by Financial Foundations on 14/01/2020

2019 Year In Review

2019 YEAR IN REVIEW

Posted on January 14, 2020

It was a year of extremes, with shares hitting record highs and interest rates at historic lows. Yet all in all, 2019 delivered far better returns than Australian investors dared hope for at the start of the year.

The total return from Australian shares (prices and dividend income) was 24 per cent in the year to December.i When you add in positive returns from bonds and a rebound in residential property, Australians with a diversified investment portfolio had plenty to smile about.

Humming along in the background, Australia entered a record-breaking 29th year of economic expansion although growth tapered off as global pressures mounted.

GLOBAL ECONOMY SLOWING

The US-China trade war, the Brexit impasse and geopolitical tensions weighed on the global economy in 2019. Yet late in the year optimism grew that US President Donald Trump would sign the first phase of a trade deal with Beijing. The re-election of Boris Johnson’s Conservatives in the UK also raised hopes that the Brexit saga may finally be resolved.

The US economy is in good shape, growing at an annual rate of 2.1 per cent in line with inflation and a jobless rate of just 3.5 per cent. China has fared worse from the trade tensions, with annual growth of 6 per cent its weakest since 1992.

In Australia, growth slipped to an annual rate of 1.7 per cent in the September quarter. Inflation, at 1.7 per cent, is well below the RBA’s target and unemployment is stuck around 5.2 per cent.ii

Despite the global slowdown, higher commodity prices were a major contributor to Australia’s healthy trade surplus in 2019.iii

COMMODITIES PRICES MIXED

Iron ore prices rose 28.7 per cent in 2019 following a mine disaster in Brazil which reduced global supply. Other major Australian exports to receive a boost were gold, up 18.5 per cent, and beef, up 32 per cent.iv

At the other end of the scale, thermal coal prices fell 34 per cent and liquefied natural gas (LNG) was down 44 per cent.v

Middle East tensions and tighter supply led to a surge in crude oil prices, with Brent crude up almost 21 per cent.vi As Australia is a net importer of oil, a jump in oil prices coupled with a fall in the Aussie dollar filtered through to higher petrol prices for motorists.

INTEREST RATES AT NEW LOWS

In an effort to stimulate the economy, the Reserve Bank cut the cash rate three times in 2019 to an historic low of 0.75 per cent. The US Federal Reserve also cut rates to a target range of 1.50-1.75 per cent. This was the main reason the Australian dollar lifted from its decade low of US67c in October to finish the year where it started, around US70c.vii

Rate cuts flowed through to yields on Australian 10-year government bonds which fell to just 1.37 per cent. However, falling bond yields result in higher bond prices and this lifted total returns from government bonds by around 8 per cent.ix

Retirees and others who rely on income from bank term deposits had another difficult year, with interest rates generally below 2 per cent. After inflation, the real return was close to zero.x It’s little wonder then that many looked elsewhere for a better return on their money.

BUMPER YEAR FOR SHARES

The hunt for yield was one reason Australian shares jumped 18.4 per cent in 2019, the best performance in a decade.xi The market climbed a wall of worries to hit a record high in November on optimism about a US-China trade deal, then eased back on concerns about slowing economic growth.

Despite low interest rates and personal tax cuts, consumers are reluctant to spend. The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.1 in December – anything below 100 denotes pessimism.xii

PROPERTY PRICES RECOVERING

Australian residential property prices rebounded strongly in the second half of 2019, driven by lower mortgage interest rates, a relaxation of bank lending practices and renewed certainty around the taxation of investment property following the May federal election.

According to CoreLogic, property prices rose 2.3 per cent on average, led by Melbourne and Sydney, both up 5.3 per cent. Also up were Hobart (3.9 per cent), Canberra (3.1 per cent) and Brisbane (0.3 per cent). The only capitals to fall in value were Darwin (-9.7 per cent), Perth (-6.8 per cent) and Adelaide (-0.2 per cent).

When rental income is included, the total return from residential property was 6.3 per cent.xiii

LOOKING AHEAD

Property prices are expected to recover further this year but with shares looking fully valued and bond yields near rock bottom, returns could be more modest.

The Australian government is under pressure to do more to stimulate the economy in the short term to head off further rate cuts by the Reserve Bank. More fiscal stimulus could inject fresh life into the local economy and financial markets.

