2020 vision for financial fitness

What better year to have your financial health in tip top shape than the one requiring 20/20 vision!

The start of any year is always a good time to assess your financial situation and make sure you are on track to achieving your dreams, but the start of a decade is even more significant.

So where do you start?

Firstly, look at your current position. After all, if you don’t know where you are, how can you know what you need to do to achieve your financial goals?

Assess your income and outgoings and see how you can create a budget, to increase your savings and reduce your debt.

Don’t be afraid to haggle

It’s not just about cutting back on spending. You can also make savings without feeling any pain. For instance, instead of foregoing small pleasures, instead look at negotiating a better deal on your household bills.

So shop around for a better priced insurance policy; check your current internet provider’s offering; and seek a cheaper deal with your electricity and gas provider or on your mortgage.

Has your variable home loan come down in line with the general fall in interest rates and others on the market? See if your bank can match that better rate. If not, you may wish to consider changing lenders but make sure the costs of switching don’t negate the benefits.

Boost your super

On the other side of the ledger, you should also consider strategies to help build your wealth. For example, why not put a little extra into your super for your retirement? You can make concessional contributions of up to $25,000 a year. If your employer’s compulsory Superannuation Guarantee contributions fall below this level, consider salary sacrificing or making a personal deductible contribution to top up your super balance. Concessional contributions only attract 15 per cent tax on your pre-tax income versus your personal tax rate. That means you keep $85 of every $100 invested.

If you didn’t reach your concessional contributions cap last year, and your super balance was less than $500,000 at 30 June 2019, you can contribute that shortfall this year or carry it forward for up to five subsequent years.i

And if you are aged 65 to 74 and no longer working full time, you may still be able to make a voluntary contribution to super this year, provided you pass the work test. You need to have worked at least 40 hours over 30 consecutive days in the year you make the contribution.ii An exemption may apply for 12 months if you satisfied the work test in the previous financial year and your super balance is less than $300,000.

Revise your investments

On the subject of super, why not take a look at your investment mix. Make sure it’s working for you in the current interest rate and investment environment while still meeting your risk profile.

And most importantly, consolidate your super. While some people have more than one fund to access better insurance or other benefits, for others, having multiple accounts means you could be paying extra fees without any added benefits. You might find this has been done for you, as since July 2019 the Australian Taxation Office has acquired inactive low balance super accounts with the intention of consolidating them into another existing account. But this only occurs if the balance is less than $6000.iii

You might also look at other avenues to save money. Perhaps consider depositing a percentage of your salary into a savings account to provide a buffer should some emergency occur.

Protect your family

The start of a new year is also a good time to check your Will is in order. Have your circumstances changed in the last 12 months? If so, you really need to update your Will to reflect your new lifestyle.

The new year, whether financial or calendar, always offers a good opportunity to assess where you are in building your financial wealth and making sure you are financially fit.

i https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=3

ii https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions---too-much-can-mean-extra-tax/?page=3

iii https://www.ato.gov.au/Individuals/Super/Growing-your-super/Keeping-track-of-your-super/

Our retirement system: great, but room for improvement

You could be forgiven for thinking Australia’s superannuation system is a mess. Depending who you talk to, fees are too high, super funds lack transparency and Governments of all political persuasions should stop tinkering.

Yet according to the latest global assessment, Australia’s overall retirement system is not just super, it’s top class.

According to the 11th annual 2019 Melbourne Mercer Global Pension Index, Australia’s retirement system ranks third in the world from a field of 37 countries representing 63 per cent of the world’s population. Only the Netherlands and Denmark rate higher.i

What we’re getting right

While super is an important part of our retirement system, it’s just one of three pillars. The other two pillars being the Age Pension and private savings outside super.

Writing recently in The Australian, Mercer senior partner, David Knox said one of the reasons Australia rates so highly is our relatively generous Age Pension. “Expressed as a percentage of the average wage, it is higher than that of France, Germany, the Netherlands, the UK and the US.”ii

As for super, we have a comparatively high level of coverage thanks to compulsory Superannuation Guarantee payments by employers which reduces reliance on the Age Pension. In fact, Knox says Australia is likely to have the lowest Government expenditure on pensions of any OECD country within the next 20 years.

Superannuation assets have skyrocketed over the last 20 years from 40 per cent of our gross domestic product (GDP) to 140 per cent. “A strong result as funds are being set aside for the future retirement benefits of Aussies,” says Knox. Even so, on this count we lag Canada, Denmark, the Netherlands and the US.

Room for improvement

For all we are getting right, the global report cites five areas where Australia could improve:

• Reducing the Age Pension asset test to increase payments for average income earners

• Raising the level of household saving and reducing household debt

• Require retirees to take part of their super benefit as an income stream

• Increase the participation rate of older workers as life expectancies rise

• Increase Age Pension age as life expectancies rise.

Retiree advocates have been asking for a reduction in the assets test taper rate since it was doubled almost three years ago.

