Is this a second marriage or a new relationship after a breakdown?
Keep your financial situation separate:
Generally it is better to keep your finances separate.
Except for a joint bank account which is used to pay all the budgeted joint expenses.
A sum of money from each party can be deposited into the joint account each month.
This way the financial well being of both parties is maintained and the opportunity for fraud is reduced.
If a person has a problem with this, RUN.....
Only own things together as "Tenants in Common."
Always have a written agreement which states the proportion you each own - kept with your executor. This means that your share of the asset is always dealt with by you and your estate.
In "Joint Tenants," the ownership of the asset automatically passes to the survivor on death of the other. It does not go through your Will, nor can you say what happens to it.
On sale of a "tenants in common" asset, hold your own share in a separate bank account.
All too often, the money is put in a joint bank account, one of the parties dies, and the funds go to the other person immediately.
It wont matter that you had "both must sign" on the account.
Always have a Will which states your wishes.
Draft it with your beneficiaries involved, with legal help, making certain your partner is informed and aware.
Avoid relying on your partners good nature - "if you die first, I'll make certain your kids get a share."
It can work, but is imprudent to allow the potential for abuse.
Consider how long the person can live in the common home before it must be sold.
Probably better to consider 1, 3, 5 years, or whatever suits you both.
It can create enormous ill-will and heartache when people are forced to wait for an estate.
Suit yourself, however be business-like.
If you are older than 21, you may have had more than one relationship.
In business, written agreements are the norm and potential conflict is discussed and reduced.
Financial arrangements are business arrangements.
Protecting your financial well being is protecting your life - it should be done thoroughly.
If you play it like a game of chance, you stand to lose a huge amount.
Share a life together with joint decision making.
People who understand that a person needs to be prudent, are perhaps the ones to get and hold onto.
Bullying, pouting, pleading do not indicate the relationship will go far.
Make decisions jointly, with all the factors considered. Participate.
Certainly, you can now jointly afford that $1,000,000 mansion, but do you want to clean it?
Perhaps a more modest home with travel would give you much greater pleasure.
A new relationship can be a cause for optimism and pleasure.
Be aware of your needs, and it will most likely remain a source of these things.
While this blog mentions Superannuation, Life Insurance, Investments, Aged Care, Estate Planning, it does not consider your personal circumstances and is general advice only. You must not act on anything that appears to be a recommendation without considering your personal needs, circumstances and objectives. RIadvice-RetireInvest strongly recommends you obtain professional financial advice specific to your individual circumstances. Planning is Important
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Tuesday, September 11, 2012
Monday, September 10, 2012
Protecting your bread and butter - Buy/Sell
If you own your own
business, chances are it’s your livelihood. But what if something happened to
you or your partner and you were unable to go on running your business?
Having a buy-sell
agreement in place can be one of the best ways for small and medium business
owners to protect their livelihood against death, disability or trauma.
A buy-sell agreement is
a legally binding contract between business partners, which facilitates the
sale of business ownership when certain ‘trigger events’ like death and
disability occur.
While the purchase can
be funded personally, it is also commonly done through insurance, which can
provide ready capital and is often more cost-effective.
But what are the chances?
It can take years of
hard work to build up a successful business, however all this can be quickly
undone if you or your business partner die or suffer a serious illness or disability.
While it’s
understandably not something you want to think about, unfortunately these
events are more common than you might think.
For two business partners currently aged 45,
there is a 55% chance of death, total and permanent disability or trauma occurring before age
65. While for three business partners
that number rises to 70% - for four business partners that number is a
whopping 80%1.
Sadly, the more partners
you have, the more likelihood there is of a misfortune occurring to one of you.
However, having a buy-sell agreement in place can protect the equity in your
business.
Using insurance to fund the agreement
There are many
advantages to using insurance to fund a buy-sell agreement.
First, it can help to protect
your equity in the business if you suffer from accident, illness or death, as
you (or your estate) aren’t forced to try and sell your share of the business
in a difficult and stressful time.
“Stressed sale” could
lead you to sell your share of the business for less than it’s worth, or worse
still, not be able to sell it at all.
Equally, it also
protects the other business partners from having to work with your estate or an unwanted replacement business partner,
your executor, or from having to suddenly come up with funds to pay you
out.