Overseas, the US-China trade war is far from resolved and could remain up in the air until after the US Presidential election in November. There is also uncertainty over the Brexit deal and its impact on trade across Europe.

The one thing we do know is that a diversified investment portfolio is the best way to navigate unpredictable markets.

If you would like to speak to us about your overall investment strategy, give us a call.

i Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 201
ii Trading Economics, viewed 1 Jan 2020, https://tradingeconomics.com/indicators
iii https://dfat.gov.au/trade/resources/trade-statistics/Pages/australias-trade-balance.aspx
iv Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/commodities
v Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019
vi Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/commodities
vii Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/currencies
viii RBA, https://www.rba.gov.au/statistics/tables/#interest-rates
ix Economic Insights: Year in Review; Year in Preview, CommSec 2 January 2020.
x Canstar, https://www.canstar.com.au/term-deposits/highest-term-deposit-rates/
xi Trading economics, viewed 1 January 2020 https://tradingeconomics.com/stocks
xii https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20191211BullConsumerSentiment.pdf
xiii https://www.corelogic.com.au/news/corelogic-december-2019-home-value-index-strong-finish-housing-values-2019-corelogic-national

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Summer 2019

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SUMMER 2019

Posted on December 3, 2019

December is here which marks the official start to summer. Unfortunately, the bush fire season is already underway. We would like to take this opportunity to express our heartfelt thanks to the firefighters, emergency services personnel and community members who have been working tirelessly to save lives and property.

After keeping interest rates on hold at 0.75 per cent in November, Reserve Bank Governor Philip Lowe said in a speech he would only consider unconventional measures to stimulate the economy if rates fell to 0.25 per cent. He ruled out negative interest rates but said he might consider buying government bonds.

Economic activity remains patchy. The Reserve Bank forecasts Australia’s economy will stay flatter for longer with growth of 2.25 per cent this year rising to 2.75 per cent by the end of 2020. Business and consumer confidence remain weak, which was reflected in a 0.2 per cent decline in retail sales in the year to September, the biggest fall in 28 years. New vehicle sales followed the trend, down 9.1 per cent in the year to October, the biggest fall in a decade. Residential building was also down, by 10.6 per cent in the year to September, the biggest fall in 18 years. Unemployment rose slightly from 5.2 per cent to 5.3 per cent in October as the number of people in work fell for the first time in 17 months.

On a brighter note, Australia trade surplus rose for the 21st successive month in September, as our annual trade surplus with China hit a new record of $67.3 billion. Our exports have been supported by the weaker Aussie dollar which eased in November from US69c to US67.7c.

OUR RETIREMENT SYSTEM: GREAT, BUT ROOM FOR IMPROVEMENT

You could be forgiven for thinking Australia’s superannuation system is a mess. Depending who you talk to, fees are too high, super funds lack transparency and Governments of all political persuasions should stop tinkering.

Yet according to the latest global assessment, Australia’s overall retirement system is not just super, it’s top class.

According to the 11th annual 2019 Melbourne Mercer Global Pension Index, Australia’s retirement system ranks third in the world from a field of 37 countries representing 63 per cent of the world’s population. Only the Netherlands and Denmark rate higher.ⁱ

WHAT WE’RE GETTING RIGHT

While super is an important part of our retirement system, it’s just one of three pillars. The other two pillars being the Age Pension and private savings outside super.

Writing recently in The Australian, Mercer senior partner, David Knox said one of the reasons Australia rates so highly is our relatively generous Age Pension. “Expressed as a percentage of the average wage, it is higher than that of France, Germany, the Netherlands, the UK and the US.”ⁱⁱ

As for super, we have a comparatively high level of coverage thanks to compulsory Superannuation Guarantee payments by employers which reduces reliance on the Age Pension. In fact, Knox says Australia is likely to have the lowest Government expenditure on pensions of any OECD country within the next 20 years.

Superannuation assets have skyrocketed over the last 20 years from 40 per cent of our gross domestic product (GDP) to 140 per cent. “A strong result as funds are being set aside for the future retirement benefits of Aussies,” says Knox. Even so, on this count we lag Canada, Denmark, the Netherlands and the US.

ROOM FOR IMPROVEMENT

For all we are getting right, the global report cites five areas where Australia could improve:

Reducing the Age Pension asset test to increase payments for average income earners
Raising the level of household saving and reducing household debt
Require retirees to take part of their super benefit as an income stream
Increase the participation rate of older workers as life expectancies rise
Increase Age Pension age as life expectancies rise.

