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Your guide to smarter holiday reading

Given all of the talk about many Australians being apathetic about their superannuation, it seems counter-initiative that one of the fastest-selling books ever in Australia is about how to improve your personal finances.

           

 

Nielsen BookScan names The Barefoot Investor by Scott Pape as a top three contender to become the overall best-selling book (fiction and non-fiction) in Australia for 2018.

The Barefoot Investor was the overall best-selling book in Australia in 2017 and is the best-selling non-fiction book in Australia since Nielsen began surveying our market.

The fact that an Australian personal finance book can beat the big-name international thrillers from the likes of John Grisham and Tom Clancy suggests that many of us really care about our personal finances.

Twice this year, The New York Times has published feature stories about the phenomenon of The Barefoot Investor.

In June, the paper published an article, Australians can’t get enough of the Barefoot Investor, by Australian journalist Amelia Lester. As Lester writes, Pape’s “folksy manner delivers down-home truths”. These include avoid trendy investments, reduce your debts and don’t become overexposed to overvalued property.

And in September, The New York Times published the second piece, I highly recommend joining this cult, by another Australian journalist Lisa Pryor.

Pryor, as does Lester, emphasises the sheer popularity of The Barefoot Investor – selling well over a million copies (and fast climbing) in a country the size of Australia. (The first edition was published two years ago.) No wonder she calls it a “cult”.

In her opening paragraph, Pryor neatly summarises what the book’s about: “It’s called common sense. Don’t live beyond your means. Don’t borrow what you can’t repay. Don’t charge what you can’t pay off when the bill comes due. It’s how our parents lived. Don’t try to keep up with the Jones. I guarantee the Jones are likely in hock.”

Most titles on Smart Investing’s annual holiday reading list appear year after year with good reason. These are the personal investment classics. If you read some of the suggested books last year, why not reread your favourites?

The best investment/personal finance titles tend to give pointers about how to accumulate wealth slowly and progressively through an understanding of sound saving and investment practices.

Here are eight to consider adding to your reading list for summer 2018:

  • 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). His views underline the benefits of having an appropriately-diversified portfolio while avoiding the traps of market-timing, trying to pick future winners on the share market and making emotionally-charged investment decisions. He strongly warns about the “biases of intuition”.
     
  • 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 instance, only buy investments you can understand, avoid inestments that seem too good to be true, and don’t have credit card debt.
     
  • The behaviour gap – Simple ways to stop doing dumb things with money by Carl Richards: The central message of this entertaining, easy-to-read guide by a financial planner turned personal finance columnist is to keep 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 by Burton Malkiel: The basic theme of this classic is that investors – individuals and professionals – cannot expect to consistently outperform the market. Malkiel, a Princeton University economics professor, favours 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 too 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 returns; focus on long-term returns; and keep investment costs low.
     
  • The Intelligent Investor by Benjamin Graham: Warren Buffett has long named this as “by far the best book about investing ever written”. Graham believed that an intelligent investor was patient, disciplined, a keen learner and determined to keep emotions under control. Buffett writes in the preface to the current edition: “What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” That’s what Graham is all about. Graham famously introduced the fictional character “Mr Market”. In short, Mr Market – that is the share market” – is an emotional, often irrational character with plenty of highs and lows.
     
  • The Barefoot Investor by Scott Pape: This serves as both a valuable starter guide to personal finance and investment, yet its common-sense principles also apply to experienced investors.

 

Supplied by Robin Bowerman
Head of Corporate Affairs at Vanguard.
18 December 2018
vanguardinvestments.com.au

 

Global outlook summary: Down but not out

As the global economy enters its tenth year of expansion following the global financial crisis, concerns are growing that a recession may be imminent. 

         

 

Although several factors will raise the risk of recession in 2019, a slowdown in growth – led by the United States and China – is the most likely outcome. In short, economic growth should shift down but not out.

We expect the global economy to continue to grow, albeit at a slightly slower pace, over the next two years, leading at times to so-called growth scares. In 2019, US economic growth should drop back towards a more sustainable 2% as the benefits of expansionary fiscal and monetary policy abate. Europe is at an earlier stage of the business cycle, though we expect growth there to remain modest.

In emerging markets, China's growth will remain near 6%, with increasing policy stimulus applied to help maintain that trajectory. Unresolved US-China trade tensions remain the largest risk factor to our view, followed by stronger-than-expected tightening by the US Federal Reserve should the US unemployment rate drop closer to 3%.