Since 1 January 2017, the amount of Age Pension a person receives reduces by $3 a fortnight for every $1,000 in assets they own above a certain threshold (singles and couples combined).iii

Other suggested improvements, such as increasing the age at which retirees can access the Age Pension, present challenges as they would be deeply unpopular.

The Retirement Income Review

One roadblock standing in the way of ongoing improvements to our retirement system is reform fatigue.

In recent years we have had the Productivity Commission review of superannuation, the banking Royal Commission which included scrutiny of super funds, and currently the Retirement Income Review.

The Retirement Income Review will focus on the current state of the system and how it will perform as we live longer. It will also consider incentives for people to self-fund their retirement, the role of the three pillars, the sustainability of the system and the level of support given to different groups in society.

The fourth pillar

One issue that the Government has ruled out of the Review is the inclusion of the family home in the Age Pension assets test.

Australia’s retirement income system is built around the assumption that most people enter retirement with a home fully paid for, making it a de facto fourth pillar of our retirement system.

With house prices on the rise again in Sydney and Melbourne and falling levels of home ownership, there are growing calls for more assistance for retirees in the private rental market.

The big picture

Despite the challenge of ensuring a comfortable and dignified retirement for all Australians, it’s worth pausing to reflect on the big picture. The Global Pension Index is a reminder of how far we have come even as we hammer out ways to make our retirement system even better.

i https://info.mercer.com/rs/521-DEV-513/images/MMGPI%202019%20Full%20Report.pdf
ii https://www.theaustralian.com.au/commentary/our-retirement-system-is-far-from-perfect-but-its-still-better-than-most/news-story/d3db43e68b3b93d8c6d6e8a8c17a491d?btr=4ff6fe5e96c92f060a779127475fa258
iii https://guides.dss.gov.au/guide-social-security-law/4/2/3

Building Wealth in Diversity

What a difference a year makes. In recent months, Australian shares hit a record high, the Aussie dollar dipped to levels not seen since the GFC and interest rates were cut to historic lows.

Towards the end of 2018, shares were in the doldrums and while experts agreed the Aussie dollar would go lower most tipped the next move in interest rates would be up.

All of which goes to show that when it comes to predicting financial markets, the only sure thing is uncertainty. There’s no avoiding market risk, but it does need to be managed if you want to build enough wealth to live comfortably in retirement and achieve other life goals along the way.

Thankfully, there is a way to reduce the impact of market volatility on your overall investment portfolio. Hint: it’s not by putting all your money in the bank.

Mix it up

The best way to reduce the risk of one bad investment or a downturn in one market decimating your returns is to hold a mix of investments. This is what is referred to as diversification or not putting all your eggs in one basket.

To smooth your returns from year to year and avoid the risks of short-term market volatility, you need a mix of investments from different asset classes.

The difficulty of predicting the market in the short-term was certainly in evidence in the year to June 2019.

Investors who panicked at the end of 2018 and sold their shares would have missed out on the unexpected rebound in global shares.

A year of surprises

Australian shares returned 11 per cent in the year to June 30. Global shares returned 11.9 per cent while US shares returned 16.3 per cent, partly reflecting the fall in the Aussie dollar from US74c to US70c.[i]

The worst performing asset class in the year to 30 June was Australian residential property, down 6.9 per cent.ii But while the housing market downturn was constantly in the news, good news in other sectors of the property market went largely unnoticed.

The best performing asset class by far in the year to June was Australian listed property, up 19.3 per cent.

The gap in performance between direct residential property and listed property highlight another important aspect of diversification. You also need to diversify within asset classes.

Look beyond your backyard

Where property is concerned, that means investing across a range of property types and geographic locations. By diversifying your property investments, you reduce the risk of short-term price fluctuations in one location which can result in a big loss if you are forced to sell at the bottom of the market.

The same holds true for shares. Many Australians have a share portfolio dominated by the big banks and miners, attracted by their fully franked dividends.

The danger is that investors with a portfolio heavily weighted towards local stocks are not only exposed to a downturn in the bank and resources sectors but also the opportunity cost of not being invested in some of the world’s most dynamic companies.

Time is your friend

Over the last 30 years the top performing asset class was US shares with an average annual return of 10.3 per cent. Australian shares (9.4 per cent) and listed property (9.2 per cent) were not far behind.[iii]

And then there was cash. In a time of record low interest rates cash in the bank returned 2 per cent in the year to June 30, barely ahead of inflation of 1.6 per cent. The return was better over 30 years (5.6 per cent), but still well behind the pack.

While it’s important to have enough cash on hand for daily living expenses and emergencies, it won’t build long-term wealth.

There’s no telling what the best performing investments will be in the next 12 months, as past performance is not an indicator of future performance. What we can be confident about is that a portfolio containing a mix of investments across and within asset classes will stand the test of time.

[i] https://static.vgcontent.info/crp/intl/auw/docs/resources/2019_index_chart.pdf?20190730%7C193023

[ii] https://www.corelogic.com.au/sites/default/files/2019-07/CoreLogic%20home%20value%20index%20JULY%202019%20FINAL.pdf

[iii] https://www.vanguardinvestments.com.au/au/portal/articles/insights/mediacentre/stay-the-course.jsp

Lessons from the Future Fund for retail investors

Established in 2006, the Future Fund is Australia’s sovereign wealth fund with assets now over $160 billion. The original seed capital was only $60 billion with no further contributions, demonstrating the power of compounding at 10.4% over the last 10 years.

