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Power of retiree super dollars

With the waves of baby boomers now nearing or entering retirement, it is hardly surprising that the ranks of retired super members is rapidly growing. Yet the extent of that growth may surprise you.



The latest Superannuation Market Projections report, recently published by independent consultants Rice Warner, forecasts that the number of members with retirement accounts will rise by almost 70 per cent over the next 15 years to more than 3.7 million.

And the total value of retirement assets in super is expected to grow from $828.9 billion (as at June 2017) to $1.335 trillion in 2017 dollars over the same period.

However, the retirement segment of superannuation is not a story of straight-out growth. There are interesting dynamics occurring.

Rice Warner projects that retirement segment's share of total superannuation assets will reduce from 35.6 per cent today to 31 per cent over the next 15 years.

This expected dip in market share is largely due the combination of retirees drawing down on their savings, and the growth in assets and members in the accumulation phase.

An even higher proportion of retirees in future are likely to take their super benefits as a pension rather than a lump sum – further breaking down the myth that Australia is a lump-sum society in regards to super.

“With the [superannuation] industry's focus on member education, improved financial literacy of the general population, and retirement products aimed at helping members preserve retirement assets, we expect a decrease in the rate of lump sum benefits at retirement,” Rice Warner comments.

Over the next 15 years, the proportion of members taking their super as pensions rather than lump sums is expected to reach 90 per cent, “resulting in a positive cash flow in the long term” for super's retirement sector.

It is anticipated that the biggest change will occur in the market share of the retirement dollars held by the different superannuation fund sectors.

Rice Warner forecasts that the market share of retirement assets held by the various fund sectors to significantly change over the next 15 years to: SMSFs, 44 per cent (58 per cent today); industry funds, 18.9 per cent (7.6 per cent today); commercial retirement products, 29.4 per cent (26.1 per cent today); public-sector funds, 7.8 per cent (7 per cent today); and corporate funds, nil per cent (1.3 per cent today).

The expected reduction in the proportion of retirement superannuation dollars held in self-managed super is readily understandable given that SMSFs hold by far the biggest market share of retiree super savings. SMSFs will therefore experience the largest proportion of retirement drawdowns.


Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
19 January 2018

‘Read the tea leaves,’ brace for cryptocurrency regulation, advisers told

Despite crytpocurrency not being regulated as a financial product, the requisites of best interests duty still strictly apply as the regulators circle, advisers are being told. 



Some information about SMSFs, cryptocurrency and compliance. 

As reported earlier this month, SMSF professionals are seeing a notable rise in interest and investment around cryptocurrencies, even with traditionally conservative clients.   You can read more about the obligations for financial advisers when discussing cryptocurrency with clients here.

Compliance consultants Assured Support are encouraging financial advisers to proceed with caution, and be particularly wary of their professional obligations when advising on cryptocurrency despite the loose regulatory framework around options like bitcoin and ethereum.

“If you’re an adviser who doesn’t want to recommend cryptocurrencies but your client comes and asks you to include them in the portfolio, then you have a best interests duty to address that,” Assured Support principal Sean Graham told sister publication ifa.

“There are some advisers saying they can recommend it because it’s not a financial product, well, it may be in some circumstances and if you read the tea leaves, it’s going to be more highly regulated in the future,” he added.

From a compliance perspective, cryptocurrency can be held in an SMSF, but there are a range of compliance considerations, which you can read more about here


By: Killian Plastow and Katarina Taurian
​30 JANUARY 2018


Where Australia is at. Our leading indicators.

While dry and not that exciting, stats on how Australia is going in regard to a vast range of important issues can be very illuminating.



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How will downsizer contributions work for SMSFs?

With downsizer contributions coming into effect on 1 July 2018, what are some tips and traps for SMSFs and their members.



To reduce pressure on housing affordability, downsizer contributions provide an incentive for super fund members aged 65 years or older to sell a main residence. The Treasury Laws Amendment (Reducing Pressure On Housing Affordability Measures No. 1) Act 2017 (Cth) which introduces downsizer contributions received royal assent on 13 December 2017.

