficulty in paying for your groceries with gold Krugerrands. Also, you’ll want to keep your gold and silver in a safe place, and it was people seeking to do just that which gave rise to paper money and our current system of bank-created money. What started out as a good idea… Centuries ago goldsmiths would take in gold and silver for safekeeping and issue the owners receipts, or notes, confirming the amount of gold held. The depositors soon discovered that these notes could be used for payment in place of the physical gold, but the goldsmiths noticed something else. It was rare for anyone to redeem all their notes at once. They saw the opportunity to issue notes as a loan that borrowers paid back over time, with interest. Provided borrowers paid back their loans on time and only a small proportion of owners wanted their gold back at any given time, all was well, and goldsmiths transformed into bankers. But this didn’t always work out. An economic shock might see everyone wanting their gold back, and if the bank couldn’t deliver the full amount that was demanded, it went broke. To help prevent this, many countries created central banks, with some governments even acting as lender-of-last-resort. While government control and the rules around banking have evolved over time, private banks are still the source of most currency created today. When things get real In economically stable times it’s easy to think of currency and real money as the same thing. However, a couple of examples reveal the difference between the two. One is when a government starts printing money to pay for its programs. Inflation usually results, and the value of currency can plummet. In the case of hyperinflation, paper money and bank deposits can quickly become worthless as happened in Germany in the 1920s. The difference between currency and real money and the issue of intrinsic value has implications for other investments. If you would like to learn more, talk to us. We’re here to help.   The information provided in this article is general in nature only and does not constitute personal financial advice.

Quarterly Economic Update: July – September 2020

Quarterly Economic Update: July – September 2020

Updated on Finance, Investing

COVID-19 remained the big story of the last quarter. Tragically, by the end of September the pandemic had caused over one million deaths. That was up by 500,000 since the end of the previous quarter, and many countries were experiencing devastating ‘second waves’. While most of Australia managed to keep case numbers of coronavirus at very low levels, Victoria provided a case study in the severe human and economic impacts of having the virus escape control. Now it is epidemiologists, rather than economists, that we look to for advice on how to transition to a post-pandemic world. Unemployment ups and downs The official unemployment rate from the Australian Bureau of Statistics was 7.5% in July, but showed a welcome drop to 6.8% in August. Meanwhile, NSW claimed that 70% of jobs initially lost in the pandemic had been restored. However, when JobKeeper, people working zero hours but classified as employed, and a big jump in gig workers are taken into account, the real unemployment rate is much higher. Roy Morgan estimated that the actual unemployment rate is closer to 13.8% and the combined unemployment and under-employment rate is 22.8%. Still, both these figures were down from their peak in late March. Property problems The major property markets of Sydney and Melbourne declined for the fourth month in a row, with the ABS reporting that in the June quarter these major city housing markets dropped by 2.6 and 2.8% respectively. And the outlook for housing construction is none too rosy. Australia relies on immigration to generate the population growth that stimulates construction and supports the prices of existing dwellings. With our borders effectively closed that population growth will either be delayed or will fail to materialise. Rental income is also expected to decline, particularly in markets with a high proportion of overseas students who are unable to return to Australia. The markets After a bit of a rally through July and August the local share market ran out of steam, with the S&P 500 index finishing the quarter down by 1.4%. International markets continued to produce some excitement. Despite weakening a little towards the end of the quarter the MSCI All-Country World Equity Index rose 7.2%. Much of this was attributable to the US market with the S&P500 up 7.6% and the NASDAQ up 10.2%. The Aussie dollar also weakened slightly towards the end of the quarter, finishing flat against the Euro and British Pound, up 2% against the Yen, and up 3.8% (from the high 60s to low 70s) against the US Dollar. The outlook If you thought that interest rates couldn’t go any lower, think again. The RBA has flagged the possibility of a further cut in the cash rate with commentators predicting a cut of 15 basis points to take the rate to just 0.1%. Internationally, the US presidential election could see an increase in market volatility with the final outcome anything but certain. For further information on current market conditions, contact us.     The information provided in this article is general in nature only and does not constitute personal financial advice.

Reviewing your insurance as you get older

Reviewing your insurance as you get older

Updated on Insurance, Retirement

So, you are seriously starting to think about your retirement. The kids are finally more independent, the mortgage is less than it was, and the super is more than it was. You look at your monthly bank statements and one particular debit is always there. The insurance premium. You have been paying it diligently for years now, maybe decades. But, for what? You’ve not claimed and ‘gained’ anything so far. At this stage and age, it might be very tempting to cancel your policies and save a few dollars. Before you do, just consider what you could be losing in a future that’s not yet written. It could be hundreds of thousands of dollars. More to the point it could be your home, your lifestyle, or your health – the very thing you are hoping to protect. Statistically you are more likely to claim the older you get. Look at these figures:   Type of cover Average age people cancel policy Average age people make a claim Income Protection 45 46 Total & Permanent Disability (TPD) 49 48 Trauma Insurance 44 49   People often don’t realise an insurance policy is not an ‘all or nothing’ concept and there are options available. For example, as you get older and your debts and commitments reduce, so might the level of cover you require. When cover is reduced, so is the premium. Take care though, once a policy is in place it’s easy to reduce the cover but much harder to increase the amount, particularly as you get older. It often only takes a phone call to lower the amount but countless medical tests to increase it or apply again. Before you rush off and reduce your cover, it’s important to tailor the amount of cover to your potentially changing circumstances, and this is where we can help. There are many other options available including requesting a temporary freeze on the premiums; paying annually instead of monthly; moving your cover into your super fund (this is not applicable to all insurance however); or given that your adult children will usually be the ones who will eventually benefit, ask them to share the cost of the premiums! The basic idea of insurance is not to put you in a better position than you were – it’s there to protect what you have. Regardless of what age you are, think twice about cancelling insurance completely. There are always other options available. Ask us for guidance before you make any decisions.     The information provided in this article is general in nature only and does not constitute personal financial advice.