In 2018/2019, when the top public super funds in the country delivered close to 10%, the Future Fund returned 11.5%. It’s worthwhile understanding how the Fund has delivered these impressive results.

Investment process

The Future Fund employs what is known as a ‘total portfolio approach’, with a strong focus on risk and return at the overall portfolio level. The Fund has developed an ‘Equity Equivalent Exposure’ where risk in all asset classes is measured in terms of an equivalent equity ‘beta’ or market risk.

The Fund operates under a set of fundamental beliefs which guide the way it invests, including:

• Expected returns and risks vary over time and therefore the amount of risk taken should also change over time.

• Higher expected return per unit of risk can be obtained from diversification.

• Investment risk is not captured by a single metric and additional risks must be assessed and managed.

To construct the portfolio, the Fund combines top-down views with bottom-up research. Top-down analysis involves forming opinions about the global economy, financial markets and geopolitics. Bottom-up analysis identifies attractive investments with compelling reward for the risk taken.

There is no fixed strategic asset allocation and therefore the portfolio is dynamic. In times of perceived favourable market conditions, the Fund is likely to increase allocations to riskier asset classes such as equities.

Asset allocation

The Future Fund’s asset allocation reveals sizeable investments in private equity and real assets. As a long-term investor, private equity may help maximise returns by capturing an illiquidity premium and giving exposure to themes not available in liquid markets, such as disruptive companies or restructurings. Elsewhere, investments in infrastructure and timberland provide inflation protection and portfolio diversification. In fixed interest, the Fund has ventured into private debt, peer-to-peer lending, trade finance, bank capital instruments and distressed debt.

The Future Fund has historically employed a ‘barbell’ strategy, meaning there is a considerable allocation to cash but also a sizeable exposure to riskier strategies. Holding cash allows the fund to be opportunistic and buy cheaper assets in times of market corrections.

In stark contrast to SMSFs, the Fund has a much larger allocation to global equities (29%) than Australian equities (7%). The Future Fund’s asset allocation as at 30 June 2019 was:

Alternative strategies (such as relative value or macro-directional ‘hedge fund’ techniques) give exposure to a diversified set of markets to provide uncorrelated income streams and help manage risk.

Performance over time

The Fund has consistently outperformed its benchmark target return of CPI + 4.5% to 5.5% pa until 30 June 2017 and CPI + 4% to 5% pa thereafter.

Source: Portfolio update at 30 June 2019, Future Fund

Risk and its measurement

It is in the measurement of risk that the Future Fund’s numbers demand scrutiny. Measuring return against volatility, the best place in the following chart is the top left corner. The combination of low volatility and high returns is ideal. The Future Fund claims it takes about half the risk of a median or top quartile growth fund with equal returns.

In fact, the Future Fund's Chief Investment Officer, Raphael Arndt, told The Australian Financial Review: "The story is in the risk and not in the return.”

How does it make such good returns with less risk? Acting in its favour is the relatively high proportion of assets held in unlisted markets, which are not revalued as regularly as listed. Assets such as private equity (16% of portfolio), alternative assets (13%), and any unlisted property (7%) or infrastructure and timberland (7%) which are revalued less frequently than daily market movements create a perception of a lower level of price volatility. Eventually, however, there is no difference in the value of an airport or toll road whether it is listed or unlisted.

Sam Sicilia, Chief Investment Officer at Hostplus, tweeted (in his personal capacity) in response to the report:

"The problem is using volatility as a measure of risk. It is NOT. Unlisted assets cannot be valued frequently, so their Vol is mostly zero. Hence nonsensical use of Vol for those assets. But that’s not a case against unlisted assets, it’s a case against Vol as a risk metric."

Nevertheless, the results are impressive. They made some good calls with a more defensive stance early in the financial year then more aggressive into 2019. They allocated to hedge funds where the results are not dependent on market direction. Even the defensive assets such as long bonds performed well. Infrastructure and property delivered further strength on the back of falling bond rates. The Fund carries high exposure to an asset class that is difficult for smaller investors to both assess and access: private equity allocations, especially venture capital. Finally, global equity markets performed well. The Future Fund keeps its costs down in equities by using factor indexes rather than paying active fund managers whose style might simply be capturing a market ‘factor’, offsetting the high cost of its ‘alternative’ strategies.

The Fund does not reveal returns by asset class, but the amount in private equity increased by about 24% over the last year, suggesting either strong returns or greater allocations, or both. Three former staff members have set up a new private equity business called Potentum Partners, and they claim to have generated net returns over 10 years of 17% plus.

Lessons for individual investors

Of course, replicating past investment success with a similar asset allocation is no guarantee of future performance as market conditions will be different. Even the Future Fund expects lower future returns from its strategy. And some assets are simply not available to retail investors.