Downsizer contributions comes into effect on 1 July 2018 and members intending to make downsizer contributions can enter into a contract of sale from this date. In preparation of this we should consider two key questions:

  • How do downsizer contributions work?
  • What are some tips and traps for SMSFs in utilising downsizer contributions?

How do downsizer contributions work?

There are four broad steps that need to be taken if a member would like to be eligible to make downsizer contributions.

Step 1: Eligibility
The first step the member needs to take is to confirm that their contributions will be eligible downsizer contributions. Broadly, an eligible downsizer contribution is where:

  1. the contribution is made to a complying super fund by a member aged 65 years or older;
  2. the amount is equal to all or part of the capital proceeds received from the disposal of an ownership interest in a dwelling that qualifies as a main residence in Australia, under the downsizer provisions;
  3. the member or the member’s spouse had an interest in the main residence before the disposal;
  4. the interest in the main residence was held by:
    • the member;
    • the member’s spouse;
    • the member’s former spouse;
    • a trustee of the estate of the member’s deceased spouse;

      during the 10 years prior to the disposal; and

  5. The member has not previously made downsizer contributions in relation to an earlier disposal of a main residence.

Note that a caravan, houseboat or other mobile home does not qualify as a main residence for these purposes.

The member should determine whether they are eligible to make downsizer contributions and whether their main residence satisfies the above criteria prior to the disposal of the main residence.

Step 2: Contributions

Upon the sale of a main residence a member can make up to a maximum of $300,000 in contributions to their super fund. Further, there is no age limit or gainful employment test that needs to be satisfied (however many SMSF deeds will preclude such contributions and an SMSF deed update is likely to be required). These contributions are not counted towards the relevant member’s contributions caps or total superannuation balance in the financial year a downsizer contribution is made.

Once the member sells their main residence, they are required to make downsizer contributions to their super fund within 90 days after the day the ownership changed (typically 90 days from settlement). An approved form should be completed and given to the trustee of the super fund detailing the amount that is to be attributed to downsizer contributions. While multiple downsizer contributions in respect of the sale of the same residence can be made, the total amount of downsizer contributions made by each member cannot exceed $300,000. This total amount includes the amount of all downsizer contributions a member makes in respect of all of their superannuation funds.

It is important to note that the $300,000 downsizer contribution cap is for only one member, therefore this would potentially allow for additional contributions of $600,000 for a couple (ie, 2 x $300,000).

Given this 90 day timeframe, a member cannot make downsizer contributions if settlement is, for instance, on vendor terms that go beyond 90 days unless they have been granted an extension from the ATO.

Step 3: Reporting and Verification

Upon the super fund’s receipt of the downsizer contribution form the super fund must inform the ATO during the super fund’s annual reporting. The ATO will then run verification checks on the amount and may contact the member for further information.

If the ATO has verified that the member has made eligible downsizer contributions, no further action is taken.

However, if the contribution does not qualify as a downsizer contribution the ATO notifies the superannuation provider. The amount will then either be allocated as a non-concessional contribution — if permitted by superannuation law and may result in the member exceeding their cap — or refunded to the member.

What are some tips and traps for SMSFs and their members?

SMSF Deed Provisions

As the downsizer contribution is a new type of contribution, the SMSF’s deed should have express wording that allows members to make these contributions to the fund, especially as a member over 65 years may not be gainfully employed and in many cases a member may be in excess of 75 years (and to date contributions cannot generally be made for such members under reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 (Cth)). Additionally the SMSF deed should provide appropriate mechanisms in resolving what happens when a downsizer contribution is deemed ineligible by the ATO. As a matter of reporting, the SMSF will need to receive approved downsizer contribution forms from the SMSF and report those contributions to the ATO.

Age Pension

Additionally, members should note that disposing of their main residence and contributing downsizer contributions to their super fund may adversely impact on their Centrelink entitlements. Broadly, the age pension provided by Centrelink is assessed against, among other things, an assets test. A person’s family home is generally not included in the assets test, however superannuation savings are included once a member reaches pension age. This means that if a member disposes of their main residence and make a downsizer contribution, the member may either be:

  • subject to reduced age pension payments; or
  • no longer eligible to receive any age pension payments altogether.