Retiree advocates have been asking for a reduction in the assets test taper rate since it was doubled almost three years ago.

Since 1 January 2017, the amount of Age Pension a person receives reduces by $3 a fortnight for every $1,000 in assets they own above a certain threshold (singles and couples combined).ⁱⁱⁱ

Other suggested improvements, such as increasing the age at which retirees can access the Age Pension, present challenges as they would be deeply unpopular.

THE RETIREMENT INCOME REVIEW

One roadblock standing in the way of ongoing improvements to our retirement system is reform fatigue.

In recent years we have had the Productivity Commission review of superannuation, the banking Royal Commission which included scrutiny of super funds, and currently the Retirement Income Review.

The Retirement Income Review will focus on the current state of the system and how it will perform as we live longer. It will also consider incentives for people to self-fund their retirement, the role of the three pillars, the sustainability of the system and the level of support given to different groups in society.

THE FOURTH PILLAR

One issue that the Government has ruled out of the Review is the inclusion of the family home in the Age Pension assets test.

Australia’s retirement income system is built around the assumption that most people enter retirement with a home fully paid for, making it a de facto fourth pillar of our retirement system.

With house prices on the rise again in Sydney and Melbourne and falling levels of home ownership, there are growing calls for more assistance for retirees in the private rental market.

THE BIG PICTURE

Despite the challenge of ensuring a comfortable and dignified retirement for all Australians, it’s worth pausing to reflect on the big picture. The Global Pension Index is a reminder of how far we have come even as we hammer out ways to make our retirement system even better.

If you would like to discuss your retirement income plan, give us a call.

i https://info.mercer.com/rs/521-DEV-513/images/MMGPI%202019%20Full%20Report.pdf
ii https://www.theaustralian.com.au/commentary/our-retirement-system-is-far-from-perfect-but-its-still-better-than-most/news-story/d3db43e68b3b93d8c6d6e8a8c17a491d?btr=4ff6fe5e96c92f060a779127475fa258
iii https://guides.dss.gov.au/guide-social-security-law/4/2/3

THE CHANGING NATURE OF DEBT

Australians delight in their nation punching above its weight. But there’s little to celebrate in being the world’s silver medallists – we’re a nose behind the Swiss – when it comes to household debt.ⁱ With the present-buying, holiday-taking season nigh, millions of Australians could soon find themselves sinking even deeper in the red.

Older readers may remember a time when credit was hard to come by and people were cautious about going into debt. But those days are long gone, as our appetite for credit and the way we access it, is evolving.

HOW DID WE GET HERE?

In 2016, when the ABS last investigated household debt, the average Australian household owed almost $170,000. This year, Australians household-debt-to-income ratio hit a new record. It reached almost 200 per cent, meaning we spend almost twice as much as we earn.ⁱⁱ

The start of the easy-credit revolution can be dated to the introduction of Bankcard in 1974. Social, economic, educational, property market and technological changes over the last 45 years have resulted in both a growing pool of lenders and an increasing willingness among Australians to take on debt.

To be fair, much of this is ‘good debt’ – to buy a home or appreciating/income producing assets such as investment properties or shares. Also, some of it is student debt, incurred to get what is usually an income-boosting qualification.

That noted, it’s also the case that Australians have become much more relaxed about purchasing depreciating assets, such as cars, and fleeting pleasures, such as restaurant meals and holidays, using other people’s money. Money that then has to be repaid, typically at high rates of interest.

THE BUY NOW, PAY LATER HAZARD

While warnings about credit card debt appear to be getting through to consumers, new debt traps are emerging.

In 2018, an ASIC report found Australians had a collective credit card debt of $45 billion and were paying interest on over $30 billion of that balance, as well as shelling out $1.5 billion in fees annually. Almost one in five consumers surveyed said they felt overwhelmed by their credit card debt load.ⁱⁱⁱ

Perhaps that is why many Australians, especially younger and lower-income ones, are bypassing credit cards for buy-now-pay-later (BNPL) digital payment methods such as Afterpay and Zip Pay.

A recent Roy Morgan survey found that almost 2 million Australians used this type of credit in the year to September 2019.^iv A 2018 ASIC report found Australians had $903 million in BNPL debt and that figure is almost certainly higher now, given the increased uptake in 2019. ^v

HOW DOES BNPL WORK?