Nevertheless, the experience of the Future Fund offers investors valuable lessons in long-term investing.

1. Diversification is key

A diversified portfolio enables an investor to maximise returns for a given level of risk. Investing in a set of uncorrelated income streams can help to manage risk and make a portfolio less 'volatile'.

The Future Fund thinks about its entire portfolio as one risk position. High cash holdings allow for market exposure elsewhere, while alternatives might have low expected correlation to equities. A heavy fall in one sector should not severely damage the portfolio, although obviously losses are possible. In extreme markets, correlations can rise quickly and there are few perfect hedges.

While it can be easy to find attractive standalone investments, it is more difficult to construct a coordinated portfolio of individual bets.

2. Identify your risk tolerance and competitive edge

As a long-term investor with patient capital, the Future Fund can accept short-term market volatility and focus on identifying investments likely to perform well over the long run, such as private equity and infrastructure.

Retail investors with the right mindset can have competitive advantages of their own. For instance, they do not need to worry about the performance of benchmarks and peers and instead can focus on generating absolute returns within their own financial plan and risk tolerance. A 50-year-old investor can plan for a 30- or 40-year investment horizon if they have the patience.

In reality, many retail investors panic when markets fall and cannot take advantage of a long-term horizon.

3. Cash provides optionality

While cash is typically the lowest-returning asset class, it gives the ability to take advantage of market dislocations or attractive opportunities as they arise. When markets are oversold, investors can opportunistically deploy capital at attractive prices.

4. Don’t overpay for something you can obtain cheaply

The Future Fund identified which of its asset managers were delivering what they call “lazy risk premia strategies such as momentum” and cancelled their mandates. That is, an active manager may be charging fees to deliver a return which is easily replicated in a ‘smart beta’ index for a much lower cost.

The main equivalent for a retail investor is an active manager charging 1% to hug the market index. This shows up in low tracking errors, where results always follow the market. It is now easy for any investor to replace such ‘index huggers’ with a cheap index fund or Exchange Traded Fund (ETF) in either listed or unlisted form.

5. Find non-traditional sources of return

Until recent years, it was difficult for retail investors to access alternative assets such as corporate bonds, securitisations, infrastructure, long/short funds and smart beta. The available range has dramatically expanded with hundreds of funds listed on the ASX, accessible in the same way as any listed share (except for mFunds which is an execution service for unlisted funds).

For a large list of reports on ETPs and Listed Investment Companies (LICs) in many different guises, see our Education Centre on the menu bar of our website.

These two articles in Cuffelinks, for example, explain dozens of ‘non-traditional’ investments available to retail investors in listed markets:

• How to generate income without equity risk, linked here.

• Let’s stop calling them ‘bond proxies’, linked here.

It must be emphasised, however, that these are general lessons and it would be impossible for an individual to replicate the Future Fund portfolio.

But a warning, dynamic asset allocation is tough

The Future Fund argues it can enhance returns by market timing and dynamic asset allocation. Even the best market professionals struggle to achieve this consistently, and retail investors are warned that switching investments in anticipation of market moves has brought many strategies undone. Let’s leave the final words to two investment legends:

Warren Buffett and his offsider, Charlie Munger

"Charlie and I spend no time thinking or talking about what the stock market is going to do, because we don’t know. We are not operating on the basis of any kind of macro forecast about stocks. There’s always a list of reasons why the country will have problems tomorrow.”

Ray Dalio, Founder of Bridgewater Associates

“You should have a strategic asset allocation mix that assumes that you don’t know what the future is going to hold.”

Graham Hand is Managing Editor of Cuffelinks. Thanks to Wilbur Li for his research assistance. This article is general information and does not consider the circumstances of any investor.

This article was originally published at https://www.firstlinks.com.au/article/lessons-from-the-future-fund-for-retail-investors

Where is the best place to stash your cash?

If like many Australians you’re looking for ways to put some cash away for a rainy day, a holiday or to earn extra income, the job has just become a bit harder. It’s also become more urgent if you are expecting a handy tax return.

In early July, the Reserve Bank cut rates to 1 per cent. Soon after, the Morrison Government got its tax package passed. As a result, those on incomes from $25,000-$120,000 got an immediate tax cut of up to $1080.

So, whether you are looking to make the most of your tax cut or other savings, here are some suggestions.

1. Throw it on the mortgage

For those who have a mortgage, tipping in a bit extra, especially in the early years, can save you substantial amounts. It can also shave years off the life of the loan, meaning you’ll enjoy the priceless peace of mind that comes with paying off your home sooner.

Banks charge more for the money you’ve borrowed from them than the interest they pay on money you deposit with them. So, it may not make much sense to put money in a savings account paying 1.5 per cent interest when you’re paying 3.5 per cent interest on your home loan.

Say you have a $400,000 loan at 4 per cent with 20 years to run. Using ASIC’s MoneySmart mortgage calculator, by increasing your monthly payments by just $50, you could save $6,146 in interest and shave 7 months off the term of the loan.i

2. Up your super contributions

It’s hard to go past super as a tax-effective investment option if you are happy to lock your money away until you retire.

