Money Matters
Autumn Issue # 29
Staying in touch Welcome to the first edition of Money Matters for the year! 2012 is the Chinese year of the Dragon which symbolises good fortune and power. Other positive aspects of the Dragon include giving sound advice, being influential, and showing enthusiasm. We hope to adopt all of these characteristics and more in 2012 and continue to provide you with quality advice and service. In times of market turbulence it’s difficult to keep your emotions in check. Many of us second guess the plans we have made but it’s important to always remember the basic rules of investing - your investment strategy should always consider three key things: your goals, your timeframe and how you feel about risk. Once these are established and a plan is in place, it’s time to trust us as your adviser, as we will provide you with the guidance, knowledge, and discipline to help you through tough times. Like you, we would love to see the market recover further and sometimes we too grow weary of repeating the mantra ‘stick to your plan’, but our job as professional advisers is to help you do just that. Read our front page article for more. A little knowledge can go a long way to help you when deciding on which investment may suit your tolerance to risk, your goals, circumstances and timeframe. So to start the New Year, we have put together some frequently asked questions to help refresh your investment knowledge. The case for rebalancing – with the New Year well under way, investors should be in a mood to consider their portfolio settings. It might well be the case that ‘rebalancing’ the portfolio back to the original strategic asset allocation will be the single most important investment decision you make this year. Read our article to find out more about what rebalancing is and its importance. We would also like to share with you the benefit of having a financial adviser overseeing your finances in a true story featured on the back page.
Regards,
Frances Magill
Brian Magill
Simon McLean
Authorised Representatives of Matrix Planning Solutions Limited
Contact Details: 250 Wright Street, Adelaide SA 5000 PO Box 6359 Halifax Street, Adelaide SA 5000 Telephone: 08 8231 8100 Facsimile: 08 8231 0155 Email: frances.magill@fmfinancialstrategists.com.au
Stick to your plan T
o invest successfully over a lifetime does not require a high IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. Either way, the point is relatively clear investing successfully, per se, is not rocket science. There are many sources you can use to develop your plan; or rather, your ‘intellectual framework for making decisions’. The difficult part is keeping your emotions in check when your investments have gone to extremes, high or low, so that you can stick to your plan. The whole reason for developing a plan in the first place is to help you to navigate the tough times. The same goes for your overall financial goals - such as retirement plans or university savings. Developing a plan is not exactly simplicity - there are many issues to be dealt with to ensure that the plan itself is sound, including investment allocation, tax concerns, coordinating various sources like pensions etc, timing of contributions and withdrawals, and so on. These things are quantifiable, although the weaving together of these issues can be very complex. The place where most financial and investing plans go awry is when difficulties arise, and you begin to question the plan. It’s understood, in part because you can often find yourself facing these difficulties in a vacuum, without any idea whether what you’re experiencing is common for all folks in your position or if you’re doing better, or worse. You may have no idea if the plan you’ve developed is appropriate for weathering the current storm, or if the reason you’re experiencing poor results is due to some problem in the plan itself.
‘ I t o nl y to ma takes two things ke mo ney a p lan ha a and o nd sticking ving f t ho s e two, to it stickin it’s th g to e i t t ha invest t mos or s s t t r u g gl e wi t h - Warr en B u f ’. fett
This is where a good financial adviser can be worth her or his weight in gold. If the adviser you’ve chosen is properly qualified, he or she can draw upon voluminous knowledge and experience to help you understand what the plan needs to include to weather the storms. The second part, and according to Buffett the most important part, is staying with the plan even when things aren’t rosy all around. A good financial adviser, one who will operate as a fiduciary, undertakes the duty to maintain calm and to ensure that emotions are not driving the decisions. Most often this ‘sticking-to-it’ part becomes the most difficult when there is great volatility on the downside in the markets. You may be aware of messages from us as your adviser repeating the mantra saying ‘stay with the plan and don’t panic’. At these times it is vital to maintain perspective and remember that your plan is for the long term. It's important to always remember the basic rules of investing. Your investment strategy should always consider three key things: your goals, your timeframe and how you feel about risk, once these are established and a plan is in place, it’s time to trust your adviser as we will provide you with the guidance, knowledge, and discipline to help you through tough times. If you would like to discuss your financial position or if your circumstances have changed, please contact our office today.