Global inflation: Unlikely to shoot past 2%

Previous Vanguard outlooks have rightly anticipated that the secular forces of globalisation and technological disruption would make achieving 2% inflation in the United States, Europe, Japan and elsewhere more difficult. In 2018, we accurately projected a cyclical firming in core inflation across various economies. In 2019, we do not see a material risk of further strong rises in core inflation despite lower unemployment rates and higher wages. This is because higher wages are not likely to funnel through to higher consumer prices, as inflation expectations are likely to remain well-anchored.

In the US, we expect core inflation to remain near 2% and even weaken by the end of 2019; an escalation in either tariffs or oil prices would probably affect US core inflation only temporarily. In Europe and Japan, price pressures are likely to increase gradually as labour market slack erodes, though core inflation is likely to stay well below 2%. Higher wages are likely, yes, but higher inflation is not.

Monetary policy: Convergence commences, with the Fed stopping near 3%
As inflation moves towards central banks' target, financial-stability risks rise and unemployment rates continue to approach or drop below estimates of full employment, global central banks will stay on their gradual normalisation paths.

In the United States, we still expect the Fed to reach the terminal rate for this cycle in the summer of 2019, bringing the policy rate range to 2.75%–3% before halting further increases in the face of nonaccelerating inflation and decelerating top-line growth. Other developed markets central banks, though, will only begin to lift interest rates from post-crisis lows. We expect the first rate increase from the European Central Bank in September 2019, followed by a very gradual hiking path thereafter. Japan is late to the party and we do not expect any rate increases in 2019, though some fine-tuning of its policy framework is likely to ease the financial-stability risk. Emerging markets countries don't control their own destiny and will be proactively forced to tighten along with the Fed, while China is able to buck the trend with the help of tightened capital control and further modest currency depreciation.

Investment outlook: No pain, no gain
With slowing growth, disparate rates of inflation and continued policy normalisation, periodic bouts of volatility in equity and fixed income markets are likely to persist and perhaps accelerate. Our near-term outlook for global equity markets remains guarded, but a bear market would not appear imminent given that we do not anticipate a global recession in 2019. Risk-adjusted returns over the next several years are anticipated to be modest at best, given the backdrop of modest growth and less accommodative policy.

But all hope is not lost. Longer-term, our ten-year outlook for investment returns is beginning to slightly improve when we factor in higher short-term interest rates across major developed markets. This is the first (modest) upgrade in our global market outlook in more than ten years.

US fixed income returns are most likely to be in the 2.5%–4.5% range, driven by rising policy rates and higher yields across the maturity curve as policy normalises. This results in a global fixed income return outlook of 2.2%–4.2% for US-dollar-based investors compared with last year's outlook of 1.5%–3.5% – albeit still more muted than the historical precedent of 4.7%.

Returns in global equity markets are likely to be about 5%–7% for US-dollar-based investors. This remains significantly lower than the experience of previous decades and of the post-crisis years, when global equities have risen 12.6% a year since the trough of the market downturn. We do, however, foresee improving return prospects building on slightly more attractive valuations (a key driver of the equity risk premiums) combined with higher expected risk-free rates.

As was the case last year, the risk of a correction for equities and other high-beta assets is projected to be considerably higher than for high-quality fixed income portfolios, whose expected returns over the next five years are positive only in nominal terms.

In our upcoming annual economic and market outlook, we'll further define our expectations for the global markets in 2019 and beyond.

 

Supplied by Robin Bowerman
Head of Corporate Affairs at Vanguard.
06 December 2018
vanguardinvestments.com.au

 

Hungry for income? Choose carefully.

When you are working or looking for a job, it’s only natural to think about the size of your paycheck. After all, you need to pay your bills, and it always helps to have a little extra.

         

 

The same need exists in retirement. But in both situations, focusing excessively on income can be a mistake. For example, taking the job that pays the most may lead you to choose work you don’t like or fail to consider your desired lifestyle.

In retirement, overemphasising income-producing investments can also lead to costly errors. Proof of these risks surfaced again a few weeks ago when — for the second time in a year — U.S. industrial giant General Electric slashed its quarterly dividend from 12 cents to 1 cent following news of a criminal accounting probe.