Over the last seven years, while interest rates and inflation have been low, growth funds (where most Australians have their savings) achieved returns of 9.3 per cent a year after tax and fees, on average. ii

You can make tax-deductible contributions of up to $25,000 a year into super, this includes your employer’s payments, salary sacrifice and any voluntary contributions you make. Once your money is in super it’s taxed at concessional rates. New rules also allow you to "carry forward” unused concessional contributions from previous years. Conditions apply so call us to see if you are eligible.

Most Australians pay little attention to super until they are approaching retirement. That means they fail to harness the power of compounding interest to the extent they could have. If you’re a decade or two away from leaving the workforce with cash to spare, it’s difficult to find a better pay-off than the one you’ll (eventually) receive from channelling savings into super.

3. Invest in shares

For longer-term savings, it’s tough to beat the returns generated by a share portfolio. Over 30 years to 2018, which included many ups and downs including the GFC, the average annual return from Australian shares was 9.8 per cent.iii Last financial year the total return from capital gains and dividends was 11 per cent.iv

Whether you are just starting out or wanting to expand an existing portfolio, we can help you align your investments with your goals.

If you would like to direct some extra cash into shares, there are now even ‘micro-investment’ apps such as Raiz and Spaceship Voyager, which you can access via your mobile phone.

4. Put it in the bank

Australia’s current inflation rate is 1.3 per cent. If your bank is paying you less than 1.3 per cent you are losing money.

If you have a so-called high interest savings account paying you a standard variable rate of between 1.5-2 per cent, you’re getting a near negligible return.v Also be aware of high introductory rates that revert to the standard base rate once the honeymoon ends.

Term deposits are currently paying around 2-2.25 per cent which is a bit better but not much.vi

Despite these low rates, it’s wise to have some money parked in a savings account or in your mortgage offset or redraw account so that it’s available in case of an unforeseen expense.

i https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mortgage-calculator#!how-can-i-repay-my-loan-sooner

ii https://www.chantwest.com.au/resources/super-funds-on-the-brink-of-a-record-breaking-run

iii https://static.vgcontent.info/crp/intl/auw/docs/resources/2018-index-chart-brochure.pdf?20180806%7C220825 (p4)

iv 'Year in Review’, CommSec Economic Insights, 1 July 2019

v https://www.finder.com.au/savings-accounts/high-interest-savings-accounts?futm_medium=cpc&futm_source=google_ppc~1659806132~61996044697~kwd-1281462095~saving%20accounts%20interest%20rates~e~c~g~1t2~~EAIaIQobChMIqpag-O-a4wIVjw4rCh18wwQrEAAYAiAAEgIMwPD_BwE&gclid=EAIaIQobChMIqpag-O-a4wIVjw4rCh18wwQrEAAYAiAAEgIMwPD_BwE

vi https://www.finder.com.au/term-deposits

Advisers must step up and articulate their value

By: Jodie Hampshire

Market experts have been warning investors to brace for the end of the longest bull run in history. This should be a time when many Australians are turning to financial advisers as they look to preserve their wealth and financial security. But the perception of the adviser value proposition is at record lows and many financial advisers are also struggling to remain positive at this time of need for their clients.

In recognising the impact an adviser can make to an investor’s overall financial well-being, Russell Investments has quantified the contribution professional advice can add to an investor’s portfolio over their lifetime. Our aim is to aid advisers with a repeatable and memorable framework to help them have open and frank conversations about their value proposition.

Our second annual Value of an Adviser Report estimates an investor gains a minimum of 4.4% p.a. through an advice partnership, which can make a massive difference to the financial security of the average Australian investor over their lifetime.

Building blocks that comprise an adviser’s real value

Here, we take a holistic look at the building blocks that comprise an adviser’s real value proposition throughout a client’s investing journey.

A is for Annual Rebalancing = variable % p.a.

Left to their own devices, individuals tend to let portfolios drift and, as a result, portfolios can look vastly different from their initial state over time. The potential result of an un-rebalanced portfolio is demonstrated in the chart below. A hypothetical balanced index portfolio that has not been rebalanced would look more like a growth portfolio and expose the investor to risks not initially agreed to.

Disciplined rebalancing is crucial to avoiding unnecessary risk exposure when investing. For example, if a certain asset class is performing strongly it can be tempting to hold an overweight position in that class. If the market corrects, investors may find themselves with too much invested in a volatile asset class.

Rebalancing is a key positive value add of advice, but we consider it variable as it depends on markets in the measurement period.

B is for Behavioural Mistakes = 1.9% p.a.

Despite strong evidence that portfolio value increases over time, investors can still feel compelled to react to short-term market volatility, serving to undermine their long-term objectives.

Advisers can play a critical role in helping clients adhere to their long-term financial plan and make better investment decisions by helping them skirt around some 200 identified behavioural tendencies that impact investing including Loss Aversion, Overconfidence, Familiarity and Herding.

If we just focus on herding, we look at the return if an investor bought and held an index. We then look at the flows into funds and ETFs through the market cycle. As markets rise, invariably, people put money in and buy high. As markets fall, investors lock that loss in by selling their funds and ETFs.

