Financial Newsletter Sunshine Coast
Welcome to Unique Financial Partnerships, keeping you up to date with all financial planning, self managed superannuation funds, tax minimisation, life insurance, on the Sunshine Coast and around Australia.
The information in this newsletter is current at the time of printing. Contact us for updates.
Negative returns on superannuation are to be expected from time to time. If you read your superannuation fund’s product disclosure statement it will clearly state this. In fact, negative returns were experienced as recently as the 2000/01 financial year. In four out of the five years following this, the industry bounced back to achieve returns of over 13%.
In the four years from 2003 to 2007 the average total return on balanced funds was just over 14%. This corresponds with the average growth in total superannuation assets of 14.3% over the ten years from 1997 to 2006.
You may regret not switching to a more defensive superannuation option, such as cash or fixed interest, before the falls occurred. Or you may be tempted to cut your losses and start switching now. According to the deputy chief executive of the Investment and Financial Services Association, John O'Shaughnessy: "If you are in a panic, get advice. This is not the time to be selling out of super or a managed fund—all you would do is crystallise losses."
If you are in the accumulation phase, continue making superannuation contributions and review your investment options. Remember that superannuation is a long-term investment. Historically, financial markets have always recovered from major falls and if you are not nearing the end of your working life, there is plenty of time to add to your superannuation assets and recover these recent losses before your retirement.
If you are a retiree or nearing retirement, you may be nervous about the falls in your superannuation balance. You should consult your financial adviser to discuss how there may be other financial strategies you can implement. For example, a fall in the value of superannuation assets may mean you now qualify for a partial government pension and other associated benefits.
Don’t forget the substantial taxation benefits related to superannuation and the tax-free income it can provide in retirement.
Sources (NFP): www.apra.gov.au – Quarterly Superannuation Performance (June 2008)
www.apra.gov.au – Insight: Celebrating Ten years of Superannuation Data Collection (June 2008)
www.businessspectator.com.au – Robert Gottliebsen - ‘Super funds losing $1bn a day’ (25 October 2008)
www.fido.gov.au – ‘Long-term performance figures for typical super fund investment options’
State of the markets
We are living in interesting times. Globally, financial markets are experiencing exceptional volatility and a number of major economies have slipped into recession. But what does this mean for you?
Job security
The prime minister and the deputy governor of the Reserve Bank of Australia (RBA) agree that Australia is well placed to avoid a recession but will experience an economic slowdown. The net effect is that we could see the jobless rate rise. Already both employment growth and job vacancies have been declining for several months.
However, according to Westpac’s senior economist, Matthew Hassan, the slowdown in the economy won’t result in mass sackings, because companies will generally wish to retain staff. The focus instead will be on reducing labour costs through alternative methods such as cutting working hours.
The share and property markets
Volatility in the financial markets is best illustrated by the falls on the share market. As at 18 November, the All Ordinaries Index had declined by around 3,300 points (48%) from its high of 6,873 in November 2007.
What these figures don’t show is the long-term profitability of investment on the share market. History has proven that for each market downturn there has been a corresponding recovery. For example, if you had purchased $10,000 worth of shares based on the All Ords index on the eve of the crash in 1987 your investment would still be worth around $16,000 today, despite the intervention of the 1987 crash, the fall following the September 11 terrorist attacks and the current financial crisis.
In Australia, the property market is also declining. Some organisations, including the International Monetary Fund (IMF), claim that Australian residential property prices are inflated by as much as 20%, with some commentators predicting a fall of up to 20%, or even 40%.
Only time will tell if the increased First Home Owners Grant and the recent fall in interest rates will be enough to stimulate the housing market.
Interest rates and inflation
Fears of a recession have led the RBA to lower official interest rates to help stimulate expenditure in the economy. Rates have fallen by 2% since September and further reductions are predicted. Inflation may be reaching a peak and may begin to decline, assisted by the expected fall in wages growth and recent falls in world oil prices.
Looking forward
While the outlook globally may not be bright, Australia should fare better than most. Our banks are well regulated, well capitalised and profitable, which provides some protection from the current financial crisis. Here are some of the positives to come out of the global market volatility:
- Quality blue chip shares are at prices lower than we’ve seen for several years, providing a strong buying opportunity.
- The dollar is down, so for anyone with overseas shares, the currency slide has provided a buffer against the falls in share markets.
- The drop in interest rates has meant more real money in the pocket for anyone with a mortgage.
- Falling oil prices are being reflected in some relief at the pump, which should also lead to an easing in inflation.