Afterpay and its competitors allow consumers to buy now and, in theory, pay only the purchase amount later. That is, access zero-interest credit and pay no fees. That sounds good but, inevitably, there’s a catch.

If users fail to make the required payments by the due date, they incur hefty late-payment charges. In 2018, Afterpay reported that late fees made up 24 per cent of its annual income.^vi Unsurprisingly, there’s growing concern that some Australians are adding BNPL debts to credit card and payday loan debts and getting deeper into financial strife in the process.^vii

NO FREE LUNCHES, EVEN AT CHRISTMAS

Credit can be used wisely or unwisely. Taking out a mortgage makes sense if it means your family has a place to live (and you are likely to make a capital gain). Or getting a car loan so you can get to work. Credit may also be helpful to manage cash-flow issues during periods such as the festive season when your expenses are larger than usual, provided you can repay the debt in full in the short term.

Credit almost always involves interest payments, fees or some combination of both. Before pulling out your credit card at the cash register in the coming weeks, consider whether it’s within your budget and you can afford to repay what is likely to be a short-lived spending buzz.

If you are feeling concerned about your level of debt, please give us a call to plan a way forward.

i https://www.abc.net.au/news/2019-10-18/household-debt-leaves-australians-working-longer-spending-less/11608016
ii https://www.abc.net.au/news/2019-03-28/australian-household-wealth-down-260-billion-in-december-quarter/10950242
iii https://www.abc.net.au/news/2018-07-04/1-in-6-credit-card-users-struggle-under-mountain-of-debt/9936826
iv http://www.roymorgan.com/findings/8191-buy-now-pay-later-september-2019-201911040100
v https://www.abc.net.au/news/2018-11-28/asic-reviews-afterpay-and-buy-now-pay-later-schemes/10561232
vi https://www.abc.net.au/news/2018-08-24/afterpay-late-fees-24pc-income-asic-loophole-credit/10156902
vii https://thenewdaily.com.au/money/consumer/2018/11/20/afterpay-debt-trap/

12 TIPS FOR CHRISTMAS

If five golden rings and a whole menagerie of birds sounds like it might blow the budget this year, then perhaps the classic carol needs a rewrite. That’s why we’ve put together a list of hot tips to make the gift-giving season a breeze without scorching a hole in your hip pocket.

1. MAKE A LIST

Before you even step foot in your local shopping mall, make a comprehensive list. That goes for all the people you plan on giving presents to, as well as all the decorations and food supplies you’ll need. The more specific you are the better.

2. CHECK IT TWICE AND SET YOUR BUDGET

Once the list is done check it again and cross off any unnecessary items. Then proceed to set a maximum cost against each item line. If you’re rigorous with this, you might even find your Christmas budget comes in at a surplus.

3. SHOP AROUND

Shopping around can save a lot of money. And these days its easier than ever as you can do most of the work online. The trick is that you need to start your research early and not leave all your shopping the last minute. There’s no point buying a bunch of gifts nobody even wants in a drastic credit card frenzy.

4. DIY

There’s nothing better than a home-made gift. It shows the receiver that you really care and they’re usually cheaper.

Making home-made gifts can also be a really great way to bond with other family members if you do it as a group. It’s what we in finance call a ‘win-win’.

5. SHOP WITH PURPOSE…

Not only do you need a list when you shop. You also need a plan. It will inevitably take you more than one trip to the shops to get everything you need, so aim to buy the big things first. This way you’ll know what you have to play around with for the smaller ticket items. Inevitably some of these may not seem quite as important once the bigger ones are accounted for.

6. DON’T SHOP FOR YOURSELF

Easier said than done we know. But try to avoid buying a whole bunch of stuff for yourself then having nothing left for your other purchases.

7. TRACK YOUR SPENDING

Tracking your spending as you shop is vital – and these days its easier than ever, with apps like The Christmas List, which helps budget and track your Christmas spend in real time.

8. SPREAD THE CHRISTMAS CHEER (VOLUNTEER OR DONATE)

Remember the true spirit of Christmas by giving back to your community in some way. Either volunteer some time with a local charity or give some funds to a deserving cause. Some charities even allow you to purchase donations as gifts with cute little cards made up to explain what the money went towards.