Positioning your portfolio in turbulent times

Positioning your portfolio in turbulent times

Updated on Finance, Investing, Superannuation

As any experienced investor knows, all investment markets have their ups and downs. Regardless of investor experience, turbulent times are a cause of anxiety, and that can lead to poor decision-making. So, if turbulent markets are inevitable, even if their timing is not predictable, how should portfolios be positioned in anticipation of and in response to market volatility? What’s your objective? First up, it’s important to go back to your investment objective. Is it to grow wealth over the medium to long term? Or are you more concerned with preserving capital? Your objective also needs to take account of your risk profile. With your risk tolerance and objectives clarified, it’s time to get to grips with asset allocation. This is the process of deciding what proportion of your portfolio will be allocated to each of the major asset classes: cash, fixed interest, property and shares. Asset allocation is the engine room of your portfolio. The amount that you apportion to the major asset classes has the biggest effect on your portfolio performance. It has a greater bearing on your returns than individual asset selection. Asset allocation is also your key risk management tool, the more you allocate to shares and property the greater the volatility, and therefore the risk. However, in this context, risk isn’t always a bad thing. A higher risk portfolio may at times fall more in value than a lower risks portfolio, but over the long term it is also more likely to generate higher returns. Oops, too late Unfortunately, the motivation to position a portfolio for turbulent times is often a sudden upset in investment markets. But this doesn’t mean it’s too late to do anything. If your investment objectives and risk tolerance haven’t changed, rebalancing your portfolio (i.e. bringing the asset allocation back to its ideal position) may help to position it for the next upswing in investment markets. Waiting out the storms While positioning can help with portfolio risk management, many investors opt to wait out any storms. Why? Because for all the ups and downs, bull markets and bear markets, bubbles and crashes, major share markets have delivered solid long-term growth. In fact, it has been claimed that investors have lost more money trying to anticipate corrections, than they would have lost in riding out actual corrections. A detached view Concerned about the financial outlook and your portfolio’s current position? We can provide an impartial assessment of your portfolio, help you identify your objectives and your risk tolerance, and recommend investments to help you weather the turbulent times. Talk to us today to get started.     The information provided in this article is general in nature only and does not constitute personal financial advice.

Unlocking financial secrets for different phases of life

Unlocking financial secrets for different phases of life

Updated on Finance, Investing

One of the keys to financial success is to adopt the right strategy at the right time. As you move through the stages of life, here are some tried and tested ‘secrets’ that will help you build and protect your wealth. Teens and young adults Time is on your side so get saving. Through the magic of compound interest, a little bit invested now can grow into a big amount over time. Most young people don’t want to think about life in 50 years time, but if a 15-year-old starts saving just $10 per week into an investment returning 5% pa (after fees and tax), when they turn 65 their total outlay of $26,000 will have grown to over $116,000. Contributing those savings to a tax-favoured vehicle such as superannuation may provide an even higher final return. Single life Saving is still a key strategy as careers are established, but usually with a shorter timeframe and a specific purpose in mind – buying a home, for example. This is a time when savings strategies can be brought undone by the allure of desirable things and the ease with which one can go into debt. Take care not to indulge in too many luxuries, and avoid taking on any high interest debt, such as credit cards. Rather, commit to working out a budget and sticking to it. Family focus The time of kids and mortgages is also the time of peak responsibility. It’s likely that your most valuable asset is your ability to earn an income, and illness, disability or death could deprive you and your family of that income. The financial consequences of each of these possibilities can be managed with a blend of income protection, total and permanent disability, trauma and life insurances. Preparing for retirement With offspring launched into the world and earning capacity often at a peak, a wealth of opportunities open up for pre-retirees. By all means enjoy some lifestyle spending, but don’t forget to supercharge your super in anticipation of a long retirement. In times of normal interest rates, using surplus income to pay off any outstanding home loan is often recommended, however, when interest rates are very low, investing spare income into super and leaving debt repayments until later may deliver a better outcome. Golden years Australians are up there with the leaders when it comes to enjoying long and healthy retirements. That means retirement savings need to last, so a): don’t go too hard too fast in spending your super, and b): don’t invest too conservatively, particularly in times of ultra-low interest rates. On the plus side, if you’ve employed the above secrets in each phase of life, you should be in good shape to enjoy a long, financially comfortable retirement. Whatever your stage of life, there are many things you could be doing to secure your financial future. To find out more, talk to us today.     The information provided in this article is general in nature only and does not constitute personal financial advice.

Are you investing or gambling?

Are you investing or gambling?

Updated on Investing

The potential financial results of investing can feel limitless, and it can be tempting to think that just one stock pick could make you an overnight millionaire. Yes, stock-picking can have a place in your investment strategy, but if you’re using a “get rich quick” mentality, you may be gambling, not investing. What’s the difference? One of the key differences between investing and gambling is process and strategy. If you don’t have a process and strategy in place, it is a sign that you need to establish or refine your plan. Further, gambling focuses on emotions such as hope. Investing, on the other hand, is all about strategy. With a clear strategy, you know approximately how much your investments will grow and over what time horizons. How do you know if you’re investing effectively? If you’re unsure whether your current investment approach is working to realise your goals, think about your investment process and how many of the below five elements are included in your approach. Completing no research If you’re not completing any research and putting money into assets based on tips from friends or what you see on social media, you’re exposing yourself to increased risk and not doing enough due diligence. Investing in micro-cap stocks only Micro-cap stocks typically have a market capitalisation under $500 million and are ranked from 350 to 600 on the Australian Stock Exchange. With a relatively small market capitalisation, buying stocks in these companies can be cheap. The downside, however, is that these companies are usually in their infancy and experience volatile price fluctuations. There’s a place for micro-cap stocks in your investing. However, if you’re putting all of your money into these companies, you’re likely exposing yourself to unnecessary risk. Investing with short time horizons Putting all of your money into short-term investments or activities such as day trading is an indication that you’re too focused on short-term gains without a long-term strategy. There’s a place for short time horizons in your investing, but only once you’ve mastered the foundations such as establishing a long-term plan and ensuring you have adequate cash buffers. Lack of diversification If all of your money is invested in one asset class, you’ll be over-exposed to volatility in a single market. To ensure your money grows consistently over time, your money needs to be balanced across a range of asset classes and sectors. Having no investment strategy If you don’t have an investment strategy, your investing won’t be as effective as it could be. To start putting together an investment strategy, you need to think about things such as: building up adequate cash buffers; how much money you need invested to live comfortably off your returns; and when you anticipate you’ll start drawing an income from your investments. Moving forward with a long-term wealth strategy Investing in different asset classes such as equities, commodities, and fixed-income assets is a great way to build long-term wealth. To build this wealth, however, you need a strategy and process to follow. If you’re unsure how to develop an investment strategy, be sure to seek qualified financial advice. Investing in this advice now can reap great rewards in the years to come, ensuring your money is working to help you realise your financial and lifestyle goals sooner. Contact us to get started.     The information provided in this article is general in nature only and does not constitute personal financial advice.