Our statistics show, the average fund investor’s inclination to chase past performance came at a cost of 1.9% p.a. from 1984-2018. This cost may well have been avoided with professional guidance.

C is for the Cost of Getting It Wrong = 1.6.% p.a.

There can be a clear disconnect between an investor’s risk profile and return expectations. In fact, research by Deloitte Access Economics found younger investors were more risk averse than their older counterparts. The research found around 81% of investors under 35 years old said they were seeking guaranteed or stable returns, compared to 41% of those aged over 55. On another note, 21% of the most risk-averse investors expected returns over 10%.

Looking below at average returns of Australian equity and bond portfolios over a 20-year period, an investor with 70% of their portfolio in growth assets and 30% in defensive would earn an average annual return of 10.9% over the 20-year period. Meanwhile, an investor with 30% growth assets and 70% defensive would achieve annualised returns of 9.3% over the same period.

In this scenario, an investor under 35 invested conservatively instead of in the growth option would have forgone an average of 1.6% return every year for 20 years. On $100,000 invested, that’s a significant difference of almost $200,000 to the final return.

Beyond investment-only advice

P is for Planning = variable % p.a.

Further to building and regularly updating bespoke financial plans and conducting regulatory reviews, financial advisers offer ancillary services including tax and estate planning, investment and cash flow analysis, retirement income planning and assistance with annual tax return preparation.

Like annual rebalancing, the quantification of this value add is variable as it depends on an adviser’s practice and services offered.

T is for Tax-smart investing = 0.9% – 1.2% p.a.

Lastly, quality financial advisers have the technical expertise to help clients make the most of their tax circumstances as well as avoid any unexpected surprises at tax time as regulatory changes occur.

We believe that the value of an adviser for tax-smart investing is at least the sum of tax effective investment strategies and salary sacrifice pre and post superannuation contributions (depending on account balances).

Therefore, we estimate the value of an adviser to range between 0.9%-1.2%p.a. depending on whether the client is in an accumulation or transition to retirement phase.

The bottom line

Russell Investments believes the importance of articulating the tangible benefits financial advice provides investors cannot be understated. From the knowledge and expertise required to help clients build personalised portfolios, to the support they provide when market conditions change, and the range of additional wealth management services they offer, such as tax and estate planning.

While we are empowering adviser conversation with clients, we are also providing investors with a framework of what financial advice looks like.

Looking forward, we believe advisers practicing a full value proposition will thrive in the current challenging environment.

Jodie Hampshire is Managing Director, Australia for Russell Investments. Based in Sydney, Jodie has overall responsibility for Russell Investment’s Australian business across Institutional and Advisor and Intermediaries Solutions. This article is general information and does not consider the circumstances of any individual. This article was originally published at https://www.firstlinks.com.au/advisers-articulate-value/

How to spot a scam

Con artists make entertaining subjects for Hollywood scriptwriters (think The Wolf of Wall Street, Ocean’s Eleven and Catch Me If You Can), but there’s nothing enjoyable about being conned and fleeced in real life.

On the latest figures available, Australians lose over $10 million every month to scammers. There are plenty of rackets running at any one time involving pyramid schemes, identity theft, fake lottery wins and non-existent inheritances, but the unholy trinity of cons are:

1. Investment scams

2. Dating scams

3. Fake billing scams

Investment scams

The grift: According to the ACCC, investment scammers mainly target those in the 45-64 age group; people who are likely to have amassed some capital and wanting to set themselves up for retirement.

Investment scams usually involve traditional investment products, such as commodities, stocks and real estate. Nowadays, the investment often has something to do with cryptocurrency or binary options (i.e. betting on events, such as a company’s share price rising.)

The fraudster typically cold calls, texts or emails the victim. They pose as a knowledgeable insider (e.g. a stockbroker) who’s able to facilitate a low risk, high return investment. Often fraudsters will spend considerable time grooming victims and direct them to a professional-looking website or send them impressive-looking documents.

Red flags: Firstly, being called, texted or emailed out of the blue by someone offering an investment opportunity. Secondly, being assured the investment opportunity involves no or negligible risk while offering incredible returns. Visit the ASIC’s MoneySmart site to review the list of companies it’s identified as dodgy and we can provide advice on any investment opportunity you may be considering.

Dating scams

The grift: Almost all online daters are guilty of gilding the lily. But if an online match seems too good to be true and they start requesting financial assistance, you’re at high risk of losing your shirt (and not in a good way).

Romance scammers’ MO is as straightforward as it is heartless. They create a fake profile, ‘love bomb’ their marks and possibly encourage them to ‘sext’, so they have embarrassing images to use as blackmail.

Then they start asking for money, gifts or bank account details, claiming a family member needs a medical procedure, or they want to buy a plane ticket to meet in person, or they need to transfer money to another country.