9. WATCH YOUR AFTERPAY

Though Afterpay can be a great way to get what you want when you want it, it’s only helpful if you are diligent with your repayments. Christmas is a period famous for people going overboard and you don’t want to end up unable to pay it back on time and having to pay hefty interest.

10. CREDIT CARD SPENDING

The same goes for credit card spending. Where possible aim to use money you already have. Last year Aussies put $30 billion on plastic to cover their Christmas spend and 27% of them were likely to still be paying it off 12 months later. ⁱ

11. REDUCE, REUSE, RECYCLE

At the end of the day we don’t need more stuff just for the sake of having it. So, when making your Christmas list, consider getting each person one meaningful item rather than ten little things that may just end up in the bin. You can also re-gift things you don’t like and recycle last year’s decorations and Christmas wrapping. It’ll save both money and the environment.

12. BE MERRY

Last of all don’t forget to have a good time. By planning your Christmas spend well in advance, it means you can enjoy the day that little bit more.

i https://www.finder.com.au/press-release-jan-2019-christmas-debt-hangover-expected-to-hit-30-billion

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by Financial Foundations on 06/11/2019

Steering Through Choppy Seas

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STEERING THROUGH CHOPPY SEAS

Posted on November 6, 2019

Like it or not, we live in interesting times. More than a decade after the Global Financial Crisis, the global economy is facing fresh headwinds creating uncertainty for policy makers and investors alike.

This time around it’s not a debt crisis, although debt levels are extremely high, but geopolitical instability.

The ongoing US-China trade war and Brexit confusion in Europe have increased market uncertainty and volatility and put a spoke in the wheel of global growth. The International Monetary Fund (IMF) forecasts global economic growth to ease to 3.0 per cent over 2019. It expects Australia to grow at 1.7 per cent. ⁱ

Against this backdrop, there has even been speculation that the Reserve Bank may need to resort to ‘unconventional measures’ such as negative interest rates and quantitative easing to boost growth. These measures have been widely used overseas but are foreign concepts to most Australians. So what are they?

WHY NEGATIVE RATES?

Negative interest rates have been a feature of the global financial landscape since the GFC, in Japan and in Europe. European central banks charged banks to hold their deposits, encouraging them to lend out cash instead to kick start economic activity.

So far, the Reserve Bank hasn’t needed to wield the negative interest rate stick, but we are edging closer. The cash rate is at a record low of 0.75 per cent with further cuts expected.

The Reserve Bank has said it is unlikely to take rates below zero, especially now that the property market is showing signs of recovery and mortgage lending is on the rise. Taking interest rates too low could run the risk of igniting another property boom.

Policy interest rates

* Main refinancing rate until the introduction of 3-year LTROs in December 2011: deposit facility rate thereafter

Source: Central Banks

If negative rates are off the table, another way to bankroll economic growth is quantitative easing.

WHAT IS QUANTITATIVE EASING?

In the aftermath of the GFC, central banks in the US, Japan and Europe printed money to buy government bonds and other assets. By pumping cash into the system they hoped to boost economic activity.

There has been much debate about whether quantitative easing worked as intended. What it did do was reduce currency values and push investors into higher-risk assets such as shares and property in pursuit of better returns.

It has also increased global public and private debt to $200 trillion, or 225 per cent of global GDP. Until now, high debt levels have been supported by high asset prices. But when coupled with geopolitical and trade tensions, debt adds to the downward pressure on growth.ⁱⁱ

The slowdown in economic growth in Australia and elsewhere is reflected in falling bond rates.

BONDS SOUND A WARNING

In recent times more than 10 European governments have issued bonds with negative interest rates. At first it applied to short-term bonds, but Germany, the Netherlands and Switzerland have 30-year government bonds with negative yields. ⁱⁱⁱ

A Danish bank has even offered 10-year mortgages at minus 0.5 per cent. ⁱⁱⁱ

In recent months, yields on Australian government 3-year and 10-year bonds have dipped below 1 per cent, an indication that the market expects growth to slow over the next decade.

10-year Government Bond Yields

Source: Refinitiv

Falling bond yields have fuelled speculation that the government could issue bonds and use the proceeds to fund infrastructure spending or direct payments to households. This would effectively combine quantitative easing with more conventional government stimulus.^iv

WHAT DOES THIS MEAN FOR ME?

It seems more than likely that bank deposit rates will stay low, and probably go even lower, for some time. That means investors seeking yield will continue to look to property and shares with sustainable dividends.