Get your super together and save

Get your super together and save

Updated on Superannuation

If you have had different jobs with different employers over your working career you will probably have superannuation accounts in many different funds. Apart from the time it takes to keep track of these accounts, there are three more serious concerns of which you should be aware. Investment strategy Choosing the right investments for your situation is critical to maximising your retirement nest egg. Super is for the long term and just 1% extra in returns every year can make a significant difference. For example, if you were earning $70,000 per annum and your fund was receiving only the 9.5% per annum superannuation guarantee contributions from your employer, you could have $288,000 after 20 years if the fund earned 7% per annum. If it earned just 1% per annum more, you could have $326,000. An additional $38,000! Reports and fees More than one fund means you receive multiple annual reports and statements. Apart from being a nuisance, the big danger is that your super will be eroded by fees. Lost billions An inactive account is one that has not been accessed or contributed to in the past 12 months and the super fund cannot locate the account owner. Superannuation held in inactive accounts with balances less than $6,000 is transferred into the federal government’s consolidated revenue account. As there are billions of dollars held in inactive accounts, this is a huge windfall for the government. Does any of this money belong to you? You can easily find out if you have any lost super by using your MyGov account and linking to the ATO. If there is lost super showing, follow the instructions on the MyGov service to claim it. If you don’t have a MyGov account you can download a form from www.ato.gov.au and submit it to instigate a search. Whichever way you do it, the key is to get your super all together now and make it work for your future. Contact us to get started.     The information provided in this article is general in nature only and does not constitute personal financial advice.

What will you do with your tax refund?

What will you do with your tax refund?

Updated on Tax

Thousands of Australians receive tax refunds every year. Some refunds won’t even cover the cost of a pizza to celebrate, however many are quite substantial. If you’re one of the lucky ones, what will you do with your tax windfall? If you go out and spend it, all you’re doing is giving part of it back to the government in the form of GST. Sure, it’s nice to splurge once in a while but there are other places you can stash your cash and reap a longer term benefit. Consider these options: a) Superannuation contributions Your superannuation fund will surpass any other investment vehicle simply due to the law of compounding… and your contributions are taxed at only 15%. Whilst superannuation funds remain the most tax-effective haven and thus the best way to grow your investments, the downside is that once your money is contributed it’s usually not accessible until you retire. b) Regular investment plan Consider investing the lump sum and setting up a regular savings investment plan to build it up. This will help you meet future objectives such as a new home, education or new car. While a certain amount of money in the bank is helpful for emergencies, now could be the time to consider a longer term plan with assets such as property or shares. You can invest in a managed fund with an initial deposit of $1,000 and make monthly contributions. While such investments are subject to fluctuations in value, you will see them grow over time. c) Reduce your mortgage By paying it straight into your mortgage, you immediately acquire more equity in your home and reduce the interest. Having more equity in your home also means that you can re-borrow that money again for investment, gearing, or to purchase other assets. So that’s an option that could keep on working for you. The moral of this story is to have a plan and then apply it. Work out where your tax refund will work best for you then talk your decisions through with your licensed financial planner.     The information provided in this article is general in nature only and does not constitute personal financial advice.

COVID-19 Economic Update

COVID-19 Economic Update

Updated on COVID-19, Finance

During the last quarter one story has dominated the news – COVID-19. By the end of June at least 10 million people had contracted the disease, and over 500,000 had died. With 8,000 cases and 104 deaths, Australia was amongst the countries that have been most successful in limiting its spread. However, this success came with a major cost. By June, 800,000 fewer people were on the nation’s payrolls than at the start of the pandemic. The travel, hospitality and entertainment sectors were particularly hard-hit. One consequence of this major loss of employment is that many people took advantage of the ability to withdraw up to $10,000 from their superannuation prior to the end of June. As of mid-June, over 2.3 million people had applied, with nearly $16 billion worth of withdrawals processed. A further $10,000 can be withdrawn in the new financial year. While this will prove a real lifeline for the many people who need the money now, those who do withdraw the maximum amounts are likely to be tens of thousands of dollars worse off in retirement, with younger people facing the biggest losses. Key numbers Perhaps surprisingly, investment markets took an optimistic view of the long-term financial consequences of COVID-19. While not returning to its record highs, the S&P ASX200 index rose 16% over the quarter, a little behind the MSCI All-Country World Equity Index (up 18.7%) and the US S&P500 (up 18%). However, the real action was on the tech-heavy NASDAQ, which lifted 30.6% over the three months to set a new high. The RBA cash rate stayed at 0.25%, with no great expectations of a change anytime soon. The Aussie dollar rose steadily, increasing from 61.7 to 69.1 US cents from the end of March until end of June. It enjoyed similar gains against the British Pound and Japanese Yen, and a slightly smaller gain against the Euro. While there are many factors that influence the value of the dollar, this last quarter saw it closely following the fortunes of one of our major export commodities – iron ore. What next? COVID-19 is likely to remain the dominant story for some time yet. Following the initial lockdown, countries around the world, Australia included, are conducting something of an experiment in trying to ease restrictions without triggering ‘second waves’ or other outbreaks. Events in Victoria have shown how challenging this can be, but successfully lifting lockdowns is a critical step towards restoring anything resembling normal economic activity. Another challenge facing the federal government is how to continue to support the millions of people on the JobKeeper allowance and the JobSeeker supplement. With these programs due to end in September, there is concern that their sudden cessation will deliver another blow to the economy.   The information provided in this article is general in nature only and does not constitute personal financial advice.

Investing 101

Investing 101

Updated on Finance

Whether it’s taking a more active interest in our superannuation, starting to build an investment portfolio, or even trying our hands at playing the stock market, we can all benefit by understanding the language and key concepts of investing.   Asset classes There is a huge range of potential investments out there, and these can be grouped together in asset classes that are based on shared characteristics. There are many asset classes, however the major ones that most mainstream investors focus on are shares, property, fixed interest and cash.   Shares give investors part ownership in specific companies. The share market sets the value of each share and prices can fluctuate significantly, even from day to day. This price volatility means that, relative to other asset classes, shares are higher risk, particularly in the short term. However, investors expect to be rewarded for taking on this risk by the potential for shares to deliver higher long-term gains than the other asset classes. Property also provides investors with full or partial ownership of growth assets. Income is received in the form of rent, and property can also provide capital growth. As property can, at times, fall in value, it is considered a medium to high-risk asset class. Fixed interest refers to investment in government or corporate bonds. Bonds are a type of loan, and each bond has a maturity date (the date the loan is repaid), a maturity value (the amount returned at the maturity date), a coupon rate and a market value. The coupon rate is fixed for the life of the bond (hence the term ‘fixed interest’), but the market value can fluctuate depending on movements in interest rates. Cash covers bank accounts and term deposits. Returns are in the form of interest payments, and cash is generally considered to be a low risk asset class. Why are asset classes important? One of the golden rules of investment is that when seeking higher returns, investors must take on a greater degree of risk. Quality fixed interest investments provide a high certainty of a particular return. They are low risk, and the returns they offer reflect this. However, for any given share, we don’t know what its price will be in a week, a month or a year. Prices may be volatile, the return is uncertain, so a share is a higher risk investment. However, that risk can be a positive thing – upside risk – which is the potential for the share to generate a higher than expected return.   Asset classes bundle together investments with similar risk and return profiles. By blending these asset classes together in different proportions – a process called asset allocation – investors can construct portfolios that provide levels of risk and return that suit specific needs.   This blending of different asset classes results in diversification, which is a critical risk management tool. As different asset classes over and under perform at different times, mixing different asset classes lowers the volatility, and hence the risk, of a portfolio.   As far as returns are concerned, studies have shown that over 90% of a portfolio’s performance is determined by the asset allocation. It’s vastly more important than individual investment selection or the timing of purchases and sales.   Help is at hand Of course, there’s more to investing than can be conveyed in a short article, but that’s no reason to delay putting the various markets to work. Speak to us today and we can help you understand your risk comfort level and design an investment strategy that’s right for you.   The information provided in this article is general in nature only and does not constitute personal financial advice.