Further adverse impact on other government entitlements may also follow as a result of the greater level of superannuation assets. This aspect will significantly reduce the attractiveness of the downsizer provisions for many who would otherwise be interested in the scheme.

Proceeds and Borrowings

It is important to note that the downsizer contributions cap is the lesser of $300,000 or the sum of the capital proceeds. Any debt outstanding on a mortgage over the relevant property is not considered for the purpose of determining the capital proceeds.

For example, John bought his main residence 12 years ago for $1 million. He then sells for $1.25 million when his outstanding borrowings are $1 million.

John received capital proceeds of $1.25 million. Thus, John can make downsizer contributions up to $300,000.

Members should also be aware that downsizer contributions are not deductible.


By Christian Pakpahan, lawyer and Daniel Butler, director, DBA Lawyers
12 JANUARY 2018


New Year resolutions, New Year strategies

Stop procrastinating. These two words can provide an excellent starting point for investors who are determined to set meaningful resolutions and strategies for 2018 and beyond.



Behavioural economists have long warned that the common traits of procrastination and inertia can be highly detrimental to investors.

Most of us would recognise the long-term rewards of setting realistic investment goals, creating an appropriately-diversified portfolio and saving more for retirement. Yet even with the best intentions, we may never quite get around to it.

In short, we procrastinate and waste opportunities to improve our chances of investment success.

Each of the following points should help investors break through their investment and personal finance inertia:

Increase your regular super contributions from the beginning of the New Year: This is a straightforward way to tackle your inertia and procrastination. Are you making the highest salary-sacrificed and tax-deductible contributions that you can afford? For 2017-18, the concessional contributions cap for all eligible members is $25,000.

Cut your investment costs: One of the simplest ways to increase your chances of investment success is to cut your investment costs. As the majority of higher-cost actively-managed funds have struggled to beat their benchmarks, low-cost traditional index funds and index-tracking exchange traded funds (ETFs) are surging in popularity. (Recent ASX research shows that the market capitalisation of Australian-listed exchange traded products, most being index ETFs, reached $35.25 billion by the end of November – up from less than a billion dollars a decade ago.)

Consider adopting a total-return approach: This approach should help prevent retirees in particular from falling into the trap of abandoning carefully-diversified portfolios in an effort to boost a portfolio's income in this more challenging low-interest, lower-return environment. (See Vanguard's latest economic and investment outlook.) A total-return approach focuses on both the income and capital growth generated by a portfolio. This approach should help maintain a portfolio's diversification, allow more control over the size and timing of portfolio withdrawals and increase a portfolio's longevity.

Tick-off investment fundamentals: Early in 2018, check whether you have the fundamentals of sound financial planning/investing practices covered. These include: Set clear and achievable goals, create an appropriately-diversified portfolio and, once again, minimise investment costs.

Build-up your mortgage buffer: Homebuyers who make higher repayments than the minimum required develop buffers to help cope with future rate rises and unexpected financial setbacks. The Reserve Bank's holding of the official cash rate at a record low of 1.5 per cent highlights this sustained opportunity to build your mortgage buffer.

Aim to eliminate your debt before retirement: Ideally, we should enter retirement with our mortgages paid off and without any other debit. This should leave us open to spend our retirement income on financing our lifestyle. Unfortunately, various research shows “grey debt” is rising at a time when waves of baby boomers are retiring.

Keep your credit card under control: Disciplined consumers pay off their total credit card bill each month to avoid any interest and minimise the credit limit on their cards to reduce the temptation to overspend. The Australian Bureau of Statistics reports that the average pre-Christmas credit card limit was more than $9000; that's a hefty amount of repay at high interest rates for those who “max out” on their cards.

Finally, make sure your resolutions/strategies for 2018 and beyond are achievable given your circumstances. By setting the bar unrealistically high, you will face almost certain disappointment.

Have a prosperous New Year.

Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
12 January 2018

Business confidence hits 5-month high: NAB

NAB’s business confidence index jumped four points in December as business confidence and business conditions begin to converge.



According to the latest results of NAB’s monthly business survey, business confidence has “almost” caught up to business conditions.