But how exactly does a buy-sell agreement
through insurance work?
Basically, partners sign
a legally binding agreement enabling the sale and purchase of business equity
in the event of death, disability or trauma.
Each partner also takes
out an insurance policy, with the agreement stipulating that if a trigger event
occurs, the funds received from the insurance policy will be used to payout
their share in the business.
This means you, or your estate,
would receive the payment, while the remaining partners would receive your shares.
Are there any other options?
If you do not have a buy-sell
agreement in place and something happens to you or your partner, the business may
be forced to take one of the below options -
consider the questions raised and how ideal these would be for YOUR business:
Buy-out the share holding: Do you have enough equity in
your business to do this at short notice? How will you determine the value?
Partner’s estate maintains share holding: Are you
comfortable with your partner’s estate as a business partner?
Sell the share holding: Would the partner’s estate
receive a good price for their equity? Would the remaining partners get the
right business partner?
Borrow funds to buy the share holding: Would
lenders still lend money despite the loss of a key person? Would private equity
be looking for a premium, making it more expensive?
In many cases, having a buy-sell
agreement via insurance should be considered as a sensible way to protect the
interests of all partners. However all businesses are unique so it’s important
to seek help from qualified professionals in order to
find the right solution for your business.
For more information call Hugh
Kilpatrick* from RIadvice-RetireInvest on 03
9471 0080.
*Hugh
Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited (ABN
23 001 774 125), Australian Financial Services Licence 238429. This editorial
does not consider your personal circumstances and is general advice only. You
should not act on the information provided without first obtaining professional
financial advice specific to your circumstances.
1 Australian Bureau of
Statistics, 2005 Australian Life Table.
Friday, August 17, 2012
A SUPER start to the year.....
With the start of a new financial year just past,
now is perhaps the perfect time to talk to a financial adviser about strategies
to boost your superannuation.
There have been some changes to super rules
recently, but with so many tax concessions in place super can still be one of
the most effective ways to save for retirement.
The Government wants to encourage us to save
gradually rather than making a huge lump sum investment as we approach
retirement, however there are limits to how much we can tax-effectively
contribute to super each year.
These limits are called contribution caps.
Different contribution caps apply depending on the type of super contribution
you make and how much you have contributed to your super in the past.
Knowing what the contribution caps are will help
you make the most of your super savings and stop you from paying unnecessary
tax. If you exceed the limit you could potentially be taxed at penalty rates of
up to 78% on top of 15% you have already paid.
One of the best super saving strategies for many
people is salary sacrifice. Salary sacrifice can be a tax-effective way to
boost retirement savings with contributions to your super made from your
pre-tax income. This means the contributions are taxed at just 15%, rather than
your marginal tax rate.
If you aren’t able to set up a salary sacrifice
arrangement, have no employment income or are self-employed (earning less than
10% of your income from an employer), you may consider making a personal
contribution to super this year.
Not only will this boost your retirement savings,
but you may also be able count it as a tax deduction, meaning savings at tax
time.
Another
advantage of super can be the ability to pay insurance premiums from your
super, by purchasing insurance through your super fund - under insurance is a
major issue in Australia and up to 95 per cent of Australian families do not
have adequate levels of insurance cover.**
While most people would never
consider driving a car without motor insurance, many of us do not insure our
most important asset – our ability to earn an income. There are a range of
different types of insurance available that could help provide for you, or your
family, in the event of accident, illness or injury.
For example, you may be able to
buy adequate life and Total and Permanent Disability insurance cover through
your super. The tax savings may be an advantage of this
strategy, plus your insurance premium may be cheaper because the super fund may
be buying the insurance in bulk at a discounted rate.
The rules around superannuation
can be complex and these strategies may not be appropriate for everyone, so it
is critically important to consult a financial adviser to get advice that is
specific to your circumstances.
Make it a super start to the year - by seeing a
financial adviser and putting a strategy in place now, giving you the peace of
mind of knowing that you are getting the most out of your super and insurance
this financial year.
Call Hugh*
from RIadvice-retireInvest on 03 9471 0080 today.
