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Financial Planning

GDP by country since 1800

This animated chart is simply amazing.  It's fascinating to see how the world has changed and is changing.  Food for thought!!

         

 

Simply click on the image and see how things have changed but also how, in many ways, they've stayed the same.

 

 

 

 

 

 

 

 

 

 

 

 

 

Traversing a synchronised economic slowdown

The International Monetary Fund (IMF) grabbed headlines this month on releasing its latest World Economic Outlook report, downgrading its global growth forecasts to the lowest levels since the 2008-09 financial crisis.

         

 

Pointing to heightened economic and political uncertainty, particularly in China and the United States, the IMF cut its 2019 global growth forecast by 0.3 per cent to 3 per cent, and its 2020 estimate by 0.2 per cent to 3.4 per cent.

Vanguard also expects global growth to continue to soften over the next 12 months, and sees the likelihood of a shallow recession occurring in the US in 2020 as being above 50 per cent, with the risk of a more severe recession a 10 per cent probability.

The IMF's forecast also came with a stark warning: that the world is in a “synchronised economic slowdown”, with financial markets expecting interest rates to stay lower for longer than had been anticipated earlier in 2019.

Indeed, more cuts to official interest rates in the US, Australia and other countries are highly likely as central banks attempt to use monetary policy as a lever to kick start growth.

“Financial conditions have eased even more, helping contain downside risks and support the global economy in the near term,” said a joint commentary by the IMF's director of monetary and capital markets, Tobias Adrian, and deputy director Fabio Natalucci.

“But loose financial conditions come at a cost: they encourage investors to take more chances in a quest for higher returns, so risks to financial stability and growth remain high in the medium term.”

Risk and fixed income inflows
Macro-economic and policy events have been among the key drivers of markets instability for some time, although risk assets such as equities are continuing to trade at high valuation levels.

“These periods of time do come about and they tend to be a more difficult time to invest, because you need to stay engaged in the market to earn respectable returns,” says Christopher Alwine, principal, head of credit, of Vanguard's global Fixed Income Group.

“But, in staying engaged in the market, it's also important to make sure the risk levels that you're positioning your portfolios in are consistent with the risks of an economic downturn, because those risks are elevated.

“To a retail investor, that really comes down to how much you have in stocks versus fixed income and cash.”

Ongoing large inflows into listed and unlisted bonds funds, where investment returns over the past year have been very strong, are a strong indicator of the de-risking phenomenon that's been occurring, and continues to occur, globally.

In a weak macro-economic environment, pointing to low inflation, higher unemployment and lower growth, broad fixed income strategies should perform relatively well as a risk diversifier to more volatile equities.

Most importantly, when you have your worst periods of equity performance, you want to see fixed income perform well. Yet, that's not always the case.

Understanding interest rate risk
Investors do need to be aware that the fixed income asset class is not homogenous. Indeed, depending on the investment strategy being used, investors in fixed income can be exposed to market risks they may not have appreciated at the time of making their investment.

For example, interest rate risk or sensitivity (duration) can enhance returns when share markets perform poorly.

But a fixed income fund may not necessarily perform this way if a fund manager has structured a portfolio in a way where the fixed income investments made materially change the underlying nature of the fund.

“One of the biggest decisions that you can make in a fixed income portfolio is to make significant duration bets,” says Vanguard senior manager, investment product management, Scott Cornfoot. “They are single decisions that can be quite volatile and surprise investors.

“What you don't want is to invest in a fixed income portfolio and, when equities go badly or markets get jittery … to find that your manager has taken a big duration position (that is, has effectively gone underweight fixed interest) and your portfolio doesn't perform as you would expect.”

This is why low-cost actively managed global credit funds that invest in high-quality investment grade bonds, and which have very tight duration constraints, are attracting investor demand.

In addition to the risk-free component generated from government bonds, these credit funds seek to generate additional performance by investing across investment grade bond markets and by seeking out opportunities to add value through specific security selection.