What to consider when withdrawing your super early

What to consider when withdrawing your super early

Updated on Finance

[fsn_row][fsn_column width=”12″][fsn_text] As the COVID-19 virus took a sledgehammer to the economy, the federal government rapidly introduced a range of initiatives to help individuals who lost income as a result of the measures taken to control the virus.   One of those initiatives was to allow qualifying individuals access to a portion of their superannuation to help them meet their living costs. Withdrawals are tax free and don’t need to be included in tax returns. Most people can withdraw up to $10,000 in the 2019/2020 financial year and up to a further $10,000 in the 2020/2021 financial year.   For many people this early access to super will prove to be a financial lifesaver, but for others the short-term gain may lead to a significant dip in wealth at retirement. And the younger you are, the greater that impact on retirement is likely to be.   Alexander provides an example that many people will be able to relate to. He’s a 30-year-old hospitality worker, and due to the casual nature of his recent employment he is not eligible for the JobKeeper allowance. He is eligible to apply for early release of his super under the COVID-19 provisions, however before going down this route he wants an idea of what the withdrawal will mean to his long term situation.   Taking the maxMuch depends, of course, on the future performance of his superannuation fund. However, if Alexander withdraws $20,000 over the two financial years, and if his super fund delivers a modest 3% per annum net return (after fees, tax and inflation), then by age pension age (currently 67), Alexander will have $39,700 less in retirement savings than if he doesn’t make the withdrawal.   At a 4% net return, he will be $65,360 worse off if he makes the super withdrawal.   But that’s not the only disadvantage for Alexander. A smaller lump sum at retirement means a lower annual income. If Alexander draws down his super over a 20 year period, at a 3% net return, he will be around $2,670 worse off each year as a result of making the withdrawal. Over 20 years that adds up to a total loss of $53,375. At a 4% return, his youthful withdrawal will cost him over $96,000 by the time he reaches 87.   Reducing the riskOn the plus side, if Alexander is eligible for a part age pension when he retires, his smaller superannuation balance may see him receive a bigger age pension.   There are other things Alexander can do to reduce the financial consequences of accessing his super early. One is to only make the withdrawal if he absolutely has to. Or if he does make the withdrawal, to use the bare minimum and, when his employment situation improves, to contribute the remaining amount back to his super fund as a non-concessional contribution.   COVID-19 is adding further complexity to our financial lives, so before making decisions that may have a long-term impact, speak to us.   The information provided in this article is general in nature only and does not constitute personal financial advice. [/fsn_text][/fsn_column][/fsn_row]

Shares are more than numbers

Shares are more than numbers

Updated on Finance, Investing

[fsn_row][fsn_column width=”12″][fsn_text] Whether it’s by direct purchase, via a managed fund or through superannuation, most Australians hold some form of share investment. Many of us are aware that if the numbers in the finance report on the evening news are mostly green that’s good and if they’re red that’s bad, but beyond that we give little thought to what shares are and why we should take an interest in them.   What’s a share? When you buy shares, you aren’t just buying a piece of paper or a digital entry on an electronic register. You are actually buying a physical part of a company. It might be a tiny fraction of the total value, but it still provides you with certain rights and responsibilities, including the opportunity to participate in the direction of the company. Shares are real assets and depending on the size and stability of the company, you can even borrow against them.   The benefits For most people, the most important aspect to share ownership is being able to share in the profits and growth of the company. For ordinary shares, a portion of the profit is usually paid out via twice-yearly dividends. Some profits may be retained to fund the growth of the company, and this should be reflected in an increase in share price over time. These capital gains can be realised by selling the shares. The downside is that, if the company does poorly, investors may see a fall in the value of their shares.   Getting involved Beyond receiving dividends and (hopefully) watching the share price increase, many investors take little interest in their shares. But shareholders also enjoy the right to have a say in the running of the business, by voting for or against the appointment of specific directors and on resolutions at the Annual General Meeting. One share equals one vote, so large institutional investors such as superannuation funds usually have the greatest say, but even small investors can turn up at the AGM and potentially ask questions of the board. And groups of shareholders may get together to influence a company’s direction on a range of business or governance issues.   Buying shares in up and coming companies is also a way of putting one’s money where one’s values and interests are, for example in renewable energy, recycling, medical technologies, batteries or emerging markets.   The rewards of investing in shares can be enormous, and they’re not just financial. There’s real pride to be gained from looking at a company that has achieved great things and to know that you’ve played a part in its success.   However, there is a financial risk associated with owning shares, so if you want to treat your share portfolio as more than just numbers on a screen, speak to us.     The information provided in this article is general in nature only and does not constitute personal financial advice. [/fsn_text][/fsn_column][/fsn_row]

