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September 2019

Lessons from the 2019 Index Chart

Between smartphones, websites and watches that alert you even when you have ignored the phone, it is hard, if not impossible, to tune out the noise of the world.

         

 

Trade wars, Brexit, currency slumps, geopolitical tensions are just the headlines that can dominate the news cycle on any given day at the moment. Thankfully the Australian cricket team provided some welcome relief – and restored a little national pride – at Edgbaston.

Vanguard has been publishing its annual index chart that plots the performance of all the major markets and asset class indices for Australian investors for 18 years. It allows investors to look at how markets have rewarded them for the risk they have taken through periods of market rises and periodic slumps.

This year's chart provides the data to June 30 2019, and naturally there is always a tendency to focus on what has topped the performance table – US shares at 10.3 per cent per annum is the answer – and while interesting, that is not the key message from the chart.

The core message – and the reason for continuing to publish it over such an extended period of time – is to understand the power of markets over the long-term.

Think of a major event that roiled investment markets and look at that point on the chart – the last Australian recession in 1992 or the collapse of Lehman Bros, for example, in 2008 – to understand its impact at the time. Then zoom out to see how it affected returns over the full 30-year time period covered by the chart.

The other message provided by the index chart that is sometimes lost in translation is when investors lean towards wanting to predict what will be the top performing asset class next year… and the year after that.

You can view the digital version of the chart here (or order a print copy here) but if you are tempted to try and time markets, it's worth taking a look at page four of the index chart brochure which has a table of the total returns across all the major asset classes featured in the chart.

The best and worst performing asset classes are highlighted across each year – and feel free to let us know if you spot a performance pattern because what we see is what Burton Malkiel captured so elegantly in his investment classic, A Random Walk Down Wall Street.

The index chart shows the performance of markets over the long-term, but for individual investors its value is in understanding how you blend all of those markets to create a portfolio with the right asset allocation to achieve your investment goals within a risk level that you are comfortable with.

For investors a sense of perspective is a critical tool in the armory that can help tune out short-term noise, focus on your long-term goals and, as the legendary founder of Vanguard, Jack Bogle said, help you to “stay the course”.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
6 August 2019
Vanguardinvestments.com.au

LRBA changes mostly affect Melbourne, Sydney retirees

Incoming changes to LRBA provisions are likely to affect the majority of SMSF trustees in Melbourne and Sydney who are approaching retirement and have recently purchased a property within their fund, according to a major financial institution.

         

 

IOOF senior technical services manager Julie Steed told SMSF Adviser that laws currently before parliament to add a member’s LRBA balance to their total super balance if the member had a related-party LRBA would have larger consequences than expected, due to the explosion in related-party LRBAs since the major lenders exited SMSF loans.

“I would say 90 per cent of the LRBAs I’ve helped advisers with in the last 12–18 months have been related-party loans,” Ms Steed said.

“If I’m an adviser, my dealer group will say an LRBA is a financial product, and as such, the LRBA has to be on my APL, but when you look at the current providers who will loan LRBA products, most of them are not major lenders or associated with AFSL holders.

“So, most people are getting a line of credit on their mortgage and there are plenty of online administration houses available to set up the LRBA relatively inexpensively, so advisers are able to get those documents within an hour’s appointment.”

Ms Steed said the new laws, expected to pass parliament in the coming weeks, would cause problems for trustees looking to pay off their LRBA in the years approaching retirement, particularly those in the major capital cities where property values were higher.

“If you’re in South Australia, it is feasible to buy a residential investment property within 10 kilometres of the CBD for under $500,000, but in Melbourne and Sydney, if you want a two-bedroom apartment in that distance of the city, you are well in excess,” she said.

“If I’m 50 and buying that type of property in Sydney, it’s likely I will get to 65 and have an outstanding loan amount that I would be looking to extinguish with NCCs. But adding back the unpaid amount of LRBA to my total super balance puts me over the $1.6 million, which means my eligibility to make NCCs is nil.”

Ms Steed added that the only way to get around the new laws was for trustees to refinance their property with a non-related party lender, which presented its own problems.