So, in a synchronised economic slowdown climate, if you're moving to de-risk your portfolio by shifting capital into fixed income, it's important to understand the nuances within the asset class and how they may impact returns.

This is where a licensed financial adviser should be able to provide guidance.

 

Tony Kaye
Personal Finance Writer,Vanguard Australia
29 October 2019
Vanguardinvestments.com.au

 

Does your mind help or hinder your investment success?

Of all the decisions we make, investments ought to be the most rational. We should be able to whip off our rose-coloured glasses, replace them with green eyeshades and choose the lowest-cost investments with the highest-expected returns to create a diversified portfolio.

         

 

However, as with so many things in life, our emotions often get in the way of this rational approach. We buy shares in a company solely because a friend recommended it. Or, we innately believe the higher-priced product is always better, even though we have no evidence to back this gut feeling.

Those are just two examples of how our brains may mislead us when we ponder money. We're supposed to be rational, but more often than not, we are often irrational.

Understanding the general tenets of behavioural finance can help investors counter irrationality and improve investment decisions. It studies the psychology of financial decision-making and is based on a sub-field of behavioural economics. This field of research began when economists noticed that a pillar of economic thought known as the efficient market hypothesis often wobbled in the real world.

Its hypothesis posits that in a market with enough buyers and sellers, and where all investors have the same information, it's impossible to beat the market. But some investors do beat the market, often by capitalising on the irrationality of others. This caused economists to try to discover why.

And here's five key concepts from their findings:

Anchoring: This refers to the tendency to depend on, or get anchored in, limited information – some of it irrelevant to the matter at hand – to make decisions. Investors sometimes get anchored in certain numbers, which may influence whether we perceive a share price or market index to be high or low. A company share make look like a bargain if it falls from, say, $100 to $80, but the drop in price may not be relevant. The relevant question should centre on the company's expected return over a time horizon. And that is not an easy or straightforward answer.

Herd bias: Every time parents ask their children whether they would jump off a cliff if their friends did, they are actually referring to the concept of herd bias, the tendency to hop on a trend because “everyone else is doing it”. The dot-com boom and bust is one of many examples of the dangers of herd bias.

Home bias: The preference for sticking to the familiar has often resulted in investors investing in the shares of the country where they live even though diversifying internationally can generate stronger returns and lessen volatility. Home bias is especially prevalent in Australia. Australia accounts for just 2% of world markets, but figures show that Australians put 61% of their share investments in local companies. More research found the same effect affecting property investors, prompting them to invest in their own neighborhood, or close by, which may concentrate risk.

Attention bias: Advertisers count on attention bias. People are more likely to buy something they have heard of. So are investors. Research suggests that people are more likely to invest in companies they have casually read about or heard about on the news, for example.

Endowment bias: People tend to hold on to investments they already own, perhaps because they suffer from loss aversion. This bias has sometimes resulted in investors holding on to money-losing investments simply because it's painful to own up to a mistake.
Awareness of how our brains sometimes cause us to make poor choices can be the first step to making better ones.

Fortunately, there are shortcuts that can help you break these behaviors.

One simple solution is to adhere to four simple principles that will help improve the chances of a successful investment portfolio – goals, balance, cost and discipline. Set your goals, choose a number of well-diversified managed or exchange-traded funds with strong long-term track records. Keep your investment costs low. And finally, maintain long-term perspective and a disciplined approach to your investment strategy.

At the very least, you'll be less vulnerable to buying that share you just heard about on television.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard
18 October 2019
vanguardinvestments.com.au

 

Four key principles that help achieve portfolio success

Buy low and sell high is the mantra of many a seasoned investor regardless of the asset class. Just stick to this investment strategy and you will never go wrong – right?

             

 

If only investing were that simple.

Short of the ability to look into the future and timing the market, how do you determine what is low and what is classified as high?

Although keeping abreast of market commentary is always useful, particularly in helping to develop your investment acumen, it is unlikely to deliver guaranteed investment success.

So, what can you do to give yourself the best chance for investment success?

Start with the basics

Vanguard believes there are four simple principles that will help improve the chances of a successful investment portfolio – goals, balance, cost and discipline.

