Category: Uncategorised

New Increased Super Contribution Caps

Posted on by Rocky Hoffman
As the end of financial year gets closer, some investors are thinking about the most effective ways to boost their super balance, particularly with an increase in the caps on contributions from 1 July. The concessional contributions cap, which is the maximum in before-tax contributions you can add to your super each year without paying extra tax, is increasing to $30,000 from $27,500 in the new financial year.i The cap increases in line with average weekly ordinary earnings (AWOTE). It’s a good idea to keep track of your concessional contributions – which include any compulsory contributions made by your employer as well as salary sacrifice contributions – so that you don’t unintentionally exceed the cap. It is particularly important for those with more than one job or super fund because all of the contributions are added together and must not exceed the cap. You can check your current balance at ATO online services. Log into your myGov account and link to the ATO to see all your details. It is also useful to be aware of payment and reporting timelines. For example, your employer can make super guarantee contributions up until 28 July for the final quarter of the financial year and salary sacrifice contributions up until 30 June. Any amounts showing on the ATO website for your account are based on when your fund reports to the ATO.

Carry forward unused amounts

If you haven’t made extra contributions in past years, you may have unused concessional cap amounts. These can be carried forward, allowing you to contribute more as long as your super balance is less than $500,000 at 30 June of the previous financial year. You can carry forward up to five years of concessional contributions cap amounts.

Getting close to exceeding the cap?

If you’re worried about going over the cap, you may wish to stop any further voluntary contributions based on an assessment of the extra tax you will pay. For those with two or more employers, you may opt out of receiving the super guarantee from one of the employers. Meanwhile, if special circumstances have caused you to exceed your cap, it’s possible to apply to the ATO for some or all of the contributions to be disregarded or allocated to the next financial year. But, if all else fails and you have exceeded the cap, the excess contributions will be included in your assessable income and taxed at your marginal rate less a 15 per cent tax offset. The good news is that you can withdraw up to 85 per cent of the excess contributions from your super fund to pay your tax bill. Any excess contributions left in the fund will be counted towards your non-concessional contributions cap.

Timing is everything

The upcoming Stage 3 tax cuts, which commence on 1 July 2024, may affect the value of your concessional contributions. For some, tax benefits may be greater if contributions are made before the tax cuts begin. Please check with us about your circumstances to make sure you make the most effective move.

Non-concessional cap also increased

The non-concessional contributions cap is the maximum of after-tax contributions you can make to your super each year without paying extra tax.ii The non-concessional cap is exactly four times the amount of the concessional cap so it increases from $110,000 to $120,000. If you exceed the cap, you may be eligible to use the ‘bring forward rule’, which allows you to use caps from future years and possibly avoid paying extra tax. It means you can make contributions of up to two or three times the annual cap amount in the first year of the bring forward period. iii If your total super balance is equal to or more than the general transfer balance cap ($1.9 million from 2023–24 and 2024-25) at the end of the previous financial year, your non-concessional contributions cap is zero for the current financial year. We’d be happy to help with advice about how the changes in contribution caps might affect you and whether you are eligible for the bring forward rule.

Non-concessional contributions

Bring-forward cap first year (applying to 2023–24 and later years)
Total super balance on 30 June of previous year Non-concessional contributions cap for the first year Bring-forward period
Less than $1.68 million $330,000 3 years
$1.68 million to less than $1.79 million $220,000 2 years
$1.79 million to less than $1.9 million $110,000 No bring-forward period, general non-concessional contributions cap applies
$1.9 million or more nil Not applicable
i, ii Understanding concessional and non-concessional contributions | Australian Taxation Office (ato.gov.au) iii Non-concessional contributions cap | Australian Taxation Office (ato.gov.au)

Investing Mistakes to Avoid

Posted on by Rocky Hoffman
                                  Investing successfully and improving your investment portfolio can be as much about minimising mistakes as trying to pick the ‘next big thing’. It’s all about taking a calm and considered approach and not blindly following trends or hot tips. Let’s delve into some of the most prevalent investment mistakes and look at the principles that underpin a robust and successful portfolio.

Chasing hot and trending shares

Every so often there are industries or shares that are all over the media and you may begin to worry that you are missing out on something. Jumping on every trend is like trying to catch a wave; you might ride it for a bit, but you’re bound to wipe out sooner or later. That’s because the hot tips and ‘buy now’ rumours often don’t pass the fundamentals of investing test. The key is to keep a cool head and remember that the real winners are often the ones playing the long game.

Not knowing your ‘why’

What would you like your investment portfolio to achieve? Understanding your motivations and goals will help you to choose investments that work best for you. If you want to build wealth for a comfortable retirement, say 20 to 30 years down the track, you can afford to invest in riskier investments to play the long-term game. If you have already retired and plan to rely on income from your portfolio, then your focus will be on investments that provide consistent dividends and less on capital growth.

Timing the market

Timing the market involves buying and selling shares based on expected price movements but at best, you can only ever make an educated guess and then get lucky. At worst, you will fail. As the world-renowned investor Peter Lynch wrote in his book Learn to Earn: “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves”.i

Putting all the eggs in one basket

This is one of the classic concepts of investing but it’s worth repeating because, unless you are regularly reviewing your portfolio, you may be breaking the rule. Diversifying your portfolio allows you to spread the risk when one particular share or market is performing badly. Diversification can include different countries (such as adding international shares to your portfolio), other financial instruments (bonds, currency, real estate investment trusts, exchange traded funds), and industry sectors (ensuring a spread across various sectors such as healthcare, retail, energy, information technology).