“One of the things with going to second-tier lenders is that they might be good mortgage brokers but perhaps not know very much about super law, so their ability to advise clients as to the structure and the whole process possibly isn’t there,” she said.

“That is where they would advise the trustee to go and get professional advice, but if a lot of trustees who feel quite happy to not be advised use second-tier lenders, they are the exact type of people who wouldn’t bother to take that advice and would then fall foul of the laws.”

 

 

Sarah Kendell
29 August 2019
smsfadviser.com

 

How’s Australia doing statistically?

One great source of data about Australia. Become better acquainted with the country we love.  An up-to-date snapshot of Australia's vital statistics.  

         

 

Please click on the following link to see all this interesting information. The areas covered are:

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

 

 

tradingeconomics.com/australia

For a smoother path to investment success, diversify

The word diversification crops up in many contexts. You might hear a business person talk about diversifying revenue streams, or a footy fan mention a team’s need to assemble a group of players with diverse skills.

         

 

In a variety of arenas, people agree that diversification can improve chances for success. Investors are no different. In a recent survey of nearly 2,000 self-managed super fund investors, about 76 per cent agreed that it is important for their SMSFs to be diversified across different investment types. Yet only 39 per cent say their portfolio is very well or well-diversified.*

That’s not especially surprising. Closing the gap between theory and reality is always a challenge. Just as it’s easy to promise yourself to eat healthily but still sit down to steak, chips and ice cream too often, it’s easy to agree on the wisdom of diversification but not be certain that your portfolio achieves that goal.

Diversification protects against the risk that a share, bond or asset class will fall in value and generate losses that will prove difficult to recover from. Today’s soaring tech share could be tomorrow’s bankruptcy. By expanding the number and type of shares and bonds you own, you increase the odds that parts of your portfolio will hold their value when others fall.

A diversified portfolio is divided among asset classes such as shares, bonds and cash to achieve investors’ required returns within the limits of their risk tolerance. This formula will vary depending on an individual investor’s age, risk tolerance, time horizon and goals.

As you examine your investments, keep these diversification concepts in mind:

  • Your asset allocation, the way you divide your portfolio between different asset classes, is one of the biggest drivers of long-term performance. In other words, the specific shares or bonds you choose matter less than how much of your portfolio you devote to each of those asset classes.
     
  • Bonds are a crucial way to diversify against the risk of the share market. A portfolio invested 100 per cent in shares generated an annualised average return of 10.5 per cent over 80 years, according to Vanguard research**, but lost more than 40 per cent in its worst year. In contrast, a portfolio divided evenly between shares and bonds returned 8.3 percent on average per year, but lost only about 20 per cent in its worst year.
     
  • Investors should diversify both across and within asset classes. Once you have decided how much to put in each asset class, you should figure out how much to put into subsets of those asset classes. A diverse share portfolio, for example, should include allocations to small, medium and large companies and include international shares. 
     
  • Remember to examine your entire portfolio. If you have multiple super, or other investment accounts, consider them as a whole.
     
  • Once you have chosen an asset allocation, the ups and downs of financial markets may throw it off course. Remember to rebalance to your initial allocations to stay on course or choose a fund that does this for you.

*2019 Vanguard/Investment Trends SMSF Report
**Vanguard Portfolio Construction for Taxable Investors

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
13 August 2019
Vanguardinvestments.com.au

 

SMSF advice appetite strong, says ASIC

A new ASIC report has highlighted demand for further advice on the specifics of SMSFs among the Australian population, particularly among those who have a financial planner.

         

 

The report, titled Financial advice: What consumers really think, found that 25 per cent of consumers who had recently received financial advice wanted more guidance around SMSFs.

Around 50 per cent of financial advice customers also wanted advice on retirement income planning, while around 45 per cent wanted guidance on growing their superannuation, highlighting the potential value for accountants in establishing a referral partnership with advice businesses to tap into this demand.

Within this group of consumers who had seen a financial adviser, 45 per cent chose their adviser based on their level of experience, while about 43 per cent chose them based on their ability to understand the consumer’s personal goals.

An additional 43 per cent selected their adviser as they were someone the consumer was comfortable talking to.