While the hunt for yield should support asset prices, it may not be plain sailing.

Trade wars, Brexit, high asset prices and slowing economic growth are creating a great deal of uncertainty. Each new twist and turn in trade talks sends markets up in relief or down in disappointment.

After a decade of positive returns, and average annual returns of 7 per cent from their superannuation funds, investors may need to trim their expectations.

TIME TO PLAN AHEAD

If retirement is still a long way off, you can afford to ride out short-term market fluctuations. Even so, it’s important to make sure you are comfortable with the level of risk and investment mix in your portfolio.

If you are close to retirement or already there, you need to have enough cash or ready income to fund your pension needs without having to sell assets during a period of market weakness. For the balance of your portfolio, you need a mix of investments that will allow you to sleep at night but still provide growth for the decades ahead. When markets recover, you want to catch the upswing.

Successful investing requires patience but also adaptability. If you would like to discuss your overall portfolio in the light of market developments, give us a call.

i https://www.imf.org/en/Publications/WEO/Issues/2019/10/01/world-economic-outlook-october-2019
ii https://www.smh.com.au/politics/federal/200-trillion-in-global-debt-at-risk-if-trust-falters-oecd-20190909-p52pdr.html
iii https://www.ricewarner.com/can-super-funds-continue-to-meet-their-investment-targets/
iv https://www.ampcapital.com/content/dam/capital/04-articles/olivers-insights/2019/august/OI-280919.pdf

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by Financial Foundations on 03/10/2019

Building Wealth In Diversity

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BUILDING WEALTH IN DIVERSITY

Posted on October 3, 2019

What a difference a year makes. In recent months, Australian shares hit a record high, the Aussie dollar dipped to levels not seen since the GFC and interest rates were cut to historic lows.

Towards the end of 2018, shares were in the doldrums and while experts agreed the Aussie dollar would go lower most tipped the next move in interest rates would be up.

All of which goes to show that when it comes to predicting financial markets, the only sure thing is uncertainty. There’s no avoiding market risk, but it does need to be managed if you want to build enough wealth to live comfortably in retirement and achieve other life goals along the way.

Thankfully, there is a way to reduce the impact of market volatility on your overall investment portfolio. Hint: it’s not by putting all your money in the bank.

MIX IT UP

The best way to reduce the risk of one bad investment or a downturn in one market decimating your returns is to hold a mix of investments. This is what is referred to as diversification or, as Grandma might say, not putting all your eggs in one basket.

To smooth your returns from year to year and avoid the risks of short-term market volatility, you need a mix of investments from different asset classes.

The difficulty of predicting the market in the short-term was certainly in evidence in the year to June 2019.

At the end of 2018 global sharemarkets were gripped by the fear of an escalating US-China trade war, confusion over the final Brexit deal, rising US interest rates and falling commodity prices. Investors who panicked back then and sold their shares would have missed out on the unexpected rebound in global shares.

A YEAR OF SURPRISES

As Table 1 shows, Australian shares returned 11 per cent in the year to June 30. Global shares returned 11.9 per cent while US shares returned 16.3 per cent, partly reflecting the fall in the Aussie dollar from US74c to US70c.

Table 1: Total returns (% p.a.) as at 30 June 2019

Source: Vanguard

Although not included in the table of returns from listed investments, the worst performing asset class in the year to 30 June was Australian residential property. According to CoreLogic, Australian home values fell 6.9 per cent over the year. But while the housing market downturn was constantly in the news, good news in other sectors of the property market went largely unnoticed.

The best performing asset class by far in the year to June was Australian listed property, up 19.3 per cent. ASX-listed real estate investment trusts (REITs) invest in a wide range of office, industrial and retail property.

The gap in performance between direct residential property and listed property highlight another important aspect of diversification. You also need to diversify within asset classes.

LOOK BEYOND YOUR BACKYARD

Where property is concerned, that means investing across a range of property types and geographic locations. By diversifying your property investments, you reduce the risk of short-term price fluctuations in one location which can result in a big loss if you are forced to sell at the bottom of the market.

The same holds true for shares. By investing in a range of companies, industry sectors and countries you reduce the risk of short-term losses.

Many Australians have a share portfolio dominated by the big banks and miners, attracted by their fully franked dividends in a low interest rate world. This is especially so for retirees and others who rely on income from their investments.