Avoiding asset allocation

While diversification is key, how do you achieve it? The answer is by setting an asset allocation plan in place and reviewing it regularly. How much exposure do you want to diversify into defensive and growth assets? Within them, how much should be invested in the underlying asset classes such as domestic shares, international shares, property, cash, fixed interest and alternatives.

Making emotional investment decisions

The financial markets are volatile and that often leads investors to make decisions that in hindsight seem irrational. During the COVID-19 pandemic, on 23 March 2020 the ASX 200 was 35 per cent below its 20 February 2020 peak.ii By May 2021, the ASX 200 crossed the 20 February 2020 peak. Many investors may have made an emotional decision to sell out during the falling market in March 2020 but then would have missed the some of the uplift in the following months in. Seeking out quality and trustworthy financial advice can help to minimise investment mistakes. Give us a call if you would like to discuss options for growing your portfolio. i From the Archives: Fear of Crashing, Peter Lynch – From the Archives: Fear of Crashing – Worth ii Australian Securities Markets through the COVID-19 Pandemic – Australian Securities Markets through the COVID-19 Pandemic | Bulletin – March 2022 | RBA

2023 Year in Review

Posted on by Rocky Hoffman
      Australia’s economy stubbornly defied predictions during 2023, dashing any hopes that we might begin to return to some kind of normal. Some had expected an end to the Reserve Bank’s continued cash rate rises during the year. Instead, inflation has been a stubborn foe and we saw five rate rises, adding another 1.25%. But there was good news for property investors with an increase in prices across some cities.  
Australia key indices December Share markets (% change) Year to December
  2022 2023   2022 2023
Economic growth 5.8% *2.1% Australia All Ordinaries -7.2%   8.4%
RBA cash rate 3.1%   4.35% US S&P 500 -19.3% 24.2%
Inflation (annual rate) 7.8% ^5.4% Euro Stoxx 50 -11.7% 19.2%
Unemployment 3.5% #3.9% Shanghai Composite   -15.1% -3.7%
Consumer confidence 82.5   82.1 Japan Nikkei 225   -9.3% 28.2%
*Year to September, ^September quarter # November Sources: RBA, ABS, Westpac Melbourne Institute, Trading Economics

The big picture

Global economic forecasts for 2023 were also beset by a number of wild cards during the year. While many economists were predicting recession in the United States and Europe and a rebound in China, the year ended differently with no recession in the US, Europe struggling but doing better than expected and China still battling some headwinds. October brought concerns of a wider Middle East conflict, the International Monetary Fund revising its outlooks for the region, saying that an escalation of the conflict could be far-reaching, affecting tourism, trade, and investment.ii

Inflation and interest rates

In Australia, economic growth slowed a little on 2022’s result but still delivered a better return than forecast. On the latest data available from the end of September, the economy grew by 2.1% although a larger-than-expected increase in the population is putting extra pressure on housing and prices, keeping inflation higher.iii It was the eighth quarter in a row of economic growth. Inflation remains high but many believe we have seen the end of interest rate rises for 2024. The latest figures show the rate of inflation dropped from 4.9% in October to 4.3% in November. New dwelling prices rose 5.5% in the 12 months to November while rents rose 7.1%. Electricity prices were up by 10.7% for the year and food and non-alcoholic beverages increased by 4.6%. The Reserve Bank raised the cash rate five times in 2023 to finish the year at 4.35%.iv

Sharemarkets

Global sharemarkets ended 2023 on a more positive note. In the US, welcome news from the Federal Reserve of an end to rate hikes saw stocks and bonds soar in the final weeks of the year. During the year, the Dow Jones index increased by 13.7% and the Nasdaq by 43.4%. There was mixed news in Asian markets with a jump of 28.2% on the Nikkei 225 and 18.7% on India’s BSE Sensex but China’s Shanghai Compositive fell 3.7% and the Straits Times index of Singapore was down 0.3%.v Australia’s sharemarket may not have experienced the heady double-digit returns of some global markets but it ended the year with a gain of almost 8%, marking its best performance since 2021.vi

Commodities

Despite big falls from the peaks of 2022, commodity prices remain high across the board. Iron ore, Australia’s biggest export, rose more than 21% as the Chinese government continues to create strong demand by stimulating property and infrastructure development. Oil prices saw some spikes during the year but steadied by December. However, the World Bank notes that conflict in the Middle East, on top of the disruptions caused by the war in Ukraine, could cause a major oil price shock, pushing global commodity markets into uncharted waters.vii As the US dollar gathers strength and Australia’s high inflation figures persist, the Australian dollar is under pressure. It ended the year where it began after recovering from a slide in the second half of the year.

Property market

While rising interest rates usually dampen property prices, by year’s end we saw a remarkable turnaround for some cities in another result that upended forecasts. CoreLogic’s national Home Value Index rose 8.1% in 2023, up from the 4.9% drop in 2022 but not quite at the stellar 24.5% increase recorded in 2021.viii It was a patchy performance across the country. House prices rose at more than 1% every month on average in Perth, Adelaide, and Brisbane in the second half of the year. While Melbourne values dropped in November and December, Sydney and Canberra prices barely moved, and Hobart and Darwin prices fell slightly.