*Hugh Kilpatrick is an
Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125),
Australian Financial Services Licence 238429. This editorial does not consider
your personal circumstances and is general advice only. You must not act on the
information provided without first obtaining professional financial advice
specific to your circumstances from a suitably trained and authorised
professional.
** 2010
Lifewise/NATSEM Underinsurance Report conducted for the Financial Services
Council.
Tuesday, July 24, 2012
Keep your Superannuation safe!
Take your year of birth off your Facebook profile.
Never divulge your details over the phone or the net.
Only invest through licenced financial advisers in major organisations.
KEEP SUPER SAFE LINK
Never divulge your details over the phone or the net.
Only invest through licenced financial advisers in major organisations.
KEEP SUPER SAFE LINK
Tuesday, June 19, 2012
Time to re-think your cash savings?
In light of all the
economic uncertainty we’ve experienced since the start of the global financial
crisis, it’s not surprising that many
investors, particularly those close to or in retirement, are settling for
low-risk options for their retirement savings. It’s one of the main reasons
we’ve seen such a large transfer of money from shares to term deposits and
savings accounts in recent years.
This strategy may less attractive following the
Reserve Bank of Australia’s (RBA )
recent cut to the official cash rate.
The RBA ’s rate cut of 0.50%, investors are likely to
see reduced returns from their term deposits and cash savings over the coming
months, and potentially longer. This is likely to concern many investors, particularly those who are relying on their
money to fund a retirement that could last up to thirty years or more.
The main issue for cash investors, as interest rates reduce, is that their money becomes less effective at
protecting against inflation.
Term deposits and cash
savings generally don’t keep up with inflation over time, so the purchasing
power of your money could reduce. This
might mean that you don’t end up with the money you need to achieve your
financial goals.
For that, you generally need some exposure to growth
assets such as property and shares. While they are more volatile than cash, they offer the potential for higher returns over the long term.
Often investors have
this perception that investing in growth assets is inherently risky, but these days
there are investment options that allow cautious investors to earn competitive returns,
yet still be well-placed to take advantage of opportunities that arise as
markets recover.
For example, many
superannuation funds offer a viable alternative to term deposits in the form of
conservative investment options. Importantly, your money remains within the superannuation environment, which is a
tax effective way of saving for retirement.
By investing
conservatively through superannuation or your pension you get the safety you’re looking for as well as a tax-effective return.
Superannuation earnings are taxed at a maximum of 15% and earnings on pension
assets are tax free.
Of course, super is only
suitable for retirement savings as your money cannot be accessed until you meet
a condition of release such as permanent retirement, but there are also
non-super options.
Other conservative
investment options can include defensive
share funds that target high regular income with lower volatility than the
overall sharemarket. This approach helps to provide better capital protection
should the sharemarket fall.
These options may be
welcome news for investors who are concerned about volatility but keen to get
more out of their investments. Everyone’s
situation is different so it’s important to get financial advice that’s
relevant to your specific needs and objectives.
Ultimately, the right
strategy will come down to how much money
you need to enjoy your retirement,
how long you have to invest it and
how much risk you are willing to take.
A financial adviser can help you
understand the various strategies available to reduce the impact of volatility
whilst still focusing on growth opportunities and quality returns.
For further information
contact Hugh Kilpatrick from RIadvice-RetireInvest on 03 94671 0080.
*Hugh Kilpatrick is an Authorised Representative of
RI Advice Group Pty Limited ABN 23
001 774 125, AFSL 238429. This editorial does not consider your personal
circumstances and is of a general nature only. You must not act on the
information provided without first obtaining professional financial advice
specific to your circumstances.
Should your SMSF be working harder?
Self Managed Super
Funds (SMSFs) are rapidly becoming the vehicle of choice for many who want more
control over how their retirement savings are invested, but given the economic
uncertainty we’ve experienced since the start of the global financial crisis,
it’s understandable that many SMSF
members are opting to stay in cash investments.
By the end of the
2011 financial year the self managed super sector had ballooned to 456,000
funds with 867,000 members and $418 billion in assets. Contributions amount to
nearly $35 billion a year, making it the fastest growing sector of the
Australian superannuation industry, with almost double the growth in assets of
the industry as a whole.1.