The business confidence index rose four points to 11 index points in the December 2017, the highest level since July 2017 – while the business conditions index remained unchanged at 13 points.

“This has helped to narrow the perplexing gap between business conditions and confidence evident over the past couple of years, and is an encouraging signal for investment,” NAB group chief economist Alan Oster said in a statement. 

Source: NAB

The higher reading in business confidence was “perhaps driven by a stronger global economic backdrop”, as well as strong conditions across all industries bar retail.

“The construction industry is performing well, thanks to support from a large pipeline of residential construction and stronger non-residential building approvals,” Mr Oster said.

“Mining has also gone from being a major drag on the index to experiencing above average business conditions.

“The retail sector meanwhile continues to struggle with slightly negative business conditions, indicating a modest rate of contraction in the industry.”

Retail stood as the only industry that was a “consistent underperformer” and reporting negative business conditions.

Mr Oster also pointed out that employment growth figures were overstated and falling from its “current extraordinary heights”.

“Official employment figures show extraordinary employment growth of over 400,000 over the year to December,” he said.

“The NAB Business Survey employment index on the other hand has not experienced the same wild swings in recent years, and tends to suggest the official figures may be currently ‘overstating’ the degree of job creation.

“The employment index implies employment growth of a little less than 300,000 at present, and a slowdown to around 240,000 per annum over the next six months, or a monthly pace of around 20,000 per month.”


Source:  NAB
Wednesday, 31 January 2018


Become a better investor through your holiday reading

Behavioural economist Daniel Kahneman – who teaches us to control our damaging behavioural traits to become better, more-disciplined investors – continues as a powerful force on the best-seller lists as 2017 draws to a close.



Kahneman's Thinking, fast and slow has been on The New York Times bestselling non-fiction paperback list for 147 successive weeks or almost three years. It is currently ranked seventh on the weekly list ending November 18 – even outselling the acclaimed American biography Alexander Hamilton by Ron Chernow, the subject of a hit Broadway show.

Meanwhile, The undoing project by Michael Lewis – number two on this best-selling list – tells the intriguing story behind the pioneering studies of Kahneman and fellow psychologist Amos Tversky into the psychology of economic or financial decision-making.

If you are going to spend time over any summer break reading about how to improve your chances of investment success, your reading list is likely to include books on how to keep wealth-destroying behavioural biases under control.

Some titles appear on Smart Investing's holiday reading list year after year. Some of the best investment books seem to improve with age – just like a good red. And as we develop as investors, the points made in these books tend to make more sense.

If you read a few of the suggested books last year, think about rereading them.

The best investment/personal finance titles tend to give pointers about how to accumulate wealth slowly and progressively through an understanding of the fundamental principles of sound saving and investment practices. Avoid sensational books that claim to offer ways to get-rich-quick; these can act as guides to quickly losing money.

Here are a few titles to consider adding to your reading list for summer 2017:

  • Thinking, fast and slow by Daniel Kahneman: A winner of the Nobel Prize for economics, Kahneman points to the many flaws in financial decision-making – including overconfidence and excessive loss aversion (inhibiting appropriate risk-taking and encouraging a short-term focus) – that can have costly consequences for an investor. His views underline the benefits of having an appropriately-diversified portfolio while avoiding the traps of market-timing, stock-picking and making emotionally-charged investment decisions. “Much of the discussion in this book is about the biases of intuition,” he writes.
  • The only investment guide you'll ever need by Andrew Tobias: His overall message is to take a common-sense approach to looking after your investments and other personal finances. For example, only buy investments you can understand, avoid investments that seem too good to be true, and don't have credit card debt. This book was first published 39 years ago.
  • The behaviour gap – Simple ways to stop doing dumb things with money by Carl Richards: This is an entertaining, easy-to-read guide by a financial planner turned personal finance columnist to keeping our negative behavioural traits under control when saving, investing and spending. His tips include: adopt strategies to avoid buying shares at high prices and selling low, don't spend money on things that don't really matter, identify your real financial goals and simplify your financial life.
  • The millionaire next door by Thomas Stanley and William Danko: Long-term research by late academics Stanley and Danko suggests that “prodigious accumulators of wealth” are typically content to progressively build their wealth while being inconspicuous in their spending. In other words, these wealth accumulators are not in a hurry to make their money by taking excessive risks or in a hurry to spend their money. Conspicuous consumption should not be taken as a sign of wealth – it often means the opposite.
  • A random walk down Wall Street: The time-tested strategy for successful investing by Burton Malkiel: The basic theme behind this classic is Malkiel's argument that investors – individuals and professionals – cannot not expect to consistently outperform the market. Given that belief, Malkiel, a Princeton University economics professor, is a firm believer in investing in market-tracking index funds (including ETFs), dollar-cost averaging (regularly investing set amounts), appropriate portfolio diversification, periodic portfolio rebalancing and low-cost investing. And he emphasises the need for investors to understand the risks of irrational behaviour.
  • The little book of common sense investing by Jack Bogle: As Bogle writes, “successful investing is all about common-sense”. Don't try to pick the best time to buy and sell stocks – consistent success with market-timing is rarely achieved; diversify to minimise risks (and spread opportunities); recognise the rewards of compounding, long-term returns; and keep investment costs low. “The more the managers and brokers take, the less investors make,” Vanguard's founder writes.
  • If you have trouble putting down such fictional thrillers as The Midnight Line by Lee Child, the latest adventure of retired colonel Jack Reacher, perhaps try something different – a novel with a personal finance theme.
  • As personal finance author Paul Brown comments in The New York Times: “If we're lucky enough to get away for a few days, do we actually want to take a book about investing to the beach?”
  • Brown's favourite new novel with a personal finance twist is The Windfall by Diksha Basu. This is the story of a middle-aged Indian business owner who suddenly becomes rich after selling his website for many millions.

His once satisfying lifestyle is lost as he turns into a conspicuous consumer, moving to an upmarket suburb and imitating his new big-spending neighbours. As Brown writes, this book may prompt you to think about why you are trying to accumulate wealth in the first place.


Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
01 December 2017

Technical expert flags top 3 traps with CGT relief

While SMSF practitioners may be familiar with the rules for CGT relief, there are some key areas where professionals are hitting snags with the practical aspects of applying the relief, says a technical expert.



SMSF specialist and former Perpetual Private head of strategic advice Colin Lewis said there is still a distinct lack of understanding of the CGT relief that will need to be addressed early in 2018.

“The irrevocable election needs to be made by the time the fund’s return is due in, which is either the end of February or in May,” said Mr Lewis.

What method should trustees claim the relief under?

One of the areas causing confusion is determining which method the fund will claim CGT relief under. Mr Lewis explained that this comes down to the way in which the fund was claiming exempt current pension income at 9 November 2016.

“That dictates going forward what method you use. So right at the outset at a very elementary level, were you a segregated fund or were you an unsegregated fund at 9 November 2016?” explained Mr Lewis.

If the fund was segregated then there will be two options available, he said.

“Now in all likelihood, the most attractive one is where the fund became a proportionate fund because it means they can then apply the CGT relief to any or all the fund assets, rather than to just to a specific asset that they’ve commuted back,” Mr Lewis said.

What date should be used?

The date that should be used is also confusing practitioners, as they may have made a contribution before 30 June, he said.

“If you were segregated at 9 November and you become unsegregated on 30 June, then all well and good, but where you put a contribution into the fund during that period, and you didn’t specifically segregate that contribution, then it becomes unsegregated as of the date of the contribution,” Mr Lewis explained.

This may have happened in circumstances where the members wanted to utilise their last opportunity to contribute the $540,000 worth of non-concessional contributions into superannuation, he said.

“So [in those cases], that’s the date that you’re actually using for the cost base reset, not the 30th of June,” Mr Lewis said.

Is the fund eligible?

One of the biggest areas of misunderstanding is around eligibility for the relief, where a proportionate fund became fully segregated, he said.

If there is a member in pension and a member in accumulation within a fund and the member in accumulation went fully into pension phase during the year, the fund may not be eligible for the relief, Mr Lewis warned.