Looking ahead

As floods and storms ravage the eastern states and bushfires break out in the west, another tumultuous Australian summer might be mirrored by a chaotic year for the economy both in Australia and overseas. The RBA expects economic growth to remain subdued but resilient in 2024, largely supported by construction and infrastructure work. Meanwhile the rebound in international students and tourism is expected to contribute to robust growth in consumer spending.ix The RBA is also confident that inflation will continue to fall slightly throughout the year, but many predict at least one more cash rate increase during the year. Worldwide, China’s spluttering economy and the outcome of the US presidential election may cause ripple effects across the globe, meanwhile markets will be nervously watching the conflicts in the Middle East and Ukraine as well as China’s threat to blockade Taiwan, for the potential to create broader economic challenges. Whatever the year ahead brings, we are here for you. If you would like to discuss your investment strategy in the light of prevailing economic conditions, don’t hesitate to get in touch. Note: all share market figures are live prices as at 31 December 2023 sourced from: https://tradingeconomics.com/stocks i https://www.afr.com/policy/tax-and-super/super-balances-grow-almost-10pc-thanks-to-tech-rally-20240103-p5euwb ii https://www.imf.org/en/Blogs/Articles/2023/12/01/middle-east-conflict-risks-reshaping-the-regions-economies iii https://www.abs.gov.au/media-centre/media-releases/australian-economy-grew-02-cent-september-quarter iv Monthly CPI indicator rose 4.3% annually to November 2023 | Australian Bureau of Statistics (abs.gov.au) v https://www.businesstoday.in/markets/story/global-market-performance-heres-how-global-equity-markets-major-currencies-performed-in-2023-411391-2023-12-31 vi https://www.abc.net.au/news/2023-12-29/asx-markets-business-live-news-dec29-2023/103271578 vii October 2023 Commodity Markets Outlook: Under the Shadow of Geopolitical Risks [EN/AR/RU/ZH] – World | ReliefWeb viii https://www.corelogic.com.au/news-research/news/2023/australian-home-values-surge-in-2023 ix https://www.rba.gov.au/speeches/2023/sp-ag-2023-11-13.html  
Posted on by Rocky Hoffman
Residential property investors have been on a wild ride in recent years as prices slumped during the pandemic then quickly skyrocketed before losing ground again. Now, with prices levelling out or slowly increasing, there is good news around the corner, according to some analysts.i A combination of positive indicators for housing could help to fuel further price rises. With a widespread view that the Reserve Bank’s interest rate increases are beginning to work to ease spending, some believe we may see the first rate cuts as early as next March. Add to that the increase in migration and the fall in new house construction, and residential property gains may follow. CBA Chief Economist Stephen Halmarick is forecasting a 7 per cent rise in house prices this year and another 5 per cent in 2024 claiming that, by this time next year, prices will return to “all-time record highs”. The sustained levels of high demand clashing with historically low levels of for-sale listings are also pushing prices up, according to the Property Investment Professionals of Australia (PIPA).ii In the meantime, some investors are doing it tough with rising interest rates and the end of fixed interest rate mortgages sometimes a contributing factor. The number of short-term property resales made at a loss has jumped, according to property analysts CoreLogic, from 2.7 per cent a year ago to 9.7 per cent in the June quarter this year.iii The median loss was $30,000, for houses sold within two years, compared to a median profit of $75,000. PIPA’s annual survey to gauge property investor sentiment found just over 12 per cent of investors sold at least one investment property in the past year.iv Less than a quarter of those houses sold went to other investors, continuing a trend that has been happening for several years. Almost half of those who sold said they were concerned about governments increasing or threatening to increase taxes, duties and levies.

Where are rents headed?

Will rents continue to rise or stabilise? Experts’ views are mixed about the short-term outlook for the rental market. The Reserve Bank says the continuing shortage of rental housing is likely to support ongoing increases in rents.v The rents paid by new tenants provide a good indication of price movements in rental housing. Actual rents paid by new tenants increased by 14 per cent over the year to February 2023. Since the onset of the pandemic in 2020, rents paid by new tenants have increased by 24 per cent.vi The Reserve Bank says rents for apartments with new tenants have been more volatile than for houses and townhouses over the past couple of years. Rents for apartments with new tenants fell sharply during the pandemic and remained below pre-pandemic levels until early 2022 but rose 24 per cent over the year to February 2023, whereas the overall index increased by 14 per cent. By contrast, rent for houses and townhouses with new tenants increased by around 10 per cent over the year to February 2023. But CoreLogic predicts a slowing in rental price growth next year, saying rents rose for the 35th month in a row in July but monthly growth has eased over the past four months. It says the expected drop in interest rates next year combined with softer income growth and stretched rental affordability will contribute to a slowing in rents.

First homebuyers falling

The recent boom in property prices, the positive outlook and the many assistance programs available from federal and state governments have not been helping those looking to get into the market. The number of first homebuyers has fallen significantly over the past 30 years, a new study has found.vii Published by the Australian Housing and Urban Research Institute, the study says the drop in first homebuyers is down to delayed partnering, higher rates of educational attainment and associated debt, the precarious nature of employment and worsening housing affordability. The study says various government policy decisions have had little effect on the numbers of first homebuyers.

Build-to-rent growth

Australia’s growing build-to-rent (BTR) market is getting a boost from governments eager to increase housing stock. Various state governments have introduced a raft of incentives for build-to-rent projects, mostly in the form of tax concessions. BTR projects, common in Europe and North American, see landlords build a large-scale residential development intending to hold it for the long-term while renting the apartments for longer-than-usual terms, often as long as three years with rent increases locked in. Rents are often slightly higher than market averages in return for better communal amenities such as roof gardens and gyms. Institutional investors, such as super funds, are also getting onboard with the projects, favouring the steady income stream. While Australia’s BTR market is mostly being driven by large developers and global players, smaller private investors are also getting in on the act. On the plus side, BTR offers regular income, often better returns and the chance to minimise expenses, not to mention the government tax concessions. On the downside, there is the possibility the BTR concept might not take off in Australia and that vacancy rates may be higher as a result. There is also a downside to the promise of regular income – locked in rental increases may not keep pace with rapid market changes.