This phenomenal
growth reflects the attraction SMSFs hold for many business owners and income
earners. The concept of having greater control over decisions and investment
choices may strike a chord with those who want to take a proactive interest in
their future prosperity; however an SMSF
may not be a suitable solution for everybody.
With greater freedom comes greater responsibility
and there are administrative and compliance demands when running a fund and as an SMSF trustee you must keep up to date
with the rules and regulations affecting super and importantly develop a sound
investment strategy to suit your needs. Interestingly, the desire for
greater choice and freedom over investment strategy seems to be contradicted by a heavy weighting of SMSF
investments in cash.
Over 60% of all
SMSF assets are directly invested in the narrow confine of either Australian
listed shares or cash and term deposits.1.
Any investment must
be consistent with your fund's written investment strategy and while troubled
investment markets in recent years may have driven many to seek the security
that cash investments offer, it may be a good time to start questioning the
wisdom of that approach.
The recent RBA
rate cut of 0.50% means that funds held in cash investments and term deposits,
are likely to have reduced returns. This should be of
concern to SMSF investors who are relying on their money to fund a retirement
that could last up to thirty years or more. As interest rates reduce, their
money becomes less effective at protecting against inflation.
There will always
be a place to have some proportion retained in the cash and fixed interest
sectors, but the recent interest movements should be sending a strong signal
for SMSF investors to reconsider their position.
These days there
are investment options that allow cautious investors to earn competitive
returns, yet still be well-placed to take advantage of opportunities that arise
as markets recover.
Ultimately, the right investment strategy will come
down to how much you need, how long you have to invest and how much risk you believe
suits you - so it’s important to get financial advice that’s relevant to your
specific needs, objectives and investment timeframes.
If you have an
SMSF, now is an ideal time to speak to your adviser about how you can take full
advantage of the freedom you have to be creative with your investment strategy
within your fund.
For further information, or to speak to an Adviser,
contact Hugh Kilpatrick* from RIadvice-RetireInvest on 03 9471 0080.
*Hugh Kilpatrick is an Authorised
Representative of RI Advice Group Pty Limited (ABN
23 001 774 125), Australian Financial Services Licence 238429. This editorial
does not consider your personal circumstances and is general advice only. You
should not act on the information provided without first obtaining professional
financial advice specific to your circumstances.
1.Australian Tax Office - Self-managed superannuation
funds: A statistical overview 2009-10, April 2012
Thursday, May 31, 2012
The five key questions on aged care
If you are considering aged care for someone
close to you, there are five questions you need answered to ensure the best
care at the most reasonable cost.
It's a fact of life that many of us will need to one day
face the daunting task of seeking aged care for someone close to us. At first
the complexity of dealing with the personal, practical and financial issues may
seem overwhelming, but there are positive ways to address these issues and
there is help available to navigate through them.
A specialist in the
field of aged care advice can help
people work through the aged care maze.
Sooner or later many
of us need to deal with a relative who is no longer able to manage independently
in their own home. Health and mobility deterioration will eventually lead to a
need for alternative care arrangements. For the relative who is trying to
facilitate this life change, it is often quite a shock when they come up
against the complexity of the transitional and financial issues involved.
To help people gain some perspective and identify what the
priorities should be, a focus on five
key questions on aged care may help.
Question 1 – what are the aged care options?
The degree of care needed is evaluated by an Aged Care
Assessment Team (ACAT). ACAT comprises health professionals and social workers
and their role is to assess if the person needs assistance services at home or
if a move to residential care is needed. In-home care can be arranged through
the Department of Health in the form of Home and Community Care (HACC),
Community Aged Care Packages (CACPs) and Respite Care Services.
If it appears that independent living is too much of a
challenge then they may recommend residential
aged care. There are two
main types of residential care available - hostels
and nursing homes. Hostels provide
assistance with daily living needs, such as meals, laundry and cleaning as
well as a degree of nursing care. Nursing
homes offer more intensive support for higher level of care, including full
time nursing care. When deciding on a facility it is helpful to take a look first hand - to get a feeling for the
standard of care available and to start comparing the pros and cons of
different aged care homes.
Question 2 – what costs are involved?