However, demand for SMSF advice was not limited to those who had seen a financial planner, with 15 per cent of the broader consumer population also indicating a desire for guidance around self-managed funds.

This broader group selected their adviser based primarily on their reputation (38 per cent), their experience (41 per cent) and their ability to talk to the consumer in a way they could understand (36 per cent).

Across all respondent groups, the majority indicated that the adviser would need at least five to 10 years in the industry to be trustworthy, the report said.

 

 

Sarah Kendell
28 August 2019
accountantsdaily.com.au

 

Valuations key to avoiding NALI restrictions

SMSF trustees may find properties within their fund caught under changes to non-arm’s length income rules if the property is involved in a related-party transaction and is not professionally valued, according to a leading SMSF law firm.

         

 

Speaking at a seminar in Sydney on Wednesday, DBA Lawyers’ Shaun Backhaus said it was important that trustees and their advisers not rely on informal valuations from real estate agents if they were acquiring or disposing of a property through a related party.

“When you get the real estate agent’s appraisal, it’s typically going to be a two- or three-line letter saying, ‘Based on my appraisal, the value is this’,” Mr Backhaus said.

“I would bet that half the time, there’s also an email or text message going to your client or, even worse, you, saying, ‘How much do you want me to make this?’ So, I think that’s not really going to cut it.”

Mr Backhaus explained that in disputed cases — such as when there was a suspicion that a property had been acquired from or by a related party at less than market value — the ATO would review the instructions given to the valuer by the trustee or adviser.

If the transaction was found not to have occurred at arm’s length, income earned from the property would be subject to 45 per cent tax as per the new measures currently before parliament.

Even those who had been diligent in their instructions to their real estate agent could be caught if the valuation did not appear to be “based on objective and supportable data” as per the ATO’s guidance on the issue, Mr Backhaus said.

“If there’s an acquisition from a related party and all you’ve got is that agent appraisal and [the value has] shot up later, the ATO could say, ‘No, based on these things in the media which the agent didn’t take into account, the value should have been more’,” he said.

“I recognise clients aren’t going to want to get a $2,000 appraisal very often, but if there are any related-party transactions involved, they need to get a valuation.”

 

Sarah Kendell
14 August 2019
smsfadviser.com

 

Access to more resources and tools than most websites.

We provide 24/7 access to all these extra tools and resources to help you build on what we offer concerning your tax and other financial affairs. *

         

 

Latest News. 7-9 individual articles every month and all chosen for their relevance. Our website is a great place to stay informed.

Videos. All are relevant, interesting, educational and interesting. Videos that are changed three times a year to ensure you and your family are able to lean about many issues related financial issues and topics.

Calculators. A good range of calculators to help you better understand and manage your personal and family financial issues. Four of the more popular are: Pay calculator, Budget Calculator, Loan Calculator, and Super Calculator

Client Portals. Portals are quite common on many sites and can be used to store your data, pay bills, log onto investment systems.

Ask us a question at any time. If you have a question on any related topic then don’t hesitate to use a form on our site to ask.

Your information is private and confidential and should be treated that way. Using Secure File transfer means your information is encrypted when sent in either direction over the Internet.

Many sites also have a message window feature that displays messages of interest or that cover topics and deadlines you should be aware of.

 

* Not all are on every website.

Your Accountant

Heed restrictions on downsizer contributions

Downsizer contributions can be a valuable strategy for members who are retired or have reached their contributions caps to tip further funds into super, but advisers need to be aware of the restrictions around which property sales are eligible, according to a technical services expert.

         

 

Downsizer contributions can be a valuable strategy for members who are retired or have reached their contributions caps to tip further funds into super, but advisers need to be aware of the restrictions around which property sales are eligible, according to a technical services expert.

Fitzpatricks head of strategic advice Colin Lewis told SMSF Adviser the contributions were an ideal strategy for those who were older, no longer met the work test and couldn’t contribute any more to super through other means, as they did not count as a non-concessional contribution.

“It’s great for people who might not be able to contribute to super because they are aged 75 or more, or no longer working, or perhaps they’ve got too much in super already,” he said.