Rental Vacancy Rates* Seasonally adjusted

* Data is monthly for Sydney and Melbourne and quarterly for all other serires Sources: REIA; REINSW; REIV i https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/total-value-dwellings/latest-release ii, iv https://www.pipa.asn.au/wp-content/uploads/PIPA_Investor-Survey-Report_2023_Final.pdf iii https://www.corelogic.com.au/news-research/news/2023/short-term-loss-making-resales-on-the-rise v, vi https://www.rba.gov.au/publications/bulletin/2023/jun/new-insights-into-the-rental-market.html vii https://www.ahuri.edu.au/sites/default/files/documents/2023-09/Executive-Summary-FR408-Financing-first-home-ownership-opportunities-and-challenges.pdf

How the Aussie dollar moves your investments

Posted on by Rocky Hoffman
                                                    It has been a wild ride for the Australian dollar since the Covid-19 pandemic struck and that could mean good news or bad news for your investment portfolio. In March 2020 the Aussie dipped below US58 cents for the first time in a decade. Since then, a high of just over US77 cents in 2021 has been followed by a rollercoaster ride, mostly downhill. In October 2022 the dollar plummeted to US61.9 cents, bounced its way back up to US71.3 cents in February this year but by mid-August it had slipped to a nine-month low at under US64 cents.i Many analysts agree that further falls are on the cards with some even predicting the dollar could fall to as low as US40 cents within five years.ii

What’s driving the dollar?

Given any currency’s susceptibility to changing economic conditions both at home and overseas, the Aussie has had quite a bit to deal with lately. Rising interest rates can boost the Australian dollar by making us more attractive for foreign investors, providing our rates are rising ahead of the US and others. If foreign investors buy more Australian assets because they can get a bigger return on their investment, more money flows into Australia which increases demand for Australian dollars. And if investors hold more Australian assets than overseas ones, less money leaves the country, decreasing supply. So, increased demand and decreased supply see the Australian dollar rise. While the Reserve Bank of Australia (RBA) has increased rates by 4 per cent in Australia since May last year as it battles to get inflation under control, rates have also been rising in the US. The US Federal Reserve has undertaken its most aggressive rate-rising cycle in 40 years with rates now at a 22-year high and signs of further increases likely. This has put pressure on the Australian dollar, narrowing the difference between the US and Australian rates, meaning foreign investors will look for better returns elsewhere.

Changing economic conditions

The value of the Australian dollar is also affected by changes in economic conditions as well as rises and falls in other financial markets. For example, in August news that the unemployment rate had increased slightly and an easing in wage price growth led to speculation that the RBA would put a hold on rates, putting a dampener on the Aussie. Also affecting the dollar was a decline in US share markets in August, confirming the typical pattern of the Australian dollar falling when prices in equity markets drop. Meanwhile, the performance of China’s economy plays a significant part in Australian dollar movements. China is currently battling soaring unemployment, particularly among young people, falling land prices and a housing crisis, among other ills. As Australia’s largest trading partner, both in terms of imports and exports, any slowdown in China means lower sales of our commodities and other goods and services and less investment in property and business.iii

How the dollar affects us

There are advantages and disadvantages of a falling Australian dollar. On the plus side, our exports will be more competitive because our customers will pay less for our goods and services compared with those produced overseas. Conversely, imported goods will be relatively more expensive. There could also be an increase in tourism – the cost of travel in Australia will be cheaper for those coming from overseas. Unfortunately, those planning an overseas trip will need to find a significantly greater pile of Australian dollars to pay for airfares, accommodation and shopping. For investors, it is a useful exercise to review the currency’s effect on your portfolio. For example, if you’re invested in Australian companies that rely on overseas earnings, look at how they handle their exposure to the currency risk. A lower dollar is good news for those with overseas operations and those that export goods. On the other hand, those that need to buy in components or products from overseas may suffer. In any case, have a chat to us to look at the best way forward in these uncertain times. i https://tradingeconomics.com/australia/currency ii https://www.news.com.au/finance/markets/australian-dollar/aussie-dollar-in-free-fall-amid-bloodbath/news-story/929165d65db4dc7d8a97bc7b27b5ab0d iii https://www.aph.gov.au/about_parliament/parliamentary_departments/parliamentary_library/

Superannuation Investment Performance & Unlisted Assets

Posted on by Rocky Hoffman

Differences in the returns of various super funds have primarily been driven by whether the funds are invested in unlisted or listed assets.

Super fund returns are always in the spotlight around the end of the financial year. This is when funds publish their annual performance results and send statements to members, and when researchers publish tables comparing fund returns. Going forward, fund members may notice a wider-than-usual gap between the performances of various super funds.  A large part of the difference in returns every year comes down to whether – and how much – super funds have invested in unlisted assets. In recent years, super funds have been under pressure due to their practices around “lumpy” revaluations for unlisted assets concerning the quality, accuracy and frequency of revaluing unlisted assets. Millions of super members are in the dark about these practices – and therefore about how much their investment is really worth. In July 2022, the Australian Prudential Regulation Authority (APRA) released final revisions on Prudential Standard SPS 530 Investment Governance to ensure better member outcomes through updated requirements that increase stress-testing, valuation, and liquidity management practices. The enhancements to strengthening investment governance have been in effect from January 2023 this year.

What are unlisted assets?