It has been identified
that the costs of residential care can be the most confronting aspect for the
uninitiated. While the cost
of care is partly funded by the government, there can still be significant
costs to residents which are partly based on their level of assets and income. It may well be that the resident is
required to contribute toward an entry fee plus ongoing daily care fees.
Hostels and nursing homes each use different structures to
calculate entry fees. Hostels ask for an
up-front bond, from which they will
take interest earnings plus an annual deduction of the bond amount. Nursing homes do not require a bond,
but will instead charge their entry fee
as a daily amount. In both cases the resident's
assets may be assessed by Centrelink to determine the level of fee and the
degree of subsidy made by the government.”
Both hostels and nursing homes also
charge daily care fees on top of the entry fee. The basic daily care fee is
generally payable by all residents, whereas the income tested fee is based on the resident’s level of income. At
the very least, the daily care fees will be a large proportion of the age
pension, but they can be significantly higher if a person’s assessable income
is over a certain level.
While all these costs may seem difficult to digest, it is vital to seek some advice on strategies to
minimise them through correct structuring of assets. There are ways and
means to limit fee liabilities so that aged care doesn't end up costing more
than is necessary.”
Question 3 - What will happen to the family home?
In many cases, the
family home will be the major asset involved and once the reality of the
costs of aged care start to become apparent, it may seem inevitable that the
family home needs to be sold to fund these costs - the situation with the
family home needs to be carefully considered.
If a spouse still
remains at home then the value of that home is not assessable for entry fee
purposes and this will serve to reduce the fee contribution required by the
aged care facility. If the home is left vacant, however, then it is
assessable. The question here is whether
it is better to sell the home or to retain it and rent it out - there is no
simple answer to this; as it requires a careful analysis of the resident's
other assets and income. This is one area where an adviser is often able to
relieve clients of the worry of making the wrong decision, by providing an
objective analysis of where the home can fit into the overall plan for
minimising fees and maximising income.”
Question 4 – what are
the impacts on the age pension?
Maintaining age pension entitlements can be a very sensitive area for many people.
If selling the family home is being considered, then it is important to factor
in how this may affect pension levels, as the value of the home should fall
under the assets test once sold.
It may well be possible to keep the home, rent it out and
use the income from this to fund the entry fees. By doing this, both the value
of the home and the rental income generated may still be exempt from the assets
and income tests respectively. Again, there are no simple answers here; it will
depend on individual circumstances. The pension may only be one component of
income, so it is vital to consider the
total income picture and not just the pension in isolation.
Question 5 – how can
ongoing income be maximised?
Optimising ongoing income for the aged care resident can be
quite a challenge once all the complexities of the aged care regime are taken
into account. The need to minimise fees, maximise the age pension, deal with
the family home and structure other financial investments will all have an
impact on what ongoing income can be generated.
Analysing all these issues and structuring
the most effective solution takes some skill to organise. There is a real
risk of poor decisions being made if someone unfamiliar with the aged care
environment either puts these issues in the too hard basket or fails to
properly assess how all the factors interrelate. Anyone in this situation is strongly
advised to seek professional advice from a qualified financial planner to find
the right answers to these five critical questions.
For further
information, contact Hugh Kilpatrick* from RIadvice-RetireInvest on 03 9471
0080.
*Hugh Kilpatrick is an Authorised Representative of RI Advice
Group Pty Limited (ABN 23 001 774 125), AFSL 238429. This editorial does not
consider your personal circumstances and is general advice only. You should not act on any information
without considering your personal needs, circumstances and objectives. We strongly
recommend you obtain professional financial advice specific to your own circumstances.
Monday, March 19, 2012
Should investors look at the small picture?
By Matthew Sherwood, Head of Investment Market Research,
Perpetual
This week’s economic data in Australia has confirmed
what Australia’s company reporting season has been telling us; there is
only modest growth momentum in both the economy and earnings at present. There
were low expectations heading into the February 2012 reporting season, but
large cap stocks had difficulty clearing even these hurdles, whereas small
cap stocks (particularly mining services and consumer discretionary) did much
better. Companies exposed to resource volumes and the Capex cycle did
reasonably well, whereas the remainder struggled in the wake of soft revenue
growth, sticky cost pressures and the high Australian dollar, which culminated
in margin pressures being the prominent theme.
