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Tuesday, September 11, 2012

Fatal mistakes that new relationships make!

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.

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

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.

A number of headwinds remain for investors. Next Wednesday, the December quarter 2012 national accounts are released and recent data has indicated that the result is likely to be soft, even though current market expectations are for a 0.7% quarterly rise. Recent data on investment, credit, housing and consumer spending, have suggested that the balance of risks to this result is to the downside. However regardless of the result, investors should not be a too perturbed, as any growth weakness likely reflects the exchange rate rising before the mining boom arrives. This is just a timing issue – investment in mining equipment may be a bit soft in Decemeber 2011, but it is expected to rise by 36% in 2012 and by another 36% in 2013. The problem is that it is entirely mining based. Indeed, there are almost no plans to boost Capex outside mining anytime soon and the Reserve Bank recently noted that ‘the import intensity of current mining investment projects is also higher than in earlier years…range of inputs…that have historically been sourced locally are now often being imported.’

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.

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.