Unlisted assets are investments that are not traded through a public exchange or market, such as the Australian Securities Exchange (ASX) or the New York Stock Exchange (NYSE). Investors in unlisted assets can either directly own the asset or invest with others through an unlisted trust. The most common types of unlisted assets are:
  • Unlisted property – from small property syndicates with assets such as neighbourhood shopping centres to multi-billion-dollar unlisted property trusts which own major CBD office buildings, large shopping centres or hotels.
  • Unlisted infrastructure – development or ownership of roads, rail, ports, airports and utilities.
  • Private equity – invest in or own private companies, including early-stage investments in technology companies.
  • Private credit – involves lending to privately owned businesses.

Can unlisted assets help or hinder my super returns?

The difference in returns comes down to whether – and how much – super funds have invested in unlisted assets. The end of the financial year is a crucial time to understand the scale of unlisted assets held within your super fund.

What are listed assets?

Listed assets are those that are traded on a stock exchange or share market, such as the ASX or NYSE. The most common type of listed asset is shares, also known as equities. Other listed assets include:
  • Listed property – offers the ability to invest in a diverse portfolio of large properties through an Australian real estate investment trust or real estate investment trust on an international share market.
  • Listed infrastructure trusts – trusts that invest in major infrastructure e.g., roads, rail and airports.
  • Bonds – issued by a company or government to raise money which constitute a loan from an investor.
  • Exchange traded funds (ETFs) – collection of assets that track the performance of a major investment index e.g., the S&P 500 Index.
  • Managed funds – money from a number of investors which is pooled to buy investments.

How are unlisted and listed assets valued?

The difference in how unlisted and listed assets are valued is what affects super fund returns at any given time.
Timing of valuation
  • Unlisted assets - are typically valued at set intervals. For example, quarterly or annually.
  • Listed assets - are valued every day. Investors decide daily how much they are willing to pay for shares in the company or trust.
Method of valuation
  • Valuations of unlisted assets are often made using historical or point-in-time factors. For example, unlisted property valuations are partly based on past sales of similar properties, which may have been completed when market conditions were different. As a result, values for unlisted assets are often different for the same asset in a listed market.
  • Listed assets are valued by investors in an organised, open, and transparent market. Valuations are an accurate, up-to-the-minute reflection of what willing buyers and sellers in a market will pay.
Continued criticism is that valuations arranged by asset owners could lead to biased results if asset owners judge the value of their own investments too generously.

How does valuation timing impact your super’s performance?

The difference in valuation timing means changes in economic, competitive and market conditions are reflected in the value of listed assets more rapidly than unlisted assets. Therefore, listed asset values are affected more in the short-term by market ups-and-downs versus unlisted assets. Over the past months, central banks globally have sharply increased their interest rates in response to inflation. Rises in global and Australian interest rates have been quickly factored into prices for assets listed on stock exchanges. The result was an immediate fall in prices and losses for investors. However, these significant changes may not yet be reflected in the valuations of unlisted assets. Add to this the fluctuations in unlisted infrastructure and unlisted property funds, which many super funds are directly invested in, and the valuation of unlisted assets becomes a bigger issue. Essentially, the difference in performance lowers returns in super funds, especially those holding mainly listed property, while funds holding mainly unlisted property have not yet been affected. However, as unlisted property trusts go through their valuation cycles, downward returns are expected to be reported in those trusts, due to the significant devaluation risks in the higher interest rate environment.

Why is liquidity in super funds important?

Super is a long-term investment and while you are accumulating your retirement savings, you may not need regular access to your money. However, super funds do need the flexibility to buy and sell investments to manage risk, respond to market conditions, and take advantage of opportunities that arise. Super funds also need to maintain liquidity to meet the redemptions of retiring investors, so the liquidity of investments is crucial at a fund level.
Source: Super fund performance and unlisted assets (cfs.com.au)
Authorised representative of Interprac Financial Planning AFSL 246638. This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.

Setting yourself up for success in the new financial year

Posted on by Rocky Hoffman
The start of a new financial year is the perfect time to get your financial affairs in order. Whether it’s tidying up your paperwork, assessing your portfolio or dealing with outstanding issues, there are plenty of practical actions you can take to set yourself up for the year ahead. Here are some strategies for starting the new financial year on the right foot.

Tidy up your paperwork

Dealing with the paperwork is the task most of us love to hate. But taking a day to trawl through the ‘To Do’ pile and the growing mountain of filing could be a good investment in yourself. What’s more, you might identify some savings. So, reviewing your bank statements, credit card bills (check for any automatic deductions that are no longer relevant), and receipts, as well as organising any tax documents can be time well spent.

Set your budget

A lot can happen in a year, so it makes sense to review your budget to ensure it still works towards your goals in the new year. This will help you track your changing expenses and ensure you’re not overspending. And if you haven’t got a working budget, now’s a great time to start. There are plenty of budgeting apps and tools available online that can help you get started. By doing this, you’ll be able to get a clear picture of your financial situation and be able to identify areas of improvement.

Assess your portfolio

Another important step to take as you start the new financial year is to assess your investment portfolio. This includes reviewing your investments, risk appetite and the investment mix and don’t forget to check your investments inside your super fund. Some important areas you may wish to address:
  • Why did you start investing and have your circumstances changed? For example, you may have started investing to receive a better return than your term deposits but now that term deposits rates have increased and share markets are challenged, should you revisit that goal?
  • What is the investment performance? Is it in line with your expectation and the benchmark?
  • Should you consider diversifying into different asset classes?
  • Is dividend reinvestment the best option for you or should you take the dividend income into cash?
  • Is your risk appetite still the same, or should you be aggressive or more conservative?
You may be regularly keeping an eye on your portfolio but standing back and looking at the big picture can be a game changer.