When an SMSF may be the wrong idea

When an SMSF may be the wrong idea

Updated on Finance, Investing, Superannuation

Since the Australian Government introduced compulsory employer contributions to people’s superannuation funds in 1992, Australia’s funds invested in super have grown to $3 trillion. In this time, self-managed super funds (SMSF’s) have grown in popularity too. There are currently just over 1 million members with $747 billion in SMSFs across Australia. SMSFs can have between one and four members. While not yet legislated, the government has proposed allowing up to six members in an SMSF. Most SMSFs in Australia have two members (70%), with most other SMSFs having a single member (23%). According to the ATO, the average value of assets in people’s SMSFs is $320,000. The general recommendation is to have a minimum balance of $200,000 in your SMSF. While it can be tempting to see the potential of being in complete control over your super balance, it may not always be a good idea to set up an SMSF. Why set up an SMSF?Many people opt to set up an SMSF to have more flexibility in where they invest their money. Along with more investment options such as residential property and rare asset classes such as art, valuable collectables and physical gold, your SMSF income is taxed at a lower rate of 15%. Compared to the marginal income tax rate for average and high-income earners (usually between 30% to 45%), establishing an SMSF can be an attractive option. However, as with any other type of investing, there are potential downsides and SMSFs can carry significant risks and costs. What are the risks associated with having an SMSF?There are several risks associated with having an SMSF. To establish an SMSF, you are legally required to have an investment strategy. When you have an SMSF, you also need to ensure you get tailored advice from your financial adviser to mitigate the risk of making poor investment and financial decisions. Many SMSFs also choose to invest in one asset, such as residential property. This leaves your super balance overexposed to risk, compared to if you had a balanced portfolio in a super fund. Unlike a traditional super fund, an SMSF has time-consuming administrative tasks and costs. Some of the costs you may incur when you have an SMSF include annual compliance, audit and management costs, investment fees, brokerage fees, wholesale managed fund fees and advisory fees charged by your accountant and financial adviser. If you have an SMSF, it’s important that these fees don’t equate to more than 2% of your super balance. On a balance of $200,000 in an SMSF, the fees would ideally need to be below $4,000 per year. When you have an SMSF, you are in complete control of your investing, which means you are also solely responsible for keeping up to date with your compliance requirements. The legislation around SMSFs is constantly changing. If you don’t have a genuine interest in continually staying updated on these changes, or the fees to seek regular advice are going to push your annual costs over 2% of your balance, you need to rethink whether an SMSF is the right option for you. To summariseWhile establishing an SMSF can offer you flexibility in how you manage your retirement funds, there’s a raft of risks and costs associated with having an SMSF. Further, an SMSF can be a lot of work, so it may not be the right option for you if you’re unsure whether you want to commit to the ongoing financial, legal and administrative requirements associated with having an SMSF. If you are considering establishing an SMSF or deciding whether an SMSF is suitable for you, speak to us to obtain personalised advice for your unique situation.    The information provided in this article is general in nature only and does not constitute personal financial advice.

Your wealth during the COVID-19 pandemic

Your wealth during the COVID-19 pandemic

Updated on COVID-19, Finance, Investing

There isn’t a single person in the world who hasn’t been impacted by COVID-19. As new case numbers start to slow in Australia, so too is our economy. This time presents new challenges as everyone gets used to a “new normal” and figures out the best way to weather the coming months. This article provides an overview of different measures the Federal Government has announced to support individuals and businesses, current market performance and what you should be thinking about when it comes to your finances and continuing to build long-term wealth. Government support for individuals and businessesThe Federal Government has announced two economic stimulus packages and the JobKeeper Payment to support individuals and businesses. An overview of the Federal Government’s measures announced to date is detailed below. Support for individualsThe Federal Government has announced a range of measures to help individuals. Eligibility to access these measures is determined on criteria such as your employment status or loss of income due to COVID-19. Some of the key measures include: two $750 payments to social security, veteran and other income support recipients (first payment from 31 March 2020 and the second payment from 13 July 2020); access to the JobKeeper Payment from your employer (if eligible) equal to $1,500 per fortnight; a time-limited supplementary payment for new and existing concession recipients of the JobSeeker Payment, Youth Allowance, Parenting Payment, and Farm Household Allowance equal to $550 per fortnight; early release of superannuation funds (see overview below); and temporarily reducing superannuation minimum drawdown rates (see overview below). Full details about the Federal Government’s measures to support individuals are available on the Treasury website. Early release of superannuationEligible people will be able to access up to $10,000 of their superannuation in the 2019-20 financial year and a further $10,000 in the 2020-21 financial year. To access your super early, you need to meet ONE of the following five criteria: You are unemployed You are eligible for the JobSeeker payment, Youth Allowance for jobseekers, Parenting Payment special benefit or the Farm Household Allowance You were made redundant on or after 1 January 2020 Your working hours have reduced by at least 20 per cent after 1 January 2020 You are a sole trader, and your business activity was suspended, or your turnover has reduced by at least 20 per cent after 1 January 2020 If you are considering early release of your superannuation, you need to consider what the potential long-term impacts may be to the growth of your super fund and retirement income. While $20,000 may not seem like a lot of money now, it could have significant compounding value if left in your fund. Understandably, people may not have any other choice to support themselves financially. Make sure you speak to a financial professional to understand your risks and if this is a suitable option for you. If you are eligible, you can apply for early release of your superannuation directly with the ATO through the myGov website. Temporarily reducing superannuation minimum drawdown ratesThe temporary reduction in the minimum drawdown requirements for account-based pensions has been designed to assist retirees who do not wish to sell their investment assets, while the value of those assets is reduced. The minimum drawdown rates have been temporarily halved. Support for businessesThe Federal Government has announced a range of measures to help businesses facing financial difficulty. Eligibility to access these measures depends on factors such as your turnover and how much your business’s revenue has decreased due to the COVID-19 pandemic. Some of these measures include: increasing the instant asset write-off threshold for depreciating assets from $30,000 to $150,000; allowing businesses with turnover below $500 million to deduct 50 per cent of eligible assets until 30 June 2021; PAYG withholding support, providing up to $100,000 in cash payments which allows businesses to receive payments equal to 100 per cent of salary and wages withheld from 1 January 2020 to 30 June 2020; and temporary measures to reduce the potential actions that could cause business insolvency. Full details about the Federal Government’s measures to support businesses and eligibility criteria are available on the Treasury website. How the banks are approaching home loansBanks have announced that homeowners experiencing financial difficulty can pause their mortgage repayments for between three and six months. It’s important to remember that, in most cases, interest will still be capitalised and added to your outstanding loan balance. When payments restart, your lender may require increased repayments, or the term of your loan may be increased. These are important factors you need to discuss with your lender. What should you focus on when it comes to personal finance?While it can be tempting to sell all your investments now as the market declines, this locks in your losses and puts your wealth in a weak position. If you haven’t already defensively positioned your investments, speak with a financial adviser about how to best adjust your investing over the coming months. You should also consider how to maximise your returns as the market recovers. Investing and building wealth is a long-term game. As such, you should be investing with a long-term time horizon in mind. What should I do next?During this time, you may face some challenges with your finances. Your ability, however, to understand the options available to you and what the current period means on a long-term basis is key to getting through this challenging time productively. Further, making well thought out decisions now will give you the strong foundations you need in your health and wealth as the world recovers and embarks on a new period of growth. Before you make any big changes to your financial situation, speak to us to obtain personalised advice for your unique situation.   This is general information only