  1. Setting goals is possibly the most important aspect of any investment strategy. Having clearly defined goals that are attainable will help establish the strategy to achieve your goals at each life stage. Having specific goals in mind will also help you stay the course and reduce your vulnerability to investment noise during periods of market volatility.
     
  2. The concept of a balanced portfolio is about building an asset allocation strategy that aligns to your investment goals, based on realistic return assumptions. The strategy is balanced between potential returns and risk, and your portfolio holdings as a result should be broadly diversified.
     
  3. Although investment costs may seem small, they can take a significant toll on your portfolio, particularly when compounded over many years. Costs are an inevitable part of any investment portfolio but are certainly the one thing you can control. Ultimately the less you pay in fees, the more of what you earn stays in your pocket, where it belongs.
     
  4. Maintaining long-term perspective and a disciplined approach to your investment strategy will help to avoid making decisions that are rooted in impulsiveness or are in response to events with a short-term effect. Making regular contributions to a portfolio and increasing them over time can have a surprisingly powerful effect on long-term results.

De-risking as you age

Where possible, always make investment decisions and portfolio allocations based on your personal circumstances and goals. Accordingly, asset allocations in a portfolio should not only be guided by your risk tolerance and its ability to guard against market volatility, but also by the stage of life you are at.

An investment portfolio that has regular contributions (as a result of regular income) has more money working in compound than an investment portfolio that has regular withdrawals (typical of a portfolio of a retiree funding their retirement).

Thus, the asset allocation in an investment portfolio of a younger investor (typically upto 40 years old) should look markedly different to that of an investor in the early stages of retirement.

An investment approach that is quite entrenched in the US and gaining traction in Australia is the target-date fund model, which could perhaps provide some lessons in asset allocation to meet goals for each life stage. These allow investors to nominate their target date for retirement and the fund will gradually shift the asset allocation as they approach and then begin their retirement.

Vanguard's US target-date fund glide path takes place over four stages and constructs a portfolio based on balancing market, inflation and longevity risks in an efficient and transparent manner over an investor's life cycle along our basic investment principles. It generally segments investors into four phases, starting with investors aged 40 and below, then moving into the mid-to-late career.

Phase one starts with an allocation of around 90 per cent to equities and then begins de-risking during the mid-to-late career phase. Phase three encompasses the transition to retirement phase, where the portfolio de-risks further before reaching a landing point in the final retirement phase.

Too often a sound concept can be undone by sub-par implementation. This arose as a theme in the Productivity Commission's final report, highlighting the impact to outcomes that can arise from a target-date fund that is:

  • Too conservative in the early years when members have the greatest capacity to take on investment risk.
     
  • De-risks too early, or lands too low.
     
  • Is constructed to retirement, rather than considering the needs of investors through retirement.

Vanguard endorses the Productivity Commission's view. The objective of Vanguard's asset allocation model is to avoid being too conservative or too aggressive and to adequately diversify where possible.

Achieving your investment goals

Vanguard's research, time and again, continues to show that disciplined, diversified and patient investors who adopt a holistic view and focus on factors within their control are likely to be rewarded over the long term.

Following the four simple principles – goals, balance, cost and discipline – and focusing on the things you can control will help you become a better investor and ultimately deliver you the best chance for investment success.

* This article originally appeared in the ASX Newsletter on 8 October 2019

 

Balaji Gopal
Head of Product Strategy
09 October 2019
vanguardinvestments.com.au

 

Downsizer contributions offer more than meets the eye

Retiree clients looking to sell their property can often contribute more to their SMSF than expected through the government’s recently introduced downsizer contribution rules, due to the flexibility to split contributions between spouses and use them in conjunction with other contribution rules, according to Fitzpatricks Private Wealth.

       

 

Speaking at SMSF Adviser’s SMSF Summit 2019 event in Brisbane, the advice firm’s head of strategic advice, Colin Lewis, said it was possible for clients approaching their 65th birthday in particular to double their contribution amounts by making use of the downsizer and bring-forward contributions and potentially splitting contributions with their spouse.