Red flags: It’s rarely a good sign if there are puzzling inconsistencies (e.g. someone who claims to be an educated professional making basic spelling mistakes). Equally if the relationship escalates abruptly (e.g. professions of undying love after a few brief exchanges), or if your new paramour is cagey about revealing themselves or their personal details (e.g. they claim they are unable to Skype or won’t reveal their address).

Fake billing scams

The grift: Fake invoices are sent to a businessperson for things such as office supplies or a domain-name renewal. A common variant of this swindle is fake notifications from the ATO claiming a tax debt needs to be paid urgently to avoid dire legal consequences.

Red flags: Businesses do have expenses and individuals do need to pay taxes so it can be easy to be taken in by fake bills, especially if you don’t examine them carefully.

Two signs a charge is dubious are mistakes (e.g. the domain name you’re being asked to renew is misspelled on the bill) or odd conditions (e.g. the ATO saying it will accept gift cards or bitcoin as payment).

If you have any doubts, Google the business or government agency then ring its helpline to confirm your debt is real. (Don’t use any of the contact details supplied on the invoice.)

For information on the latest scams and who they are targeting, visit the government’s Scamwatch site. The ATO also regularly updates its scam alerts.

Swindlers seek to leverage powerful emotions – greed, love and fear – to encourage their victims to act impulsively. If you receive an approach or a request for money that doesn’t seem quite right, hang up or exit the website and do some background checks. If you’re unsure we can help you spot the scam and protect your financial future.

And remember… as the saying goes, if it seems too good to be true, it probably is.

i https://www.scamwatch.gov.au/about-scamwatch/scam-statistics?scamid=all&date=2019-03

Don't short-change your medium-term goals

When it comes to setting financial priorities, medium-term goals often suffer from middle child syndrome, not taken as seriously as the oldest or indulged as much as the youngest.

The serious long-term goal of saving for retirement gets lots of attention, and rightly so. It’s super important. And next year’s trip to Bali will be so much fun, even if it does drain all your savings.

It’s little wonder there never seems to be enough money left over to save for those in-between things you hope achieve in the not-too-distant future. Things such as your children’s education, a home deposit, renovations or a new car.

Yet those medium-term goals – for spending approximately three to five years away - are just as important to the life you want to create for yourself and your family. So how can you make sure you’ve got them covered?

Getting started

The first step is to find time to think about your medium-term goals. Write them down with an estimate of what each will cost, your time frame and how much you need to save each month to achieve them. The more specific you can be the better.

These goals will differ depending on where you are in life, but whether you are 25 and saving a home deposit or 55 and wanting to buy a boat, you need a plan. Otherwise you might be tempted to use high interest loans and credit cards or simply borrow more than you can afford.

Next comes the reality check. To work out whether your medium-term goals are achievable, you need to take stock of your current financial situation. Tally your income and expenditure to calculate how much you can afford to save and invest each month. There are plenty of free apps and online calculators that will help you do this.

Also look at what you owe. If you have any high interest debt, such as an outstanding credit card balance, you might consider paying this off first.

Weighing risk and reward

Setting an investment time frame is important because it has a bearing on how much risk you can afford to take. That’s because the longer your investment horizon the more time you have to ride out short-term market fluctuations.

Say you are saving for a holiday next year. You can’t afford to risk losing money in a share market correction, so you park your savings in the bank. The interest rate may be low, but your capital is guaranteed.

With medium-term goals you can afford to take a little more risk for a higher rate of return. The exact return you earn on your investments will change from year to year but historically shares and property do better over the medium to long term than cash or bonds.

Even so, the last thing you want is for your investment to fall 10 per cent just before you need to spend the money. One way to avoid this is to spread your savings across a range of investments and asset classes, reducing the risk of a large or untimely loss in any one of them.

Finding a home for your savings

Unlike long-term savings which are locked away in superannuation until you retire, you want your medium-term savings to be accessible. And unlike a bank savings account, you want an investment that will grow in value.

Alternatives you may wish to explore include managed funds and ETFs (exchange-traded funds). These options allow you to diversify your investments across the full range of asset classes and can be bought and sold whenever you want.

Some managed funds allow you to get started with a small initial investment and then make regular weekly or monthly contributions. Another approach might be to set up a direct debit from your pay into a dedicated savings account and every time your balance reaches, say, $5000 invest in an ETF.

Transition to retirement still a smart move

They say 60 is the new 40. And while it’s true that today’s over-50s are healthy and active for longer than previous generations, many in this position begin to dream about scaling back their work commitments so they can start ticking off their bucket list. 

You may want the flexibility to travel more, volunteer or take up a hobby. Perhaps you want to look after the grandkids for a day or two a week. It might be you see your 60s as an opportunity to switch careers or try your hand at freelance work or consulting where you control the amount of time you work. Services such as Airbnb and Uber are also providing opportunities to earn an income on your own terms. 

Alternatively, you may have planned to retire early but now find you are not in a financial position to stop work completely. Your savings may have been adversely impacted by the GFC, divorce or remarriage or you may still have mortgage or other debts to repay. 