The number of positive earnings surprises (64) was similar
to the number of negative surprises (62), and overall FY12 earnings per
share growth declined to around 2%. However, the downgrades-to-upgrades ratio
bottomed (from 0.3x in mid-January 2012) and is now starting to recover (0.8x
in late February), which indicates that almost as many stocks are being
upgraded as downgraded. This is the best result for a year. Although earnings
growth was modest during the season and there was little in the way of capital
management (only Westfield and Telecom New Zealand announced notable buybacks
plans), the market experienced some very positive price reaction to their
respective results. Clearly the market was priced for bad news on many
fronts and stock prices rose when the results were a bit better.
Consequently, two smaller themes have become prominent in
the prevailing market environment. The first is ‘value’, which allows oversold
companies to experience price growth even though the macroeconomic
environment may not improve. The second is ‘quality’, with firms that
have a good earnings profile, strong balance sheets and that can provide
income growth, being highly prized by investors.
Wednesday, January 18, 2012
Smoother sailing on the investment high seas
There is no doubt that 2011 was a tough year with many
investors finding volatility in the sharemarkets woefully challenging – the US
debt debate, revolts in the Middle East, Greece’s near economic collapse, the
European debt crisis, the threat of another recession in the US and fears of a
Chinese slowdown all played a part in making the year a very bumpy ride.
So is 2012 a good year to invest? Choosing the best time to
invest is notoriously difficult. Even the world's best economists don’t always know
when markets are heading up or down.
There may be a way to safeguard yourself from investing your
money at the worst possible time - it's called “dollar cost averaging.”
Dollar cost averaging is simple strategy with a lot of power
- basically, all you have to do is invest a set amount of money at regular
intervals, for example $100 at the start of each month.
This takes the stress out of trying to time the market by
smoothing out your investment over time.
One month you may buy $100 worth of shares at $10 each, the
next month the price could be $9.50, and the next month $9. This means you attempt
to mitigate the risk of buying all your shares at an inopportune time.
With this strategy you can worry less about investment
prices day-to-day and chopping and changing your plan based on investment tips
from neighbours and taxi drivers.
While this may sound like a simple, almost intuitive
concept, when left to their own devices most investors appear to have the seemingly
bad habit of buying more shares when prices are high, and less when prices are
low.
This might be human nature. When markets are booming and
investors are happy, everyone wants a piece of the action. But when markets are
falling, people panic and tend to want to put their money somewhere 'safe'
while markets recover.
Unfortunately this “human nature” means many investors miss
out on the opportunity to buy shares when they are effectively on sale, and
even worse miss out on the big gains that can be made when markets recover.
Dollar cost averaging cuts out the emotional element to
investing - replacing irrational spur of the moment decisions with a thoughtful
long-term investment plan that will see you building wealth consistently over
time.
With market volatility high and so much noise in the press
about the state of the economy, now is the perfect time to take the emotional
elements out of investing and get your investment plans back on track – whether
that’s setting yourself up for your ideal retirement or lifestyle goals such as
buying a new house.
For more information about dollar cost averaging and
getting your financial wellbeing on track, call Hugh Kilpatrick* on 03 9471 0080
today.
*Hugh
Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services
Licence 238429. This article does not
consider your personal circumstances and is general advice only. You should not
act on the information provided without first obtaining professional financial
advice specific to your circumstances.
Financial markets in 2012 and a sound investment strategy
I trust you had an enjoyable
Christmas break and wish you a very Happy New Year!
There is no doubt that 2011 was a tough year with many investors finding the heightened volatility challenging. Market volatility was driven by a number of events – the US debt debate, revolts in the Middle East, Greece’s near economic collapse, the European debt crisis, the threat of another recession in the US and fears of a Chinese slowdown. Or more correctly, the sensationalizing of these things.
*Authorised Representative
There is no doubt that 2011 was a tough year with many investors finding the heightened volatility challenging. Market volatility was driven by a number of events – the US debt debate, revolts in the Middle East, Greece’s near economic collapse, the European debt crisis, the threat of another recession in the US and fears of a Chinese slowdown. Or more correctly, the sensationalizing of these things.