“Clients must be age 65 at the time of contribution [to use downsizer], not when they sell the house, it’s when they wish to contribute the proceeds into super,” Mr Lewis said.

“So, when they sell the house they can be under 65, but if within a 90-day period they turn 65, they can make contributions, so it’s the timing that is the essence here if you are dealing with a client that is 64 and thinking of selling their home.”

Mr Lewis gave the example of Ron and Paula, who were 76 and 64, respectively, and planning to sell their $1.5 million home before Paula’s 65th birthday in December 2019. Ron had an existing account-based pension worth $1.6 million while Paula had $1 million in accumulation phase, and the couple had a joint investment portfolio worth $1.5 million outside super.

“On 16 October, they enter into a contract to sell their home for $1.5 million with settlement on 27 November,” he said. 

“From the proceeds, Ron and Paula make the following contributions within 90 days: Ron makes a $300,000 downsizer contribution; prior to her 65th birthday, Paula makes a $300,000 non-concessional contribution; and after turning 65 she makes a $300,000 downsizer contribution and commences an account-based pension of $1.6 million.

“So, they’ve rearranged their affairs, they’ve now got a new house worth $1.6 million, Ron’s got an accumulation benefit worth $300,000, Paula’s got an account-based pension of $1.6 million, and their money outside super is $500,000. So, what they’ve been able to do is upsize, put more into super and make a downsizer contribution.”

Mr Lewis added that splitting contributions between a couple was another good way to make the most of the downsizer rules, given that a client’s spouse did not need to have been an owner of the property to use the proceeds for their contribution.

“The spouse doesn’t have to be on the title to contribute — with spouses, it all hinges on whether the owner of the property is eligible, and if they are, the spouse can contribute too provided they’re 65 or above,” he said.

 

Sarah Kendell
29 October 2019
smsfadviser.com

 

6 new financial videos

Videos are a good way to learn more about a topic or show to others who my be new to financial management.

         

 

Six new videos have just been added to our website. The topics covered are: 

  • Understanding Estate Planning
  • Update your will
  • How interest rates affect your mortgage
  • Car and personal loans
  • Caring for elderly parents
  • Cup of advice – Financial divorce

Click on the Video menu entry above to view our new collection.

 

 

 

 

 

 

 

 

DGP by country since 1800

This animated chart is simply amazing.  It's fascinating to see how the world has changed and is changing.  Food for thought!!

         

 

Simply click on the image and see how things have changed but also how, in many ways, they've stayed the same.

 

 

 

 

 

 

 

 

 

 

 

 

 

The main benefits of professional financial help.

Unfortunately, of recent times there has been no shortage of negative press, comment and sentiment about financial planners but what is the real picture?

         

 

Firstly, a 16-year long study by Vanguard found financial planners improve investment performance over time by around 3% net.

This is not insignificant and means that even for small investors, a financial planner will not only pay for themselves but provide the expertise to help navigate and manage two major threats to the success of investment strategies, namely, market volatility and emotion. A win-win for all.

There are many tasks a planner undertakes on your behalf on top of managing investment strategies and they are best summarised as behavioural coaching.

Put simply, behavioural coaching is the way a financial planner manages investor 'emotion' and 'reaction’ to short-term market ‘volatility’ 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, the majority of investors who played the ‘long game’ have recovered well.

This form of control is hard to achieve when an investor is acting alone, it almost always requires teamwork and professional help.

Behavioural coaching centres on four issues:

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

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

There are four components that you and your planner 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, 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 maintain on your own so help in this area is a major contributor to attaining long term goals.

Balance / asset allocation

This simply means not putting all your eggs in 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.

Costs of investing

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.

Finally, a financial planner will struggle to help you achieve your goals if they aren't continually kept up to date with any changes in your life. This is one of the most important jobs the financial planner’s clients has.

 

Peter Graham
BEc, MBA
PlannerWeb / AcctWeb

 

Australia by the numbers – September 2019

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

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