“One of the criteria of the CGT relief for a proportionate fund is that you don’t become segregated at any time. So if the fund does become fully segregated by moving fully into pension phase during the year, then you are ineligible for CGT relief,” he said.

“[Also] if you had a segregated fund, on the other hand, and you didn’t commute the excess amount during the [2016-17 financial] year, then you haven’t become unsegregated and you won’t be able to apply the relief.”


By: Miranda Brownlee
21 December 2017

As share prices rise, the risk-return trade-off gets tricky

Part of Vanguard's Global Macro Matters research series.



In the eight and a half years since the lows of the global financial crisis, the Standard & Poor's 500 Index has climbed more than 250%, making the current bull market the second strongest – and the second longest – since 1926 (see Figure 1).

The dot-com boom of the 1990s, when the index climbed more than 400% over nine and a half years, holds the record in both categories. This comparison raises inevitable and uncomfortable questions. Can the bull market continue to charge much higher? And, more important, are we in a late-1990s-style bubble, when valuations reached record highs and share prices subsequently plunged by 50%?1

Figure 1. The S&P 500 is in its second-strongest bull market

Notes: Data shown are for the S&P 500 Index from 1 January 1950 through 23 October 2017. “Bear market” is defined as a period with a decline of 20% or more from the previous high. Sources: Vanguard calculations, using data from FactSet and Bloomberg.

Our analysis finds that:

  • Traditional valuation metrics, such as CAPE (cyclically adjusted price/earnings ratio), paint an alarming – but incomplete – picture when compared with long-term averages. Vanguard's “fair value” CAPE, a more useful measure for assessing over- or undervaluation than traditional metrics, suggests that while shares are trading above fair value, they aren't yet near the extremes reached in the dot-com high.
  • Even so, our five-year outlook for US equities is subdued at best, and the benefits of global diversification are particularly compelling because of better prospects for non-US equity markets. Our simulations show that, under current market conditions, a globally diversified 60% stock/40% bond portfolio may offer return prospects that are on par with an all-US equity portfolio, while having significantly less tail risk.2

Conventional valuations are unusually high
Price/earnings (P/E) ratios are an important signal to identify periods of equity market overvaluation and even bubbles, when market prices become completely detached from corporate fundamentals such as dividends, book value and earnings. While valuations are not a good market-timing tool, elevated valuations are typically followed by depressed returns over the following decade. After reaching a CAPE multiple of 44x in 2000, the S&P 500 Index returned a cumulative -8% over the subsequent “lost decade.”

Whether we use one-, three-, five-, or ten-year average earnings in the denominator, P/E ratios are quite high. The four valuation ratios in Figure 2a are between the 89th and 95th percentiles relative to their historical levels. The CAPE is at the 95th percentile of its historical levels. As Figure 2b shows, it stands at 31x, just below two standard deviations from its long-term average of 18x since 1926. By just about any conventional measure, equities are overvalued.

Figure 2. The S&P 500 Index is unusually high relative to history

Note: Analysis above is for the S&P 500 Index since 1926. Sources: Vanguard calculations, based on Robert Shiller's website, at

The fair-value CAPE tells a less alarming tale
While the levels in Figures 2a and 2b seem alarming, a straight comparison of CAPE (and other valuation multiples) with their historical averages can be misleading. Such comparisons fail to account for changes in the economy and markets, including inflation levels and interest rates that can influence the fair values for these multiples. For example, a secular decline in interest rates and inflation pushes down the discount rates used in asset-pricing models, thus inflating P/E ratios. In this case, a high CAPE may indicate not overvalued stock prices, but low bond yields. At the 2017 CFA Institute Annual
Conference, professors Robert Shiller, creator of the CAPE, and Jeremy Siegel cited low interest rates as a possible partial explanation for elevated CAPE ratios.

In Vanguard's Economic and Investment Outlook for 2015, we introduced a fair-value CAPE that accounts for current interest rates and inflation levels.3 This fair-value concept provides a more useful time-varying benchmark against which the traditional CAPE ratios can be compared.