This update is designed to
highlight some of the important themes at play for financial markets in 2012
and emphasise the importance of retaining a sound investment strategy during
uncertain times.
The market will continue to
focus on economic news…
Volatility over the past year
can be largely attributed to the market’s reaction to the daily economic news
flow out of Europe, the US and China. While we expect 2012 to be no different,
we do see tentative signs of improvement as we head into the New Year.
While the situation in Europe
could indeed worsen, should policymakers be able to avoid the worst case
scenario – that is, a complete collapse of the banking system – the rest
of the world should be able to continue its recovery and/or growth trajectory.
Importantly, global growth has
been less reliant on European economic growth over the last couple of decades.
Therefore, if the issues in
Europe can be contained and avoid a full blown recession, the US should be able
to resume its moderate recovery, and for emerging markets the process of
urbanisation and the growth of the middle class consumer.
In Europe, policymakers also
start the New Year with a greater willingness to acknowledge the core problems
facing the region. This follows the appointment of more
economically-disciplined leaders in Italy, Spain and Greece.
In Australia, while it is true
that the economy has slowed – particularly in the non-resource side of the
economy – policymakers have plenty of “ammunition” in the form of further
cuts to interest rates and increased government spending.
The medium and long-term drivers for the Australian economy also
remain firmly intact. These factors should see record levels of infrastructure
spending over the next decade. Deloitte-Access Economics puts the amount of
“mega-projects” at approximately $400bn as at October 2011 – equal to
approximately a third of total GDP!
Sharemarkets: some
attractive fundamental attributes
Global sharemarkets were mostly
lower over the year – but what may come as a surprise is that the US was one of the best performing
markets. The S&P500 ended the year flat, while the Dow Jones was up
more than 5%.
This was despite the extreme
levels of volatility and negative news flow from the media.
Over the same period, the
Aussie market recorded a decline of almost 15%. The weak relative performance
can be attributed to the poor performance of our two dominant sectors – resources
and financials. Most of these concerns reflected the potential impact from
a slowdown in the Chinese economy.
The divergence in performance
between the Australian and US markets highlights the importance of geographical
diversification in an investment portfolio.
Looking ahead, despite
expectations for continued high levels of volatility, we are comforted by a
number of attributes for the market both here and offshore – valuations,
dividend yields and corporate balance sheets.
Valuations are at levels that are
considered low on a historical basis, indicating that the market has factored
in some of the worst possible eventualities. This is despite the continued
moderate recovery in the US and recent European efforts to resolve the debt
crisis.
Dividend yields are also
attractive on many measures. The Australian market is trading on a grossed up
dividend yield of approximately 7% to 8%, which is attractive on a relative basis
to both cash and inflation.
Sustainability of these dividends should be well supported by
generally strong corporate balance sheets, low debt, high cash levels, and for
some sectors low historic percentage of earnings paid to shareholders in
dividends.
Performance of best
performing sectors unlikely to be repeated…
The best performing traditional
asset class over the past 12 months was the fixed interest sector on a “flight
to safety” as investors sold riskier assets such as equities (shares).
The extent of this risk
aversion was no clearer than in sovereign bond markets where the US 10-year
treasury yield sunk below 2.0%, while in Australia the equivalent touched 3.6%
- a record low.
Looking ahead, we would caution
against chasing last year’s winners. With treasury yields already at record low
levels it is very difficult to repeat last year’s gains – interest rates cannot
fall indefinitely!
Focus on your investment
strategy and long-term investment goals
While dealing with market
volatility is often difficult and investors with short term investment goals
may need to consider how market changes will affect them, it is during these
periods that the market provides a number of opportunities for patient and
disciplined investors with long term investment goals.
Altering a long-term investment
strategy should also be considered against the negative implications of
frequent and undisciplined changes. Missing just a few of the best months in
equity markets may substantially reduce your overall return.
Lastly, very few people have
increased their wealth by selling low and buying high. Unfortunately, this is a
typical response due to the psychology of investing. Markets reward those with
patience and discipline.
Hugh Kilpatrick
RI Advice Adviser *Authorised Representative
*Authorised Representative of
RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238 429. This information
does not consider your personal circumstances and is general advice only. You
should not act on this information without first obtaining professional
financial advice specific to your circumstances.
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