Some information in this article has been taken from an article by Jim Blankenship.
Refresh your knowledge A
little knowledge can go a long way to help you and your adviser when deciding on which investment may suit your tolerance to risk, investment goals, circumstances and timeframe. That’s why it is important to have some idea of where your money is going and how your investment ‘mix’ is made up. To start the New Year, we have put together some frequently asked questions to help refresh your investment knowledge.
Investing: Q. How are risks and returns related? The principle is that potential return rises with an increase in risk. Low levels of risk are associated with low potential returns, whereas high levels of risk are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of market fluctuations which carry some risk of loss. Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can’t cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night. Q.What is diversification and how does it help reduce risk? Simply put, diversification is not putting all your eggs in one basket, or not putting all your money into just one type of investment. All investments are subject to some level of risk, some more than others. It is almost impossible to predict how the financial markets will perform - if we could predict sudden corrections in the share market or
changes in the value of the Australian dollar we’d all be millionaires. But diversifying your investments can help you take advantage of the ‘ups’ while moderating the ‘downs’. Different types of investments perform better under different market conditions. By investing in more than one type of investment you diversify, which can help reduce the risk for your overall investment portfolio. The more you diversify the more likely you are to reduce your risk. For example, you can diversify across:
Different asset classes (cash, fixed interest, property, shares)
More than one investment in each asset class (eg several different industries and companies when investing in shares)
More than one type of fund and investment manager when investing in managed funds.
Q. What is Dollar Cost Averaging? Dollar cost averaging takes the form of investing equal amounts of money regularly and periodically over specific time periods (such as $100 a month) in a particular investment or portfolio. By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time. Instead of trying to ‘time’ the market, you may be better off dollar cost averaging. Example - Dollar cost averaging You decide to purchase $100 worth of XYZ shares each month for three months. In January, XYZ is worth $33, so you buy three shares. In February, XYZ is worth $25, so you buy four shares this time. Finally, in March, XYZ is worth $20, so you buy five shares. In total, you purchased 12 shares for an average price of approximately $25 each. By making smaller, regular, investments you have purchased more shares overall for a lower price.
Insurance: What should I do if I am unable to work and I need to make an Insurance claim? The first thing you should do is contact
your adviser as we will help you through the claim process. There will be various application forms to complete through your insurance company and you will have to supply further information such as medical reports to support your claim. You will then usually be required to attend one or two medical assessments to determine the level of your disability. The insurer may take up to several months to make a decision. In the mean time your adviser can help you manage your budget while you are out of work.
Retirement: What is a Transition To Retirement strategy? The ‘transition to retirement’ (TTR) option is available when you hit your preservation age, (the age in which you can access your superannuation). This strategy allows you to access your super benefits as an income stream prior to retirement. By doing this, you might be able to cut your working hours, effectively going part-time, but you won’t have to cut your annual income and you do this by accessing some of your super. Of course you’re tapping into your retirement income stream, but you can keep building it up as well. Under TTR, you can only access your super benefits as a ‘non-commutable’ income stream. That’s ATO jargon for the fact you cannot take your benefits as a lump sum cash payment while you’re still working. As to how much you can get, no more than 10 per cent of the account balance, as at the start of the financial year, may be paid each year. And when you go to TTR, your employer still pays the compulsory nine per cent super guarantee contributions on the relevant wages. You can also make salary sacrifice payments to help build up your super. The TTR gives you a number of options and if it means you work less and you can keep building up your super, then it’s not a bad idea. If you have any questions regarding your finances, investment portfolio or just general financial questions, please do not hesitate to call our office – we are always here to help.