Nothing stays the same and all crises eventually come to an end. We still have much to be optimistic about for the future.
Sources (NFP): www.ato.gov.au
www.news.com.au – ‘Unemployment figures, is your job recession proof?’ (7 August 2008)
www.rba.gov.au – Cash Rate Target (November 2008)
www.rba.gov.au – Statement on Monetary Policy (November 2008)
www.rba.gov.au – About Monetary Policy
www.bloomberg.com – Australia’s economy faces worst recession since 1990
www.charteredaccountants.com.au – The collapse of the US sub-prime mortgage market (May 2008)
www.abc.net.au – ‘Experts differ on forecasts for Australian property market’ (15
October 2008)
www.aph.gov.au – Monthly Statistical Bulletin (November 2008)
Building an investment portfolio while the buying is good
Share prices, property values and interest rates are all on the way down. So how does a person get ahead with their investments?
The fall in financial markets has reduced the value of the average investor’s portfolio, prompting many investors to sell investments to cut their losses.
Now is not the time to panic. Times are tough, but tough markets present excellent buying opportunities. Logic would suggest that the time to buy something is when prices are low. The same holds true for investments.
Shares produce returns in two ways: capital gains through increases in value and income through dividends. Current low share prices mean that potential capital gains will be greater on any recovery and the same dollar value of dividends represents a higher dividend yield. If the net tangible asset (NTA) backing of the share is higher than the share price, the company is undervalued and a rise in price or a takeover offer is more likely to occur.
Take the simple example of Abacus Property Group. The following table shows how the fall in price actually makes the share more attractive in view of higher dividend yield and NTA.
Date |
Share Price |
Quarterly Dividend |
Dividend Yield |
NTA |
November 2007 |
$1.89 |
3.25c |
6.88% |
0.25 |
November 2008 |
$0.35 |
3.5c |
44.35% |
1.37 |
Superannuation comprises a major component of most Australians’ investment portfolios. However, we should not overlook the importance of accumulating wealth outside of superannuation. A good way to achieve this is through a regular savings plan.
A regular savings plan involves making investments of a set amount at regular intervals. This is a suitable strategy for people who do not have a large sum of money to invest immediately but are able to build up an investment portfolio over time.
Apart from creating a disciplined approach to saving, such a strategy can benefit from a principle known as ‘dollar cost averaging’ where the same investment buys more shares when the price falls and fewer when the price increases. The net result is that the average cost of the investments will always be below the average value of the investments.
And don’t forget diversification. You can diversify your investment across different asset classes, regions and investment managers or styles.
Contact your financial adviser if you would like to take advantage of the current buying opportunities to build your investment portfolio.
Sources (NFP): www.bt.com.au/Articles/2008-september/200809-Rules-for-investing.asp
20somethingfinance.com – ‘4 Reasons why you should brave a tough market’ (13 March 2008)
Afr.com – Share tables (November 2008)
If I had my life over again
A nurse in an aged-care facility reported on her conversations with some elderly and terminally ill patients. “They all say the same things. No one regrets the things they have done in their lives. All people talk about is the things they didn’t do!”
Over a period of a few months she collected the words her patients used. Here is a selection of what they would do if they had their life over again.
I’d spend more time with my kids.
I would take more trips and explore new places.
I’d try more things.
I’d be sillier—life shouldn’t be that serious.
I’d take more risks. Perhaps I’d have more actual troubles but fewer imaginary ones.
I’d dare to make more mistakes next time round.
I would make up with my brother.
I would listen more and talk less.
I would take the dog for more walks.
I would take more time to savour life as it happens.
Looking at the list is interesting—no mention of bigger houses or faster cars. People looking back on their lives think most about family, relationships and activities they could have done. They berate themselves for being too cautious.
Making a change to do what you really want in your life can seem pretty daunting. But don’t wait until it’s too late. Take a tip from a kindergarten joke: “How do you eat a dinosaur? One mouthful at a time!”
Disclaimer
All representations and information contained in Futuro in Focus are made in good faith and are believed to be correct at the time of preparation. Articles are of a general nature and they do not purport to be specific investment advice. Individual needs or other considerations have not been taken into account, thus information contained herein should not be relied upon as a substitute for detailed advice. Futuro Financial Services will receive fees or brokerage from the provision of advice or placement of investments. You may, by contacting our Privacy Officer on 07 3018 0400 or by writing to Futuro Financial Services Privacy Officer GPO Box 942 Brisbane QLD 4001, request not to receive further editions of Futuro in Focus.
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