Economic Update: First quarter results reflect shock

Economic Update: First quarter results reflect shock

Updated on Finance

The first quarter of 2020 will forever be remembered for delivering one of the greatest health and economic shocks of all time. The economic damage was an inevitable consequence of governments worldwide taking unprecedented action to curb the spread of the novel coronavirus that emerged in China in December 2019. Never have so many people in so many countries experienced such major upheaval to their daily lives at the one time. With numerous countries enacting harsh measures to reduce person-to-person spread of the virus, many sectors of most economies effectively ground to a halt. Tourism, travel, entertainment and hospitality were particularly badly affected, but the fallout will be felt far and wide for some time to come. By the numbersFinancial markets (and many governments) were slow to appreciate the magnitude of the coronavirus threat. Major share markets rose steadily, setting record highs on 20 February, then, as the likely economic consequences of tackling coronavirus became apparent, markets plunged. From its peak of 7,163 the S&P/ASX 200 index fell to 4,546 on 23 March. A rally then saw the index rise to 5,077 at the end of March, 24% down from the start of the quarter. In the US, the S&P 500 fell 34% from top to bottom. The MSCI All-Country World Equity Index dropped 35%. Both indices recovered ground at the end of the quarter to limit January to March losses to 18% and 21% respectively. The Reserve Bank moved quickly to further cut interest rates to 0.25%. This is as low as the RBA is prepared to go, with the Governor indicating this rate will be with us for several years come. Partly in response, and partly due to investors seeking the relative safety of the US dollar, the Australian dollar plunged from US$0.66 US to US$0.55. It then staged a partial recovery to end the quarter at US$0.61. Falls against other currencies were less severe. Massive stimulusGovernments around the world responded with programs that will, over time, pump almost unimaginable sums of money into the economy – hundreds of billions of dollars in Australia, trillions in the US. Banks have deferred some loan repayments, and many landlords will forgo rent payments. The focus is on helping employers retain staff, to provide income support to people who do lose their jobs, and to assist pensioners. One aim is to minimise economic disruption now to facilitate a quicker recovery once coronavirus is brought under control. However, despite these economic initiatives, escalating public health measures saw thousands of businesses close in March, with job losses estimated to be more than one million. While most of the economic stimulus measures were widely applauded, some concern was expressed over the ability of eligible people to withdraw up to $10,000 from superannuation this financial year, and again in 2020/2021. Withdrawing money from super at a time of depressed prices will likely have a major adverse impact on future superannuation savings, leading a number of observers to suggest that this option only be considered once all others have been exhausted. Few silver liningsIt’s difficult to find any silver linings in the clouds of the current crisis. While motorists may welcome the drop in petrol prices, due to oil falling from over US$60 per barrel to near US$20 per barrel, this is a sign of how hard the pandemic is hitting the economy. One small positive: with airlines grounded, people staying home and many industries closed, air pollution and carbon dioxide emissions are down. For advice on how to manage your investments through this financial downturn contact us today.   This is general information only

The upside of a market downturn

The upside of a market downturn

Updated on Finance

Most people view share market downturns as unequivocally bad events. Suddenly, hard earned savings aren’t worth as much as they were yesterday. It seems as if our money is evaporating, and in the heat of the moment selling up can look like the best course of action. The alternative view But on the opposite side of each share sale is a buyer who thinks that they are getting a bargain. Instead of getting 10 shares to the dollar yesterday, they might pick up 12 or 15 to the dollar today. When the market recovers, the bargain hunters can book a tidy profit. So why do share markets experience downturns, and what are the upsides? A range of natural and manmade events can trigger market selloffs: Terrorist attacks Infectious disease outbreaks such as SARS and COVID-19 Wars, the possibility of war, and geopolitical issues such as threats to oil supplies Economic upheavals, the bursting of speculative investment bubbles, and market ‘corrections’ In short, anything that is likely to reduce the ability of a broad range of companies to make money is likely to trigger a market sell off. The common thread that runs through the causes of downturns is uncertainty. In the immediate aftermath of the 9/11 attacks nobody knew what the size of the threat was, and markets dropped. As the fear of further attacks receded, markets soon recovered. However, the initial drop in market value occurred quite rapidly. By the time many investors got out of the market the damage was already done. Paper losses were converted to real losses, and spooked investors were no longer in a position to benefit from the upswing. After the initial sell off it took the ASX200 Accumulation Index just 36 days to completely recover from 9/11. Other downturns and recoveries take longer. The Global Financial Crisis began in October 2007, and it wasn’t until nearly six years later that the ASX200 Accumulation Index recovered its lost ground. This caused real pain to investors who bought into the market at its pre-crash peak, but for anyone with cash to invest after the fall, this prolonged recovery represented years of bargain hunting opportunities. If? Or when? Of course, much hinges on whether or not markets recover. While history isn’t always a reliable guide to the future it does reveal that, given time, major share market indices in stable countries usually do recover. It’s also important to remember that shares generally produce both capital returns and dividend income. Reinvesting dividends back into a recovering market can be an effective way of boosting returns. Seek advice Of course, it’s only natural for investors to be concerned about market downturns, but it’s crucial not to panic and sell at the worst possible time. The fact is that downturns are a regular feature of share markets. However, they are unpredictable, so it’s a good idea to keep some cash in reserve, to be able to make the most of the opportunities that arise whenever the share market does go on sale. For advice on how to avoid the pitfalls and reap the benefits offered by market selloffs, speak to us today.   This is general information only