The case for rebalancing With a new year well under way, investors should be in a mood to consider their portfolio settings. It might well be the case that ‘rebalancing’ the portfolio back to the original strategic asset allocation will be the single most important investment decision you make this year.
and a progressive under-weighting in fixed-interest.
Rebalancing is necessary because the value of every kind of security in your investment portfolio changes over any period you want to look at: some rise, some fall, and because of this, the weightings change. This can alter your asset allocation – and with it, potentially, your risk levels. To keep this risk level minimised, or at least under control, you rebalance by buying and selling portions of your portfolio so as to bring the weighting of each asset class back to its original state. Or you might have altered your asset allocation, and you rebalance to achieve this new mix.
Rebalancing always has a counterintuitive element to it, in that often during a market cycle, it involves selling winners and buying losers. Given that outperformance by any one asset class is not guaranteed to be replicated in the following year, rebalancing from good performers to poor performers makes sense. But Australian investors have a well-deserved reputation for flocking into last year’s best-performed asset class, at usually the wrong (if not worst) time to do this.
Institutional investors will rebalance monthly, or quarterly. Individual investors and self-managed super funds (SMSFs) don’t need to do it that often – and probably shouldn’t because the transaction costs can be high – but they certainly cannot afford to set an investment plan only to forget it. Investors need, in conjunction with their adviser, to construct a carefully crafted financial plan, tailored to their personal circumstances, needs, objectives, tolerance of risk and volatility, need for liquidity, tax positioning, and so on. The asset allocation that comes out of that plan will be the source of most of their investment returns – but it should be treated very much as a flexible, adaptable plan. If you implemented an asset allocation based on your needs and objectives, and then forgot about it, you would run the risk of ‘style drift.’ Consider a portfolio comprising only equities and fixedinterest: over time, given that equities tend to outperform fixed-interest, this portfolio would – if equities keep performing to their historical track record – build up a progressive over-weighting in equities
Most medium to long-term timeframes support this outperformance by equities. But over the course of the GFC, all sorts of issues have compromised returns from shares - and affected investors’ view of rebalancing.
The case for rebalancing is particularly interesting at the beginning of 2012, with such a clear bifurcation between asset class returns in 2011. Cash earned 5 per cent and Australian bonds earned 11.4 per cent last year, but Australian shares lost 11 per cent. Not many investors would look at that scorecard and decide to increase their holdings of shares. But sound rebalancing would do exactly that. For some time, a “wall of cash” has been building up in Australian investment portfolios. For example, the Vanguard/ Investment Trends Self Managed Super Funds (SMSF) Report, released in September 2011, showed that total cash and cash products held by SMSFs in Australia had grown by $40 billion since May 2009, to $113 billion. The survey also identified $39 billion in ‘excess cash’ being held by SMSFs, defined as funds that would normally have been invested in other investments/assets, but were being held in cash because of recent market volatility – one of the major issues that has compromised returns from shares. This wall of cash continues to grow. According to Market research consultancy CoreData’s Investor Sentiment Report for the December 2011 quarter, cash was the asset class toward which most investors (27 per cent of the survey respondents) intended to rebalance in the current quarter,
despite the percentage of people who believed cash would perform worse than in the previous quarter rising from 25 per cent in the September quarter to 29 per cent at December – not surprising, given the prevailing perception that Australian interest rates are more likely to go down than up. This highlights the problem of trying to time the markets when rebalancing. It is tempting to think that right now, because there is enormous market uncertainty, you will be rewarded by increasing your cash allocation. The problem with that is that you become ultra-defensive – in moving into cash and term deposits you are, consciously or otherwise, taking a pessimistic outlook on the future growth of the Australian economy and the earnings prospects of major Australian companies. Increasing your weightings of cash and fixed interest means that if the market does rally over the medium term, you will be more of a spectator in that secular rally rather than a participant. That’s why it is best to stick to broad strategic asset allocation – in which equities, based on their long-term track record, will be the major component – and rebalance back to these weightings. Right now, such a strategy would suggest rebalancing into equities – not cash. Allowing your portfolio to become overly defensive means that you could actually lose out on real spending power over longer time periods. Even retirees still need growth assets to retain their real spending power over extended periods. No longer is the retirement paradigm one of switching at a certain age to running down an accumulated balance – increasing life expectancy means that you will need growth assets virtually all the time you are in retirement. Your rebalancing strategy should constantly reflect this. Contact our office if you have any questions about rebalancing or if you would like to make an appointment to see us today! Article by James Dunn, supplied by Vanguard.