Either way, there is a trend towards more people working well into their 60s and beyond but not necessarily full time. According to the Australian Bureau of Statistics, 56.9 per cent of 60 to 64-year-olds are in the job market, while the percentage of those working over the age of 65 has jumped to a record high of 12.7 per cent.i
 

Winding back the hours

One way to achieve a better work/life balance in the lead-up to retirement is to adopt a transition to retirement income stream (TRIS). Once you have reached your preservation age, which is currently at least 57 (depending on your date of birth), then you can access between 4 per cent and 10 per cent of your superannuation as an income stream. This will let you work fewer hours but maintain your standard of living. 

Despite losing some of their tax advantages on July 1 last year, a TRIS strategy still holds its appeal for people who want to use it as it was originally intended – to aid in the transition to retirement.ii

In the past no tax was payable on earnings from your TRIS investments; now you will be taxed at 15 per cent. But the favourable tax treatment of withdrawals remains the same. Once you reach 60, any monies withdrawn from your TRIS pension are tax free. For those aged 56 to 60, you will pay tax at your marginal rate but then enjoy a 15 per cent offset. 
 

Boost your super

Another change to the super legislation is that you can only contribute a maximum of $25,000 a year as salary sacrifice regardless of your age. As a result, there may not be so much money beyond your employer’s Superannuation Guarantee contributions that you can add to your super to fully take advantage of the scheme.iii Even so, if you salary sacrifice as close to this limit as possible, you will help boost your super for when you do completely retire. 

Despite these changes, a transition to retirement strategy can still work for you, largely because super continues to be one of the most tax-effective investment environments for your retirement savings. 

Supplementing part-time income with a TRIS might also give you an opportunity to reduce your mortgage or other debts before you leave the workforce completely. 
 

A win-win solution

Easing your way out of work can be as good for you financially as it is for you psychologically. To go cold turkey from working one day to retirement the next can be difficult without careful planning. 

Working out what to do in the run up to retirement needs careful consideration. We can help you decide what will work best for you.
 

i ‘Older Australians working longer’, Commsec Insights, 23 November 2017. 

ii https://www.ato.gov.au/Individuals/Super/Super-changes/Change-to-transition-to-retirement-income-streams/ 

iii https://www.ato.gov.au/super/self-managed-super-funds/contributions-and-rollovers/contribution-caps/

High-frequency trading on regulators' radar

High-frequency trading is one of the biggest developments on global share markets since tickertape machines were replaced by computers. While traders and regulators argue the merits of the trend, the challenge for private investors is to understand what it means for them.

High-frequency trading – or HFT for short - uses powerful computer algorithms and high-speed cable networks plugged directly into exchanges’ computer systems to exploit small price differences.

Critics say this has the potential to manipulate the market while supporters say it results in greater market liquidity and lower fees. The truth probably lies somewhere in between.

On any given day HFT accounts for more than half the turnover on the New York Stock Exchange. There are no reliable figures for the Australian market but it is estimated to be much less than that.

High speed, high volume, low margin

High frequency traders make money by moving millions of shares a minute, aiming to earn a fraction of a cent on each share traded. The sheer volume and speed of the trades, executed in milliseconds, is why ordinary investors can be left flat-footed when computers malfunction or the algorithms are faulty.

This is what happened during the so-called ‘flash crash’ of May 2010 when the US sharemarket plunged 10 per cent in minutes, bringing a shadowy corner of the market into the open.

Controversy around high-frequency trading has simmered ever since but it recently reignited following the release of the book Flash Boys by Michael Lewis. He claims high-frequency traders have rigged the market at the expense of investors.

The head of the Australian Securities Exchange, Elmer Funke Kupper says regulatory settings and structural differences between Australia and the US mean that concerns about the practice are not relevant here.

But not everyone is convinced. Industry Super Australia has accused high-frequency traders of skimming $2 billion a year from local investors.

Increased regulation

Regulators have begun to respond to the trend but a comprehensive and co-ordinated response will take time. The US Securities and Exchange Commission is investigating the practice amid accusations that it is little more than insider trading.

Closer to home, the Australian Securities and Investments Commission (ASIC) is concerned that high-frequency trading has the potential to undermine trust and confidence in the market.

ASIC has threatened to introduce a pause on trades for half a second before being executed. This has been introduced successfully in the US by the IEX exchange in an effort to remove the speed advantage exploited by high-frequency traders.

ASIC also has its eye on so called “front running”, where high-speed traders test the market to see what price buyers and sellers will accept then jump in ahead of them with large transactions.

The human touch

The one advantage mere mortals have over computers is judgement. If a company’s share price plummets then rebounds faster than a bungee jumper, the cause is more likely to be a computer glitch in a remote trading room than any fundamental problem with the company.

Extreme volatility is a feature of modern financial markets and is probably here to stay. But the challenge for investors is the same today as it was decades ago.

If you focus on the fundamental value of an investment, diversify your holdings and ignore the swings and roundabouts of daily price movements, you will reap the rewards in the long run.

Along the way you may even profit from market fluctuations by picking up quality stocks that have been dumped by traders who focus on price not value.

If you would like to discuss any of these issues in light of your investments, don’t hesitate to contact us.