The true cost of a pandemic

The true cost of a pandemic

Updated on Finance

Recent events such as the coronavirus outbreak, bushfires across Australia and the drought highlight the far-reaching effects of an epidemic. Following the initial devastation of these events, the true cost of an epidemic takes time to filter through the economy. In this article, we’re taking a look at the economic impacts that epidemics and pandemics have on a local, regional and global scale. How do epidemics and pandemics affect industries? The biggest impact on many industries in an epidemic or pandemic is supply chain delays. Industries rely on specific regions to source parts and products. Using the coronavirus outbreak and assembly lines for technology products, as an example, people in assembly lines typically work in close quarters. To contain the outbreak, factories in China have delayed restarting production after the Lunar New Year break. One smartphone factory, Foxconn, is expecting a 12% decrease in production as a result. Tourism is another key industry effected by epidemics and pandemics. In Australia, measures to contain coronavirus, including halting incoming flights from China will have significant impacts on the tourism and education industries. How are individual businesses effected by epidemics and pandemics? Businesses within the sectors most impacted by epidemics and pandemics experience the effects of an outbreak first. In Australia, for example, travel booking company Webjet experienced a 10% slump in its share price in late-January following the coronavirus outbreak. Other companies such as JB Hi-Fi and Harvey Norman have said their supply of electronics could be disrupted. Small and medium businesses can often be the hardest hit. Businesses such as restaurants and retailers in tourist hotspots and tourism services companies will be among the hardest hit in Australia over the coming months. How long does it take for markets to recover after an epidemic? Market recovery following an epidemic is dependent on a range of factors. Following the SARS outbreak, for example, the Chinese Government deployed fiscal stimulus to aid in economic recovery. At the time of the SARS outbreak (first quarter of 2003), China’s economic growth was 11.1%. By the second quarter, the country’s economic growth fell to 9.1%. As the outbreak was contained, and fiscal stimulus was deployed, China’s economic growth recovered to 10% by the third quarter of 2003. Looking at other markets, the S&P500 posted a gain of 14.59% following the first confirmed case of SARS. The index posted a gain of 20.76% a year after the outbreak. How will an epidemic or pandemic impact my investments? The economy has changed since the SARS outbreak. China is now a much larger part of the global economy, accounting for around 17% of global GDP, compared to 4% in 2003, so the economic impacts of coronavirus may be more pronounced. The best thing investors can do right now is exercise caution, but don’t panic. Often market corrections provide investors an opportunity to invest into the market at discount prices. To discuss how your investments may be impacted by coronavirus speak to us today.   This is general information only

4 financial resolutions to kick start the New Year

4 financial resolutions to kick start the New Year

Updated on Finance

The dawn of a new year sees many people setting new year’s resolutions such as losing some weight or giving up smoking. Similarly, the beginning of a new year is the ideal time for setting financial goals, and here are four practical ways you can kick your year off to a great start. Decide what you want to achieve. January is perfect for taking stock of where you’re at financially, particularly as those post-December bills start rolling in. So perhaps you’d like to start by paying off debt or commence a savings plan for a new car or family holiday. The main thing is to be decisive. Setting a realistic household budget will provide understanding of your finances and identify areas of unnecessary spending. This will not only assist in balancing your income and expenses, but will help you clear debt and allocate money to other financial goals like setting up an emergency cash fund. Tidy up your filing cabinet. According to the Australian Taxation Office, you should keep financial records for five years. Shred financial paperwork older than five years and file everything else, including bills, invoices and bank statements. Remember that any filing system you implement should be quickly and easily maintained so you’re motivated to keep your records in order. Review your paperwork; start with insurances – life insurance, house, car etc. Are they current and are you adequately covered? Are your premiums appropriate for your level of cover? Assess your superannuation and nomination of beneficiary. Is your will up to date or have your circumstances changed? While we’re experiencing record-low interest rates, do a few sums and work out whether you’re getting the best deal on your mortgage. Perhaps it’s time to renegotiate with your lender! While the idea of setting a new year’s resolution is common, sticking to resolutions and accomplishing them are less so. The key to achieving any goal is to be SMART about it:S – be Specific. Clearly define your goal.M – ensure it’s Measurable so you know when you’ve achieved it. A – make it Achievable. Planning to complete a marathon in February may not be achievable if you’ve never run before.R – be Realistic; could you really lose 20 kilos in a month?T –set a Time by which you want to achieve your goal. If you’re not sure where to start, talk to us. We can help you put processes in place to get your SMART goals underway. With a little planning and organisation, being clear about what you want to achieve, and mapping out how and by when you expect to achieve it, you’ll be giving yourself the best possible start to a successful year.   This is general information only

5 ways to benefit from record low interest rates

5 ways to benefit from record low interest rates

Updated on Finance

Interest rates have never been lower, and it’s possible they might fall even further. This creates opportunities for householders and businesses, so how can you best take advantage of low interest rates? 1. Pay off your debt more quicklyBy maintaining constant repayments as interest rates fall, you’ll reduce the time it takes to pay off your loan. That’s because interest will make up less of each repayment, with more going to reduce the outstanding capital. And the great thing is that to take advantage of this strategy you don’t need to do anything. Lenders usually maintain repayments after each drop in interest rates unless you instruct them otherwise. 2. Refinance your home loanLenders vary in the extent to which they pass on cuts in official interest rates. So if you want to reduce your loan repayments it might be worth shopping around to see if you can find a better deal from other lenders. Just make sure that, if switching lenders, you take all fees into account to be certain you really are saving money. If you are restructuring your borrowing another thing to consider is fixing the interest rate on all or part of your loan. This can provide protection from the impact of rising interest rates in the future, though it may mean you benefit less from any further cuts in rates. However, with interest rates already very low, there simply isn’t the room for rates to fall much further. 3. Buy a first home – or upgradeLow interest rates create opportunities for first homebuyers to get a toehold in the property market, and for existing homeowners to upgrade to a bigger home or better location. While lower interest rates can be a bit of a two-edged sword, as they tend to drive up property prices, most people are happier borrowing in a low rate environment rather than when rates are high. 4. Borrow to investWhile Australians love to invest in property, borrowing to invest in shares is also a viable wealth creation strategy. Often referred to as gearing, the key to successfully investing borrowed funds is that the total returns must exceed the total costs. As the most significant cost is usually the interest on the loan, low rates make this strategy more attractive. Take care, however. Gearing can magnify investment returns, but it can also increase your losses. It’s therefore important that you fully understand investment risk and how to minimise it. 5. Expand your businessThe whole point of a reduction in interest rates is to stimulate the economy, and that includes encouraging business owners to invest in their enterprises. Low interest rates make it cheaper to borrow to buy equipment to increase productivity, to take on more staff, or buy out a competitor and generally expand the business. Take adviceSome of these strategies are simple ‘no-brainers’. Others involve significant levels of risk. To take a closer look at how you can make the most of low interest rates, talk to us. We’re here to help.    This is general information only