Check your insurance

Now is a good time to examine your insurances closely and to consider whether they match your needs and risks. It is also a good reminder to take note of policy renewal dates so that you can shop around to make sure you get the best price. Make sure that any life insurance, total and permanent disablement, trauma, and income protection insurance premiums you hold are appropriate for you. Most of us have some kind of insurance cover within our super funds. Check to see what and how much you have. Is it enough to support you and your family should something happen to you? Alternatively, you may have multiple insurance policies or have too much cover and it may be time to reduce or cancel some of it to save the premium costs. And don’t forget your house and contents and car insurance. Are you adequately covered if you are unlucky enough to have a total loss?

Understand Federal Budget changes

Keeping up to date with the commentary about Federal Budget initiatives may be useful. The measures aimed at easing the cost of living will provide a boost to some. They include energy bill relief for concession card holders and energy saving incentives. Meanwhile those with chronic health conditions will benefit from a number of changes announced in the budget. The Budget also included support for families with cheaper childcare and a more flexible Paid Parental Leave scheme, and incentives for some types of new home building projects.

Simplify your debt

The start of the new financial year is a good time to deal with reviewing and simplifying any outstanding debt by negotiating better interest rates on loans or credit cards. Consider refinancing for better loan terms and offers. You could even consolidate multiple debts into a single loan, which will allow you to pay one fortnightly or monthly payment instead of multiple payments but carefully calculate the costs of any change first. If you have a loan offset account but also have cash savings in other accounts, you could consider pooling your cash into the offset account to save interest costs. One simple change you can implement is making fortnightly mortgage repayments instead of monthly, which could reduce your interest over time. For example, on a 30 year $1,000,000 mortgage at 6% p.a. interest, your monthly principal and interest repayments are about $5,996. If you switch to fortnightly payments of $2,998, you will repay the loan 5.5 years sooner. This is because instead of making 12 payments, you have made 26 payments, which is an extra month’s payment each year.

Principal remaining ($) vs. Time (years)

Source: Mortgagechoice.com.au

Review your superannuation

A review – at least annually – of your super account is vital to make sure that:
  • Your investments and risk strategy are still right for you
  • The fees are reasonable
  • ·Any insurance policies held in your super account are appropriate
  • Your employer contributions are being made
  • Your death benefit nomination is relevant
It is also important to check for any stray super accounts from previous employers that may be incurring unnecessary fees. These can be consolidated, if necessary, into your main account. Check your myGov account for details of your super accounts. You might also consider a salary sacrifice strategy, where you ask your employer to make extra super contributions from your pre-tax salary. These additional contributions are taxed at 15 per cent within the super fund, plus an additional 15% if Division 293 tax applies to you (income over $250,000). Meanwhile, it is not too late to top up your super balance for this financial year using either concessional contributions (from your pre-tax income) or non-concessional contributions (after-tax income). Don’t forget the caps on payments, which are $27,500 for concessional contributions and $110,000 for non-concessional. It is a good idea to get some expert advice regarding your super contributions, we can assist with the best ways to manage your contributions. So, set yourself up for a fresh start to the year with some simple strategies to help you achieve your financial goals.

How do Interest Rates Affect Your Investments

Posted on by Rocky Hoffman
Interest rates are an important financial lever for world economies. They affect the cost of borrowing and the return on savings, and it makes them an integral part of the return on many investments. It can also affect the value of the currency, which has a further trickle-down effect on other investments. So, when rates are low they can influence more business investment because it is cheaper to borrow. When rates are high or rising, economic activity slows. As a result, interest rate movements are also a useful tool to control inflation. The cash rate or headline rate you hear mentioned regularly in the media is the interest rate on unsecured overnight loans between banks. The Reserve Bank of Australia (RBA) sets the rate and meets every month, except January, to consider whether it should move up, down or stay the same. This rate then usually flows through to market interest rates causing, for example, mortgage rates to rise or fall.

Rising steadily

For the past few years, interest rates have been close to zero or even in negative territory in some countries, but that all started to change in the last year or so. Australia lagged other world economies when it came to increasing rates but since the rises began here last year, the RBA has introduced hikes on a fairly regular basis. Indeed, the base rate has risen 3.5 per cent since June last year.

Australian Cash Rate Target

Source: RBA The key reason for the rises is the need to dampen inflation. The RBA has long aimed to keep inflation between the 2 and 3 per cent mark. Clearly, that benchmark has been sharply breached and now the consumer price index is well over the 7 per cent a year mark. While interest rates are the key monetary policy weapon to control inflation and dampen the economy, there can be a risk of taking it too far and causing a recession. Economic growth is forecast to slow to around 1.5 per cent this year as high inflation, low consumer confidence and rising rates take their toll.i

Winners and losers

There are two sides to rising interest rates. It hurts if you are a borrower, and it is generally welcomed if you are a saver. But not all consequences of an interest rate rise are equal for investors and sometimes the extent of its impact may be more of a reflection of your approach to investment risk. If you are a conservative investor with cash making up a significant proportion of your portfolio, then rate rises may be welcome. On the other hand, if your portfolio is focussed on growth with most investments in say, shares and property, higher rates may start to erode the total value of your holdings. Clearly this underlines the argument for diversity across your investments and an understanding of your goals in the short, medium, and long-term.