The danger is that investors with a portfolio heavily weighted towards local stocks are not only exposed to a downturn in the bank and resources sectors but also the opportunity cost of not being invested in some of the world’s most dynamic companies.

TIME IS YOUR FRIEND

Over the last 30 years the top performing asset class was US shares with an average annual return of 10.3 per cent. Australian shares (9.4 per cent) and listed property (9.2 per cent) were not far behind.

And then there was cash. In a time of record low interest rates cash in the bank returned 2 per cent in the year to June 30, barely ahead of inflation of 1.6 per cent. The return was better over 30 years (5.6 per cent), but still well behind the pack.

Cash in the bank provides interest but absolutely no capital growth. While it’s important to have enough cash on hand for daily living expenses and emergencies, it won’t build long-term wealth.

Table 2

*Growth of $10,000 with no acquisition costs or taxes and all income reinvested.
Source: Andex and Vanguard

As you can see from Table 2, someone who put $10,000 in the bank in 1989 and left it there earning interest would have the princely sum of $51,896 today. Whereas someone who invested the same amount in US shares would have almost $190,000.

There’s no telling what the best performing investments will be in the next 12 months, as past performance is not an indicator of future performance. What we can be confident about is that a portfolio containing a mix of investments across and within asset classes will stand the test of time.

If you would like to discuss your overall investment strategy, please give us a call.

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by Financial Foundations on 20/09/2019

Changing The Narrative To Achieve Success

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CHANGING THE NARRATIVE TO ACHIEVE SUCCESS

Posted on September 20, 2019

As children, we are surrounded by stories. The books our parents read to us, the cartoons we watch, the imaginary games we play. As adults we might like to think that story time is over. But it isn’t.

We are constantly surrounded by narratives in the media, amongst our peers and in our own heads. If these narratives are positive, they can propel us forward. But if they are negative, they can hold us back.

The sky’s the limit until we hit our self-imposed limitations, usually founded in feelings of fear and unworthiness.

So how do we break through these limitations and start reaching our goals. The answer is to change the narrative.

HOW WE LIMIT OURSELVES

To change any narrative, you need to have the right words. And in this case, that means identifying the obstacles you’ve set yourself and being able to communicate them. Identifying your fears is never easy or comfortable, but it helps to know that they usually fall into three main brackets.

FEAR OF FAILURE

This is the big one and it manifests differently in everyone. For some, it’s short-selling your abilities, for example not going for a new job because you fall slightly short on the listed criteria. Others might suffer from a stifling perfectionism, missing deadlines and opportunities because of an inner critic in overdrive.

This in turn can develop into what famed TED talker and vulnerability expert, Dr Brené Brown, calls ‘self-handicapping’. Say you’re preparing a proposal that requires a lot of research—instead of doing the work you avoid it. The internal logic goes that if you don’t try, you can blame any ensuing failure on lack of effort, which is easier to bear than lack of ability. The problem with this approach: you never get anything done, and your career trajectory will inevitably stall.

To combat this, start with that old adage, ‘nothing ventured, nothing gained’. For as novelist JK Rowling said in her now viral Harvard Commencement Address, ‘It is impossible to live without failing at something, unless you live so cautiously that you might as well not have lived at all – in which case, you fail by default.’ⁱ Getting comfortable with failure isn’t easy, but it is perhaps the only given on the pathway to success.

FEAR OF COMPARISON

No one likes to be negatively compared to others. But when we fear it intensely, envy can turn to jealousy, which doesn’t usually bear great outcomes. It doesn’t feel too good either.

Two-time Olympic Gold medallist, Abby Wambach, thinks we need to change our approach. She takes the soccer pitch as a metaphor. When you kick a goal, run towards your teammates. They set you up for the shot. Likewise, if your team mate scores, run towards them, and celebrate their victory. Success almost never exists in the vacuum; it is usually the cumulative result of a lifetime of learning and other people’s input.

FEAR OF CONFLICT

While Hollywood screenwriters love conflict, in the workplace and our personal lives we tend to avoid it at all costs. But avoidance isn’t necessarily helpful. It often leads to a reduction in productivity, and mounting unspoken tensions. Worse still, when the conflict does inevitably come to a head, it is more profound than if it had been dealt with early on.