Mr Lewis said some of the common queries from advisers about the contributions were around eligibility and specifically the type of property being sold, as it made a difference to whether the contribution would be accepted.

“You get some weird and wonderful arrangements where people think they can do it — for example, someone might sell an investment property and think they can contribute, or they might subdivide a parcel of land into six but in that case they haven’t actually sold a house,” he said.

Mr Lewis clarified that downsizer contributions were only eligible if they were proceeds from a physical dwelling that was or had been a member’s main residence. 

However, beyond this there was no requirement for the member to be actually “downsizing” by moving to a smaller or lower-value home. 

“The ability to make a downsizer contribution from age 65 hinges on making the contribution within 90 days of settlement of a property that was owned for at least 10 years which qualified for the main residence exemption, so you could sell an investment property that was once your home and that would qualify,” he said.

“So, you don’t have to sell the last dwelling you’ve lived in to be able to qualify for it, but then again, you can’t just sell a straight-out investment property.”

Mr Lewis said he had also received queries about the effectiveness of the strategy for members that had already reached their transfer balance cap, but said contributing funds to accumulation stage accounts was still a tax-efficient option.

“People think if they’ve started an account-based pension and used their $1.6 million then why put more money in, but how else are they going to invest that money?” he said.

“If they are investing it outside and paying tax on their earnings, they are better off having it in accumulation phase even if they can’t get it into retirement phase.”

 

 

Sarah Kendell
30 August 2019
smsfadviser.com

 

SMSFs attract younger members

Given that self-managed super funds (SMSFs) hold more than half of the retirement dollars in super, it is easy to assume that self-managed super is dominated by older members. Not so.

         

 

In reality, a high proportion of investors establishing SMSFs are middle-aged or younger. And it seems that the average age of new SMSF members is getting younger.

The tax office's latest quarterly SMSF report shows that more than 15 per cent of investors who established SMSFs in the March quarter of 2019 were aged under 34, while a third were aged 35-44.

Indeed, 35-44 is the peak age group, by far, for establishing a self-managed fund.

Further, 80 per cent of investors who established SMSFs in the latest March quarter were under 54. And the 2019 Vanguard/Investment Trends SMSF Report notes that SMSFs are being established at lower average ages in recent years.

Other tax office statistics indicate that the age range of SMSF members – no matter whether the funds have existed for many years or setup in recent months – is widely distributed. At June 2018, 65 per cent of SMSF members were under 65.

A key financial decision for many fund members is whether to switch from a large APRA-regulated fund to an SMSF. Even the strongest advocates of self-managed super would agree that SMSFs are not for everyone – regardless of age.

Before setting up an SMSF

Some of the things to consider when deciding whether to setup an SMSF include:

  • Super balances: Unavoidable costs of running an SMSF can handicap the returns of low-balance funds. Are your super savings large enough for an SMSF to be financially viable or should you wait for a few more years until your savings are higher?
  • Knowledge: Do you have enough knowledge about sound investment practices and the legal obligations of SMSF trustees? And are you willing to take specialist professional advice when needed? (Considerations here include trustee duties, investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and investment selection.)
  • Time: Are you willing to set aside the time necessary for running an SMSF? Most SMSF trustees receive at least some professional assistance, ranging from fund administration to full financial planning.

Creating a new SMSF portfolio

A fundamental task for new SMSFs is, of course, to create an investment portfolio in accordance with their chosen asset allocation. (A diversified portfolio's asset allocation – the proportions of its total assets that are invested in different asset classes of mainly local and overseas shares, property, fixed interest and cash – spreads risks and opportunities.)

More SMSFs are taking a “core-satellite” approach to the creation of their portfolios. With this approach, the core of a portfolio is held in low-cost traditional index funds or ETFs tracking selected indices with smaller “satellites” of favoured directly-held investments (such as shares) and/or actively-managed funds.

The 2019 Vanguard/Investment Trends SMSF Report shows that of the estimated 393,000 investors holding ETFs in April this year, almost a third were SMSFs.

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
06 August 2019
Vanguardinvestments.com.au

 

 

 

 

 

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