Shares take a hit

Higher interest rates tend to have a negative impact on sharemarkets. While it may take time for the effect of higher rates to filter through to the economy, the sharemarket often reacts instantly as investors downgrade their outlook for future company growth. In addition, shares are viewed as a higher risk investment than more conservative fixed interest options. So, if low risk fixed interest investments are delivering better returns, investors may switch to bonds. But that does not mean stock prices fall across the board. Traditionally, value stocks such as banks, insurance companies and resources have performed better than growth stocks in this environment.ii Also investors prefer stocks earning money today rather than those with a promise of future earnings. But there are a lot of jitters in the sharemarket particularly in the wake of the failure of a number of mid-tier US banks. As a result, the traditional better performers are also struggling.

Fixed interest options

Fixed interest investments include government and semi-government bonds and corporate bonds. If you are invested in long-term bonds, then the outlook is not so rosy because the recent interest rates increases mean your current investments have lost value. At the moment, fixed interest is experiencing an inverted yield curve which means long term rates are lower than short term. Such a situation reflects investor uncertainty about potential economic growth and can be a key predictor of recession and deflation. Of course, this is not the only measure to determine the possibility of a recession and many commentators in Australia believe we may avoid this scenario.iii

What about housing?

House prices have fallen from their peak in 2022, which is not surprising given the slackening demand as a result of higher mortgage rates. Australian Bureau of Statistics data showed an annual 35 per cent drop in new investment loans earlier this year.iv The consequent reduction in available rental properties has put upward pressure on rents which is good news if you have no loan, a small loan or a fixed interest loan on the property. The changing times in Australia’s economic fortunes can lead to concern about whether you have the right investment mix. If you are unsure about your portfolio, then give us a call to discuss. i https://www2.deloitte.com/au/en/pages/media-releases/articles/business-outlook.html ii https://www.ig.com/au/trading-strategies/what-are-the-effects-of-interest-rates-on-the-stock-market-220705 iii https://www.macrobusiness.com.au/2023/02/inverted-yield-curve-predicts-australian-recession/e. iv https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release

Retirement Mistakes and How to Avoid Them

Posted on by Rocky Hoffman
Retirement is a phase of life most of us look forward to. It’s a chance to pursue other interests, travel and maybe do some part-time work or volunteering. Thanks to more than 30 years of compulsory superannuation, we are also retiring with more savings than previous generations and have higher expectations of the lifestyle we wish to enjoy. But that also brings its challenges. According to the government’s Retirement Income Review, the average age of retirement in Australia is around the ages of 62 to 65.i At the same time, today’s 65-year-old men and women can expect to live to 85 and 88 respectively, on average, and many will live well into their 90s. To make the most of your retirement years, it’s important to have confidence that your savings will last the distance. The best way to achieve that is to have a plan that will help you avoid some common and preventable retirement mistakes.

Mistakes people make

While it’s impossible to predict what financial challenges lie ahead, these eight common retirement mistakes remain the same:

1. Not knowing your living costs

When you are receiving a regular income, you may be tempted to focus less on keeping a track of your living costs. When the regular income stops at retirement, you can be unaware of whether your investment income and/or pension payments will support your lifestyle costs. Knowing what your living costs are before you retire can help manage expectations accordingly.

2. Not looking at your super until just before retiring

What if your super was invested in conservative assets throughout your working life? It could mean that your super would not have grown to the level needed to fund your retirement. What if your super’s insurance premiums and fees consumed the returns? It is vital to review your super account as early and as regularly as possible to ensure it is appropriate for each stage of your life.

3. Underestimating the impact of inflation

Australia’s rate of inflation hovered around 1 per cent to 3 per cent per year between June 2012 and early 2020. Since the onset of the global pandemic in March 2020, inflation has jumped to more than 7 per cent.ii This along with a disruption to the global supply chain and the Russia-Ukraine war has lifted the cost of living to levels that require you to reassess your retirement planning.

4. Not understanding your government entitlements

If you’re age 66 or older, you may be eligible for a full- or part-Age Pension. However, even if your level of wealth puts you above the pension limits, you may still be eligible for other entitlements. These can include the Seniors Card, Pensioner Concession Card, income tax offsets or pensioner stamp duty exemption/concession.

5. Letting the noise affect your investment decisions

Negative news grabs headlines, such as talk of billions being wiped off share markets, but you rarely read about the billions made during the rebound. There is no denying that the financial markets face volatility during periods of uncertainty. However, as history has shown, over the long run the market trends upwards. All this noise makes it difficult to stick your long-term strategy, when in fact such events can present opportunities in the markets too.

6. Trying to time the financial markets

“We haven’t the faintest idea what the stock market is gonna do when it opens on Monday — we never have,” said legendary share investor Warren Buffett. Say you invested $10,000 in the ASX 200 index by trying to time the market and you missed the 40 best days between October 2003 to October 2022, your investment would be worth $9,064, whereas if you remained fully invested it would be worth $46,099.iii Trying to time the markets is never a good idea, especially with your retirement savings.

7. Being asset rich and cash poor

You may have built up a strong balance sheet of assets, but in retirement it is income you require. For many Australians, their family home could be their biggest asset and its value is sometimes unlocked by downsizing into a smaller home, but many Australians remain living in a family home that has surged in value while they struggle to find enough income to live on. Are your assets generating enough income to support your lifestyle? This income can include rent from an investment property, share dividends or managed fund distributions. If the income is insufficient, you may have to sell some of your assets to provide that liquidity or tap into the equity in your home by taking out a reverse mortgage-style loan.