One useful tool in these situations is what Dr Brown calls ‘the story I’m telling myself’. It’s a great way to frame conversations and avoid misconstruing your projections about the other with their reality. Rather than casting aspersions or laying blame, open the conversation with the sentence ‘the story I’m telling myself…’ It will allow the other interlocutor the space to hear you, and open the door to vulnerability, which is crucial to conflict resolution.

CHANGING THE NARRATIVE

We all have a tendency to limit ourselves when it comes to realising our dreams. But if you start to acknowledge the fears behind these limitations you can also start to unlearn them. Change the narrative you’re telling yourself about the life you deserve, and this might be story that ends happily ever after.

i https://news.harvard.edu/gazette/story/2008/06/text-of-j-k-rowling-speech/

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by Financial Foundations on 10/09/2019

How Super Is Your Life Insurance?

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HOW SUPER IS YOUR LIFE INSURANCE?

Posted on September 10, 2019

For most people, life insurance provides a safety net against unexpected events. This is particularly the case if you have a mortgage, debts or family who are dependent on you earning an income.

In many cases, life insurance has been automatically offered through superannuation. Although 85 per cent of people hold life insurance this way, a recent survey found one third of them don’t even realise.ⁱ

Now some super members may have lost their insurance cover and may not be aware of it.

MILLIONS COULD LOSE COVER

Concern that super balances were being eroded through insurance premiums and fees has led the government to introduce Protecting your Superannuation legislation.

As a result, from July 1 this year your insurance cover is to be cancelled, if your fund has been inactive for more than 16 months.ⁱⁱ

Letters were sent towards the end of the financial year to those with inactive funds, advising you to contact your fund to make a contribution or risk losing your life cover.If you didn’t respond, your life insurance policy may have been cancelled.

It’s estimated that up to 3 million super members may have been affected.ⁱⁱⁱ And while you can buy a new life insurance policy, you may not be able to reactivate your previous one unless your fund offered an extension of the deadline to reactivate cover. If not, you may have to face a medical examination and/or pay higher premiums in order to take out a new policy.

YOUNGER MEMBERS TO OPT-IN

It is also proposed (although not yet legislated) that new superannuation fund members who are aged under 25 will no longer be given automatic life insurance cover as they have in the past. Instead, they would be given the opportunity to opt in to cover.

The argument in favour of this move is that young people with no responsibilities, have nothing to insure. But once you buy a home, get married or become a parent, the need for life insurance becomes paramount.

As you get older, once the family has flown the nest and you have paid off all your debts, the need for life insurance may reduce. However, with a blended family, a life insurance policy in super can prove a good financial strategy to ensure the right beneficiaries receive your money. That’s because superannuation ‘death benefits’ don’t form part of your Will but are paid out separately to your nominated beneficiaries.

SMSFS MAY ALSO BE CAUGHT OUT

Up until now, some self-managed super fund members have deliberately kept a public offer super fund active to take advantage of the cheaper insurance. But as stated above, if that public offer fund is inactive and an election to maintain cover has not been made, then cover may be lost.

The beauty of having life insurance in super is that the premiums are generally cheaper because you are charged at a group rate. In addition, it won’t affect your cashflow as premiums come out of your super. Of course, that is the point of this legislation. The monies available for investment to build your balance for retirement may be eroded through those very premiums.

Another precautionary note is that it may be harder to access a payout through super if you need to make a claim. If you haven’t correctly nominated a beneficiary in your super, then it is the trustees who decide who receives the payout. And because the insurer makes the payment via the fund, this can also take longer.^iv

WHAT HAPPENS NEXT?

As part of the Protecting your Super changes, inactive funds with balances less than $6000 will see the monies transferred to the Australian Taxation Office. The ATO will then endeavour to amalgamate this money with an active superannuation fund of yours or hold the money for you until it is claimed.

If this happens, investment returns on the money held by the ATO may be significantly less than if you invested through your super.^v

Don’t wait until you need to make a claim to discover you don’t have any insurance cover after all. If you have any questions about the changes or your insurance needs in general, give us a call.

i https://www.superannuation.asn.au/media/media-releases/2019/joint-media-release-10-june-2019
ii https://firststatesuper.com.au/member/super/manage-super/protect-your-super
iii https://www.superannuation.asn.au/media/media-releases/2019/joint-media-release-10-june-2019
iv https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/insurance-through-super
v https://www.ato.gov.au/Individuals/Super/Growing-your-super/Keeping-track-of-your-super/ATO-held-super/

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