It’s often difficult to break the habit of fixating on income. We spend our working years trying to amass enough to retire. Our minds concentrate on a number — $1 million, for example — that will allow us to stop working. Psychologically, it becomes challenging to shift to spending that money, so many retirees try to live off portfolio income only.

History also encourages an income focus. When interest rates were high, many retirees could count on interest and dividends to pay their bills without dipping into principal. But as interest rates declined, so did income. In the last decade, the yield on a globally diversified portfolio split evenly between shares and bonds fell from nearly 5 per cent to 2.5 per cent, a 50 per cent decline in income, according to Vanguard research.

Investors may try to close this gap by overweighting income-producing or defensive assets, but let’s look at how these strategies can unwittingly increase risk:

Moving money from fixed income into shares that pay high dividends. This choice can increase portfolio volatility for a simple reason: Shares are riskier than bonds. When share prices fall, investment-grade bonds tend to rise in value, cushioning a portfolio. Also, shares that pay higher dividends tend to be value, as opposed to growth, shares and are concentrated in certain industries, such as financials. As a result, boosting allocations of dividend-paying stocks can reduce diversification and increase vulnerability to sector downturns — exactly the opposite of what the investor hopes to achieve.

Replacing investment-grade bonds with higher-yielding bonds. Higher-yielding bonds can be as volatile as shares, so this strategy also sacrifices downside protection for the potential of higher income. Bonds that pay above-average rates of interest are riskier credits. That’s why they are often called junk bonds. During periods of economic turmoil, default rates on lower-quality bonds increase, causing them to fall in value, often in tandem with shares.

Overweighting term deposits and cash while underweighting bonds. Shifting money toward safe bank accounts is tempting. But while term deposits and cash protect principal, they don’t offer capital appreciation in troubled times. When interest rates fall, bank deposits usually earn less money, but investment-grade bonds often increase in value, providing reassuring ballast when shares decline.

The pitfalls of these choices are many, which is why we advocate a total-return strategy, which involves creating a diversified portfolio in line with your financial goals. That way, you base withdrawal amounts on income and capital appreciation.

Compared to the income approach, total-return investing gives you flexibility. You can adjust spending and withdrawals based on overall portfolio growth instead of depending only on the income the investments yield. Total-return investors avoid the downsides of overemphasising income and enhance their ability to reach their goals.

Many investors can benefit from getting professional advice when making these decisions. If you’re looking to learn more about total-return investing, our paper, “From assets to income: A goals-based approach to retirement spending”, can help.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
13 November 2018
vanguardinvestments.com.au

Franking credit policy to dent retirement savings by 15 per cent

Data analysis based on a 20-year time frame indicates that Labor’s franking credit proposal could reduce retirement savings by 15 per cent for SMSFs with an average balance.

       

 

In a submission to the standing committee on economics, SuperConcepts said that data analysis confirms that lower income retirees will be hit hardest by the removal of franking credit refunds.

Data analysis undertaken by SuperConcepts indicates that for a retiree with an account-based pension receiving the minimum pension amount of $45,000 per annum at age 65, the removal of franking credit funds will negatively impact their retirement savings by 15 per cent after 20 years.

This is based on a balance of $900,000, which is around the average balance for an SMSF member at that age.

The calculations assume a 40 per cent allocation to Australian shares, 3 per cent capital growth and a 4 per cent income return. The calculations also assume the SMSF has a single member who only has a retirement phase interest in the fund and is receiving the minimum annual pension entitlement from an account-based pension.

The analysis shows that the member’s closing balance after 20 years would be $825,519 if refundable franking credit were removed compared to $953,480 if refundable franking credits were not removed.

SuperConcepts general manager of technical and education services Peter Burgess said this equates to a significant impact on the fund’s earning rate and the total income received per annum.

“In year one, the total income received including franking credits is $36,771 compared to $30,600 if refundable franking credits were removed. After five years, the income differential is $7,631 per annum, and after 10 years, the differential is $9,207 per annum,” said Mr Burgess.

Mr Burgess has also previously pointed out that while the measure is intended to target the wealthy, in reality it may actually allow them to accumulate more in super.

“Transferring some of their pension balance to the accumulation phase may allow them to use all of their franking credits. The effect will be more retained in super for longer, as they can draw down super from accumulation phase when they need it rather than being forced to take the minimum pension each year,” he said.