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It pays to seek advice H
ere’s a headline the press will never print:
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might be eligible for a Capital Gains Tax Small Business Exemption. Much to the surprise of their accountant, after some research by their Matrix adviser it was confirmed that they could receive this exemption The new tax bill from the sale of the farm was only $5000.00. A difference of $295,000.00!!
“GOOD ADVICE SAVES CLIENT $295,000!” The benefit of having a professional financial adviser overseeing your finances is shown in this true story below. John and Jenny* were married for over 15 years. They owned a farm in the south of Sydney and ran a small business from their citrus orchard. They recently decided to divorce and part ways. As the time came to split their assets they had to sell the farm. Having owned the farm and seeing it grow in value for many years,
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they were advised by their accountant that once the sale went through they would have to pay $300,000 in Capital Gains Tax. Having heard this news, John thought it would be a good idea to run this past their Matrix financial adviser. As their adviser knew John and Jenny quite well over the years, she was aware of their business and knew that they
Market update International shares:
A strong Aust$ v US$ provides opportunities for international shares and a benchmark weighting is appropriate for the sector. Asia and emerging markets remain long term growth regions. Stock and country selection is going to be much more important over the coming year as volatility remains high. Europe is likely to remain subdued.
Australian shares: Valuations have become more compelling as the negative environment impacts the equities market. The focus should be on quality companies with strong income streams in this environment. Consider an overweight weighting appropriate on a three-year outlook.
Listed Property Trusts: Property securities are likely to underperform equities on a three year outlook and we suggest under weighting the sector. Quality
The capital gains tax exemption which was used was the Retirement Exemption. This exemption is available to eligible small business owners who dispose of active assets. This true story shows the importance of having a professional financial adviser to oversee your finances as well as the importance of ensuring you keep your adviser up to date on what is happening in your life.
If there are any changes - big or small - please be sure to tell your adviser. *names have been changed
direct property valuations are starting to show signs of recovery although likely to be slow as access to funding remains difficult. The listed property sector remains subdued.
Fixed Interest: With interest rates at low levels globally and in Australia, opportunities for fixed interest are likely to be limited over the coming year. An underweight for the sector is appropriate. A cautious approach to sovereign debt is required with opportunities for corporate bonds preferred.
Cash: The risk return profile of Cash and Term Deposits is attractive when compared to cash based funds and those fixed interest funds with an allocation to sovereign debt.
Please contact our office to discuss any queries you may have about your investment portfolio.
Disclaimer: Money Matters is a private communication to clients and contains general information and advice only. It is provided by Matrix Planning Solutions Limited (ABN 45 087 470 200. AFSL No. 238256). As the particular circumstances and needs of individual investors may vary greatly, the information herein should not be used as a substitute for personalised advice. You should read the product disclosure statement before investing in any product Whilst every effort has been made to ensure the information is correct, its accuracy and completeness cannot be guaranteed, thus Matrix Planning Solutions Limited cannot be held responsible for any loss suffered by any party due to their reliance on the information or arising from any error or omission. Privacy Statement: This newsletter is provided as an information service for you and your family. If you do not wish to receive information of this kind in the future, please contact us by mail, email or phone and we will remove you from our mailing list.