8. Not consulting professionals

Financial advisers, accountants and other financial professionals can help set you on the right path by navigating the complexities of superannuation, investments, constant rule changes and other factors that affect your retirement. A good retirement plan, implemented correctly, can set you up for life.

Start Planning

Whether it’s due to lack of time or awareness, too many people tend to make these same mistakes when entering retirement which can lead to unwanted financial surprises. A phase of life you have looked forward to for so long deserves careful planning. So please get in touch if you would like to review your retirement income needs. i Retirement Income Review Final Report, July 2020 page 63 Retirement Income Review Final Report (treasury.gov.au) ii https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release iii From 31 Oct 2003 to 04 Oct 2022, Fidelity Australia Timing the market | Fidelity Australia

Sustainable Investing on The Rise

Posted on by Rocky Hoffman

 Sustainable investing is not new, but in recent years it’s moved from the green fringes into the mainstream. From climate change to animal rights and gender diversity, more people are interested in aligning their money with their values. Last year alone, Australia’s sustainable investment market increased 20 per cent to a record $1.5 trillion. According to its 2022 benchmark report, the Responsible Investment Association Australasia (RIAA) found sustainable investments now represent 43 per cent of total professionally-managed funds. In addition to traditional shares and fixed interest you can buy sustainable investments in a wide range of assets, including property, alternatives such as forestry and farmland, infrastructure, private equity and cash. These days, most big super funds offer a sustainable investment option and some even offer this as their default option. You can also buy sustainable managed funds, including a growing list of exchange-traded funds (ETFs). So what are sustainable investments and how can you tell?

Focus on people and planet

Sustainable investing is also known as ethical, responsible and ESG (environmental, social, governance) investing. But whatever the name, the focus is on people, society and/or the environment instead of an exclusive focus on financial returns. Sustainable investments are selected using a variety of screening methods, including:
    • Positive screening selects the best investments in their class
    • Negative screening excludes harmful sectors, companies or activities such as arms, gambling, animal testing, tobacco and fossil fuels
    • Norms-based investing screens for minimum standards of relevant business practices
  • Impact investing has the explicit intention of generating positive social or environment impacts.i
Increasingly, the term ESG investing is used when a fund or company commits to sustainable investing in these three areas:
    • Environmental, including air and water pollution, biodiversity and climate change
    • Social, including child labour and labour standards, ethical product sourcing, gambling and human rights
  • Governance, including board diversity, corruption, business ethics, corporate culture and whistle-blower schemes.
While climate change is a strong theme these days, the RIAA report found gender diversity and women’s empowerment are gaining popularity. Yet despite the focus on making the world a better place, sustainable investing is not all warm and fuzzy. Performance still matters.

Performance gains

In the early days, sustainable investing often came at the expense of returns but that is no longer necessarily the case. The RIAA report compared the performance of what it terms responsible investment funds and mainstream investments funds (on average and net of fees) over the past 10 years to December 2021. As the table shows, responsible multi-sector growth funds consistently outperformed mainstream funds and their benchmark over 1, 3, 5 and 10 years. Responsible Australian share funds generally outperformed or were on par with mainstream funds. Only responsible international share funds disappointed, underperforming mainstream funds across all timeframes.

Performance of responsible investment funds vs mainstream funds and benchmarks

Fund categories/benchmark 1 Year 3 Year 5 Year 10 Year
Responsible investment multi-sector growth funds 16.1% 14.0% 10.6% 10.9%
Morningstar category: Australia multi-sector growth 14.1% 10.9% 7.9% 8.8%
Responsible investment international share funds 18.1% 17.3% 12.3% 11.3%
Morningstar category: Australia Equity World Large Blend 24.6% 18.1% 13.4% 15.1%
Responsible investment domestic shares (Aus/NZ) 16.6% 14.8% 11.8% 11.2%
Morningstar category: Equity Australia Large Blend 18.3% 13.7% 9.3% 10.1%
S&P/ASX 300 Total Return 17.5% 14.0% 9.9% 10.8%

Source: RIAA Responsible Investment Benchmark Report Australia 2022

Watch out for greenwashing

Not surprisingly, increased investor demand for sustainable investments has led to a rapid increase in the number of products available. The rush to cash in on the trend has sometimes led to what is known as ‘’greenwashing”. The Australian Securities and Investments Commission (ASIC) describes greenwashing as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical. ASIC warns investors to look beneath the green label at the fine print. For example, a fund might describe itself as ‘’no gambling” but the product terms say it may invest in companies that earn less than 30 per cent of revenue from gambling. It’s also important not to rely on vague language such as “considers”, “integrates” or “takes into account” sustainability-related factors, but to look for a clear explanation of how the product will achieve its aims.

Australian companies lifting their game

It’s not just super funds and managed funds taking sustainable investing more seriously. For investors who like to invest directly in shares, Australian listed companies are also adapting to changing investor preferences and regulatory environment. In a recent analysis of ESG reporting by Australia’s top 200 listed companies, PwC found the bar has been raised following the formation of the International Sustainability Standards Board (ISSB) in 2021, but there is still work to be done. PwC found a 13 per cent increase in companies declaring a commitment to net zero emissions. However, only 55 per cent of those disclosed a transition plan or activities that will enable them to reach net zero. There was also a 10 per cent increase in companies disclosing climate risks and opportunities, and a 30 per cent increase to 77 per cent of companies now disclosing a gender diversity policy. For investors seeking sustainability along with financial returns from their investments, momentum and choice is growing. So please get in touch if you would like to discuss your investment options.

i https://responsibleinvestment.org/wp-content/uploads/2022/09/Responsible-Investment-Benchmark-Report-Australia-2022-1.pdf