Financial Advice, Royal Commission and You

Financial Advice, Royal Commission and You

Updated on Finance

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry delivered its final report in February 2019, capping off a process that revealed the unethical and, in some cases, illegal practices of some of Australia’s largest banks, insurance and other financial services companies. Many of the Royal Commission’s recommendations are aimed squarely at financial services companies, and they should lead to changes in corporate attitudes and practices that will deliver indirect, and hopefully positive changes to many consumers. The Royal Commission also made a number of recommendations that will have a more direct impact on investors. Unfortunately, these may not always be for the better. Even though the Royal Commission unearthed a wide range of bad behaviours, it’s important to acknowledge the large number of financial advisers who have always adhered to high ethical standards while delivering great outcomes to their clients. Clients of these advisers may see little change in the relationship with their adviser and how their money is managed. So what changes are likely to affect consumers? A ban on conflicted remunerationConflicted remuneration arises when an adviser has an incentive, such as a sales bonus, to recommend an investment product. Conflicted remuneration was banned some time ago, but existing arrangements were ‘grandfathered’. These grandfathered arrangements will now cease. An end to trailing commissionsInvestment and superannuation products may pay the recommending adviser an ongoing annual or ‘trailing’ commission. The expectation is that the adviser will continue to provide ongoing review of the suitability of the product and recommend changes when warranted. Unfortunately, the Royal Commission revealed numerous cases where fees were charged and no advice given. This extended to fees being charged to dead peoples’ accounts. All investment and superannuation trailing commissions will cease from 2021. While this should lead to higher investment returns, many consumers will miss out on proactive follow up from advisers unless they ‘opt-in’ and agree to pay for advice. As the cost of such advice may be uneconomic for investors with smaller portfolios, the end of trailing commissions may deliver mixed outcomes. One prediction is that it may spark an increase in so called ‘robo advice’, where automated systems deliver lower cost, albeit more generic advice. Increased educational requirements for advisersNew advisers must now hold a relevant, degree level qualification. Existing advisers without such qualifications will need to undertake further study. While qualifications are important, they overlook the value of the real-world knowledge of experienced advisers. Many older advisers may retire rather than undertake additional study, which may lead to a shortage of advisers. Incidental outcomesAnother indirect outcome of the Royal Commission is that many of the larger banks and insurance companies have decided to sell off their financial advice businesses. This also has the potential to reduce the number of active advisers but may see a rise in the number of smaller, independent advisory firms. The Royal Commission has delivered a major and necessary shake-up of the financial services industry. To find out what the direct, personal impacts may be for you, talk to us. We’re here to help.    This is general information only

Making the most of low interest rates

Making the most of low interest rates

Updated on Finance

Banks have not been passing on the full reduction in the Reserve Bank’s official cash rate, but no one knows with any certainty, what the future holds for rates and to what extent. Most predictions are that they will remain at the low end for some time to come, so while borrowers love low rates and savers curse them, what can be done to make the most of the situation? Yay! Major winners of low interest rates are households with mortgages that were taken out at a higher rate. Keeping up repayments at the original level will see the mortgage paid ahead of schedule, delivering a big reduction in the total interest bill. Property investors can also be winners, particularly when buying property away from the high prices and low rental yields of inner capital city areas. However, care still needs to be taken to avoid excessive debt that could have a disastrous effect when rates rise. Businesses benefit from a low and stable interest rate environment. It’s cheaper to borrow to grow the business; and a major reason why the Reserve Bank lowered interest rates to stimulate business investment. Boo! For everyone cheering on low rates there will be someone booing them. People who depend on term deposits, high-interest savings accounts and bonds have seen their interest income fall by more than half! Self-funded retirees are particularly affected, especially where interest payments make up most of their income. Low rates aren’t always the friend of new entrants into the housing market as commonly touted. Low interest has been a major contributor to the rise in house prices, saddling new borrowers with higher levels of debt. With higher debt, any future rate rises will bite harder, so new borrowers need to carefully assess their ability to meet loan repayments when interest rates do rise. It’s also a good idea to reduce debt whenever possible. Life is also difficult for investors, including everyone contributing to superannuation. The low yield from conservative investments (cash and fixed interest) means there is a greater ‘cost’ in minimising portfolio risk than has previously been the case. One consequence of this is to drive many investors to search for other investments that offer higher cash returns at a potentially higher risk. Looking for yield While a bank share paying an annualised 5.83% dividend (including franking credit) looks very attractive beside a term deposit offering 1.70% interest, it needs to be remembered that, in the current climate, any effort to increase yield comes with an increase in risk. Even so, high yield shares can be a viable option for some investors who need a regular income. What to do? The best way to navigate the world of low interest rates depends very much on your personal circumstances. Good advice is critical, so talk to us about your situation.   This is general information only

Tap into the amazing power of compounding

Tap into the amazing power of compounding

Updated on Finance

When you invest over a period of time, compound interest is your best friend. In effect, it means you are earning interest not just on your own capital, but also on the interest you’ve already earned. Over the long term, this might be phrased as “interest on interest on interest on interest on interest …” or more simply, “free money”! So how do you get this free money? This is how… A simple start Imagine you place $100 in an investment that earns 10% pa. At the end of one year, you’ve earned $10. Then you spend all the interest you receive. At the end of each year, your investment amount is back to $100. That’s simple interest. At the end of 10 years, you will still have your $100, and you will have received a total of $100 in interest. I = P(1+r)n-P Don’t worry, we’ll do the maths for you. It calculates your net profit when you earn interest on the interest. That’s what compounding is all about. Going back to our first example – if you re-invest the interest on your original $100, at the end of the first year you will have $110. Leaving it invested at 10% pa, you will earn interest of $11 in the second year, bringing the total in the account to $121. If you keep going for 10 years, your investment will grow to $270.70 – that’s your original $100 plus $170.70 in interest. Time is money – literally This example may not seem so impressive, but the power of compound interest really shines over the long term. Looking at our simple situation and taking the interest out each year for 30 years, you will earn a total of $300 in interest. But relying only on the compounding of the interest (ie. no other deposits are made), the total interest earned over the same time would be $1,883.74. A child born today could easily live to 100. Simple interest on a $100 investment would amount to $1,000 over their lifetime. Left to compound untouched at 10%, that same investment would grow to $2,113,241! Even on such a small initial investment, that’s an incredible difference! The other critical factor is the actual rate of earnings. If the earnings rate dropped just 1% to 9% pa, a one-hundred-year investment would grow to only $783,548 A couple of drags Don’t forget to take into account tax and inflation. They act as drags on investment performance. Let’s assume investment earnings remain at 10% pa and are fully taxable. What will your $100 grow to over 30 years at different tax rates? As for inflation, although we are currently experiencing very low inflation, nobody knows how long this will last. If it reaches the Reserve Bank’s target of 3%pa, you will need $2.43 in 30 years’ time to buy something that costs $1.00 today. There are many ways of minimising the effects of tax and inflation. Picking the right tax environment is clearly important. Capital gains are only taxed when an investment is sold, so growth assets have an advantage over those that only produce income. They also cope better with inflation. Investment risk Always remember, seeking higher returns generally involves taking higher risks but some of those risks can be managed with an effective and professionally constructed investment strategy. If you want to take advantage of “the most powerful force in the universe” contact us for a chat.   This is general information only  

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