 

Miranda Brownlee
12 November 2018
smsfadviser.com

Compliance, tax advice in strongest demand from SMSFs

While investment advice is the most valued by SMSF clients, compliance and tax are still the areas that SMSF trustees required the most assistance with, according to recent research.

         

 

A report compiled by the SMSF Association and OpenInvest using data from an Investment Trends’ survey of SMSF investors indicates that most SMSFs tend to engage two different types of advisers each.

The results from the survey indicate that in the last 12 months, over 45 per cent of SMSFs had used an accountant for tax advice.

The second most common professional was financial planners with around a quarter of SMSFs in the survey having received advice from a planner in the past year.

The survey also showed that compliance is the area members require the most help with, closely followed by tax.

The report pointed out that members and trustees that do not understand their obligations could incur severe penalties and sanctions or significant financial detriment.

Investment advice was the most valued area of advice.

The four main areas which SMSFs said they require more advice were superannuation tax planning, investment selection, post-retirement planning and retirement strategies.

When asked what holds them back from seeking their unmet advice needs, SMSF clients said the cost, followed closely by the lack of trust.

SMSF Association chief executive John Maroney said it was surprising that one in five SMSFs have not used any financial advisers in the last 12 months, particularly when regulatory and market volatility is increasing.

“Investing in an SMSF means you’ve taken control of your retirement savings, it does not qualify you as an expert investor, and one of the most effective ways to achieve a secure and dignified retirement is with expert assistance,” said Mr Maroney.

The research report also revealed that some SMSFs were lacking in diversification with half of SMSFs holding 50 per cent or more of their assets in a single asset type.

The report said that confusion around what diversification means is still prevalent among SMSF trustees.

“SMSF trustees say they primarily invest in shares to achieve diversification in their SMSF, while just a quarter say they invest in at least four asset classes to achieve this,” it said.

“When you look at the allocation to shares, the majority of SMSFs believe they can achieve adequate diversification using only a range of shares, with two-thirds of SMSFs considering a portfolio invested in 20 individual shares to be a well-diversified portfolio.”

 

Miranda Brownlee
19 November 2018
smsfadviser.com

Our Advent calendar for 2018

On behalf of all our staff we wish our clients a Merry Christmas, Happy New Year and a great holiday period.

Come back each day for an inspirational quote or poem about Christmas, summer and life in general from some of the great writers and poets.

(Please click on the image to open the Advent Calendar and then click on a date)

         

 

 

 

 

 

 

The value of advice – Behavioural Coaching

Behavioural coaching is a major component in how a financial planner adds value to your portfolio.

 

     

     

 

 

Last month’s topic was “How a Financial Planner adds value to a Portfolio?”, a major component being Behavioural coaching. The month before the topic was “The Value a Planner Adds to a Portfolio”.

This month the focus is on “What is Behavioural Coaching?”.

There are many long-term investment charts that show how portfolio values increase over time but even with this proof many investors react to short term market volatility which can often undermine attainment of long-term objectives.

Managing this reactionary behaviour is the definition of behavioural coaching.

Behavioural coaching is how a financial planner manages investor 'emotion' and 'reaction’ to market ‘noise' to ensure long term goals are achieved. A good example of this was the GFC. Planners often talked of the stress of having to explain the correct path under such extreme circumstances. In the end, though, those who played the long game have recovered well.

This form of control is hard to achieve when acting alone, it often requires teamwork and professional help.

Behavioural coaching centres on four issues:

  1. A financial plan is the anchor to all actions.
  2. Set clear expectations at the beginning.
  3. Managing the emotions that accompany periods of market volatility.
  4. Work together to ensure an effective planner / client relationship rather than simply reacting to markets.

Behavioural coaching may also involve assisting in areas such as budgeting to save money now to help attain goals later.

A planner, though, will struggle to help you achieve your goals if they aren't continually kept up to date with any changes in your life.

There are four components that you and your planner need to work on together. These are:

Goals

Without goals there can be no planning. However, goals must be realistic and for many investors this is itself difficult because of their starting age. The earlier a person has a financial plan then in most cases the better the outcomes.

Discipline

Market noise and emotion means decision making is difficult. It may even mean cuts now to help win in the end. Discipline is very hard to do on your own so help in this area is a major contributor to attaining long term goals.

Balance

This simply means not to put all your eggs in the one basket. Spreading the risk may mean the full extent of up swings aren't gained but it means that the full extent of down swings aren’t either. Balance means 'slow and steady' and we all know how that works out.