Figure 3 plots the Shiller CAPE versus our fair-value model since the 1950s. In the late 1990s, the difference between these two would have suggested a bubble. Today, the CAPE is approaching historical highs, it's only marginally higher than our estimate of its fair value. In other words, the
market, going by the fair-value CAPE, is approaching overvalued territory – but it is not grossly overvalued, as it would be in a bubble.4

Figure 3. The Shiller CAPE is approaching overvalued territory

Notes: Fair-value CAPE is based on a statistical model that corrects CAPE measures for the level of inflation expectations and for lower interest rates. The statistical model specification is a three-variable vector error correction (VEC), including equity-earnings yields (S&P 500 Index), ten-year trailing inflation, and ten-year US Treasury yields estimated over the period from January 1940 to September 2017. For details, see Vanguard's Economic and Investment Outlook. Sources: Vanguard calculations, based on Robert Shiller's website, at; the US Bureau of Labour Statistics; and the Federal Reserve Board.

Implications of high US equity prices, low yields
Even if comparisons with the late-1990s share market bubble are too extreme, our analysis suggests that US equity returns during the next five to ten years will be subdued at best. Today, the always-compelling case for global diversification is particularly strong. Consider the results from our Vanguard Capital Markets Model (VCMM) simulations:

  • US equity seems set for lower returns and a higher risk of loss. As illustrated in Figure 4, our five-year US equity return simulations show roughly a one-in-three chance of surpassing a 5% annualised return. The probability of a 10% or worse decline in any given year is 69%, which is high relative to the historical probability (42%).
  • Global diversification improves outlook. Relative to US equity, global equity (60% US equity/40% global ex-US equity) offers better potential for return with slightly lower odds of a 10% or worse decline in any given year. Investors with no allocation to global equity can benefit by diversifying globally.
  • Global bonds enhance diversification, limit tail risk. A global balanced 60% stock/40% bond portfolio has similar potential for return as US equities, with much lower downside risk. Although global bonds are likely to have muted returns themselves, low correlation with equities provides a ballast during times of equity market turmoil, making diversification the only free lunch.

Figure 4. The benefits of global diversification are more compelling than usual

Notes: Summary statistics of 10,000 VCMM simulations for projected five-year annualised nominal returns as of September 2017 in US dollars before costs. Historical probabilities are probabilities of a 10% or worse decline in any given year for rolling five-year periods and are calculated from 1960 onward based on calendar-year returns. The global equity portfolio is 60% US equity and 40% global ex-US equity. The global bond portfolio is 70% US bonds and 30% global ex-US bonds. Balanced portfolios include global equity and global bonds. For VCMM details, see Vanguard Global Capital Markets Model.2

Investing is always a balancing act between return objectives and risk preferences. Given current valuations, risky portfolios appear to offer low return with even-higher-than-usual odds of loss, while a global balanced 60% stock/40% bond portfolio offers an unusually compelling trade-off. The next few years could be challenging for investors, who may have to navigate an environment with low returns and a compressed equity risk premium.

Decisions around saving more or spending less will be as important as staying diversified and controlling costs. Adhering to investment principles such as long-term focus, disciplined asset allocation, and periodic portfolio rebalancing will be more crucial than ever before.


Research & Commentary


1 The CAPE ratio rose more than three standard deviations above its long-term average in the late 1990s and early 2000s, and thus the period can be considered extremely overvalued or a bubble.
2 Joseph Davis, Roger Aliaga-Díaz, Harshdeep Ahluwalia, Frank Polanco, and Christos Tasopoulos, 2014. Vanguard Global Capital Markets Model. Valley Forge, Pa.: The Vanguard Group.
3 Joseph Davis, Roger Aliaga-Díaz, Andrew Patterson, and Harshdeep Ahluwalia, December 2014. Vanguard's Economic and Investment Outlook. Valley Forge, Pennsylvania: The Vanguard Group.
4 One important point to keep in mind is that as the depressed company earnings of the 2008-2009 global financial crisis begin to roll out of the ten-year moving average calculation next year, the Shiller CAPE could fall slightly (to around 28x, assuming current prices and earnings don't change much).

UPDATE: Australia’s vital statistics

Keep up to date regarding how our great country is traveling.  Almost 150 different items covered. 



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

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