Cost

A planner needs to be able to show that they manage the costs in your portfolio, so they can be as low as possible. History shows that on average, lower costs means better performance.

This is the third in a series of articles is based on a 16-year study by Vanguard Investments Pty Ltd.

 

Peter Graham
BEc, MBA
PlannerWeb / AcctWeb

 

 

Ranking of the world’s best: Taking it personally

You may have read about the latest ranking of Australia as one of the best countries for retirees in terms of lifestyle and retirement-income systems. 

         

 

And you may have wondered what such rankings personally mean for you – apart from perhaps making you feel fortunate about where you live.

After all, you are unlikely to move to, say, the Netherlands because it’s retirement-income system ranks as the world’s best.

However, the rankings may prompt you to take measures to improve your chances of a successful retirement lifestyle.

Retirement incomes

First, let’s look at the Melbourne Mercer global pension index 2018, published by Mercer and the Australian Centre for Financial Services. This ranks Australia’s retirement-income system fourth out of the 34 countries assessed, based on adequacy, sustainability and integrity. Australia was given a B while the Netherlands and Denmark received A grades.

A B-rated retirement-income system is described as having a “sound structure with many good features” but, in the words of many school reports, says: There’s room for improvement.

Irrespective of each country’s social, political, historical and economic influences, this report stresses that many of their challenges in dealing with an ageing population are similar. These include encouraging people to work until older ages, setting the level of retirement funding and reducing the” leakage” of retirement savings before retirement.

Although the suggestions of the Global Pension Index are directed mainly at government and the pension/retirement sectors, individuals may pick up useful personal pointers from most of its suggestions. In short, consider taking a personal perspective on this global retirement-income challenge.

Personal pointers may include:

Think about whether to work until an older age than planned. A longer working life may provide a chance to save more for a shorter, and, therefore, less-costly retirement. And as the report says, working until an older age will limit the impact on retirement savings of increasing longevity. In reality, your ability to work past traditional retirement ages will much depend your personal circumstances including health and employment opportunities.

Save more in super within Australia’s annual contribution caps. This can include making higher salary-sacrificed contributions if employed. If self-employed, consider making voluntary super contributions, which are not compulsory for the self-employed.

Aim to repay your debts before retirement. Otherwise, you face repaying that debt with your retirement savings. One of the reasons why Australia has achieved a lower score this year (down from B-plus to B) for its retirement-income system is that the latest Global Pension Index includes pre-retirement household debt in its calculations for the first time.

Take your super as pension rather than a lump sum upon retirement. This will keep your savings in the concessionally-tax or tax-free super system for longer and, most importantly, make your retirement lifestyle as comfortable as possible for as long as possible. The Global Pension Index suggests that a way to improve Australia’s retirement-income system is to compel super members to take part of their super as a pension.  

As Dr David Knox, a senior partner of Mercer in Australia, comments in the report, retirement income systems around the world are under pressure from ageing populations; low growth and low interest from investments reducing long-term compounding interest; and lack of “easy access” to pension plans (superannuation in Australia) in the gig economy; high government debt in some countries; and high household debt.

In this environment, individuals have more of an incentive to take matters into their own hands to maximise their retirement savings.

Best countries for retirees

The 2018 Best Countries report once again ranks Australia as the world’s second-best country for a comfortable retirement – behind New Zealand and ahead of Switzerland, Spain and Portugal in the top five. This is an annual survey and analysis by US News & World Report, BAV Consulting and the Wharton School at the University of Pennsylvania.

Survey respondents aged over 45 ranked the best countries for retirement on seven attributes: affordability, favourable tax environment, friendliness, “a place I would live”, pleasant climate, respect of property rights and a well-developed public health system. (The survey did not seek views about the adequacy of a country’s retirement-income systems.)

For the main report, more than 21,000 survey participants from around the world were asked to grade 80 countries on a range of factors from quality of life to economic potential. It aims to gauge global perceptions of the countries.

Australia came seventh overall with Switzerland again taking first place. Specific areas where Australia ranks in the top five are: quality of life (Australia fifth), best countries to invest in (Australia sixth – up from 22nd last year) and best countries for a comfortable retirement (Australia second).

Now think about what these findings may mean for you personally.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
04 November 2018
vanguardinvestments.com.au

Information needed to be the BBQ expert.

Comprehensive statistics on how Australia is performing.

 

 

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

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