The trouble with intuition when investing
Knowing how your mind works can help you avoid the more obvious traps many investors fall into.
Cognitive bias has become a bit of an investing buzz phrase in recent years.
The theory is that the human brain predictably makes errors of judgment that can lead us to be emotional, short term and come to other incorrect conclusions.
Cognitive bias has been of particular interest to the investing community and long lists of biases – confirmation bias, anchoring, the recency effect and dozens of others – are now the stock-in-trade of beginner investors worldwide.
The Nobel-prize winning economist Daniel Kahneman first researched bias in human thinking, distinguishing two ways in which we think: an automatic, instinctive and almost involuntary style contrasted with effortful, considered and logical thought.
That original research has grown into an industry.
Researchers and psychologists have identified endless ways in which the human brain is prone to bias, errors and poor judgment – and the investing community has latched on.
But underlying it all is that original finding that we spontaneously seek an intuitive solution to our problems rather than taking a logical, methodical approach.
Kahneman wrote that when we are confronted with a problem – such as choosing the right chess move or selecting an investment – our desire for a quick, intuitive answer takes over.
Where we have the relevant expertise, this intuition can often be right. A chess master’s intuition when faced with a complicated game position is likely to be pretty good.
But when questions are complex and rely on incomplete information, like investing, our intuition fails us.
The very fact we find the concept of cognitive bias so appealing is simply another example of our innate desire for simple, intuitive answers.
Unfortunately, the world is complicated, and almost everything that happens in investment markets emerges from the combination of a web of unrelated, intricate and multi-faceted events.
Our bias towards simplicity is reinforced by the nightly news and the morning newspapers that persist in providing simple explanations for complex events. Each day, market movements are distilled into ‘this-caused-that’ explanations that obscure the true drivers of change.
It is our intuition that is reacting when we find ourselves excited that markets rose 100 points – and a little nervous when markets ‘wipe off’ billions. We experience these emotional reactions even though the effect on our overall wealth from either event is likely to be tiny.
Our understanding of history is similarly simple, reducing wars, recessions and pandemics into simple cause and effect stories that are easy to remember and teach.
These stories help us understand the past. But they do not help us predict the future.
This explains why investment opportunities that seemed certain at the time we made them so often go awry.
It is not bad luck or circumstances changing against us – it’s the fundamentally simplistic cause and effect model in our minds that doesn’t allow us to understand all the possible outcomes.
So how can we best use the science of cognitive bias to become better at investing?
It is certainly worth learning about the wide and growing range of cognitive biases scientists are identifying that can stand in your way of being more successful.
Knowing how your mind works can help you avoid the more obvious traps many investors fall into.
We can use the basic principles of successful investing to avoid becoming victim to our own cognitive biases. Stick to a plan and don’t react to market noise or your emotions. Stay diversified to reduce the risk of permanent loss. And ensure you do not spend too much money on unnecessary fees.
But it is also a trap to rely too heavily on the science of cognitive bias, thinking that it can provide you with the keys to investing success.
The serious research being done by psychologists has been co-opted to offer you yet another tempting short cut – and in successful investing, there is no such thing.
Source: Vanguard
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2022 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Six ways to pay off your mortgage faster
Paying off your mortgage early will save you money and take a financial load off your shoulders. Here are some ways to get rid of your mortgage debt faster.
Switch to fortnightly payments
If you’re currently paying monthly, consider switching to fortnightly repayments. By paying half the monthly amount every two weeks you’ll make the equivalent of an extra month’s repayment each year (as each year has 26 fortnights).
Make extra payments
Extra repayments on your mortgage can cut your loan by years. Putting your tax refund or bonus into your mortgage could save you thousands in interest.
On a typical 25-year principal and interest mortgage, most of your payments during the first five to eight years go towards paying off interest. So anything extra you put in during that time will reduce the amount of interest you pay and shorten the life of your loan.
Ask your lender if there’s a fee for making extra repayments.
Smart tip: Making extra repayments now will also give you a buffer if interest rates rise in the future.
Find a lower interest rate
Work out what features of your current loan you want to keep, and compare the interest rates on similar loans. If you find a better rate elsewhere, ask your current lender to match it or offer you a cheaper alternative.
Comparison websites can be useful, but they are businesses and may make money through promoted links. They may not cover all your options. See what to keep in mind when using comparison websites.
Switching loans
If you decide to switch to another lender, make sure the benefits outweigh any fees you’ll pay for closing your current loan and applying for another.
Switching home loans has tips on what to consider.
Make higher repayments
Another way to get ahead on your mortgage is to make repayments as if you had a loan with a higher rate of interest. The extra money will help to pay off your mortgage sooner.
If you switch to a loan with a lower interest rate, keep making the same repayments you had at the higher rate.
If interest rates drop, keep repaying your mortgage at the higher rate.
See what you’ll save by making higher loan repayments.
Consider an offset account
An offset account is a savings or transaction account linked to your mortgage. Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.
For example, for a $500,000 mortgage, $20,000 in an offset account means you’re only charged interest on $480,000.
If your offset balance is always low (for example under $10,000), it may not be worth paying for this feature.
Avoid an interest-only loan
Paying both the principal and the interest is the best way to get your mortgage paid off faster.
Most home loans are principal and interest loans. This means repayments reduce the principal (amount borrowed) and cover the interest for the period.
With an interest-only loan, you only pay the interest on the amount you’ve borrowed. These loans are usually for a set period (for example, five years).
Your principal does not reduce during the interest-only period. This means your debt isn’t going down and you’ll pay more interest.
Source:
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/home-loans/pay-off-your-mortgage-faster
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
Important
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Responsible investing on the rise
For many people, there’s much more to choosing investments than focusing exclusively on financial returns. Returns are important, but a growing number of people also want to be assured that their investments align with their values.
Everyone’s values are different but given the choice most people would wish to make a positive difference to their community and/or the planet. Or at least to do no harm.
Indeed, four out of five Australians believe environmental issues are important when it comes to their investment decisions.i
As a result, there has been a surge in what is called responsible investing. Also known as ethical or sustainable investing, responsible investing is pretty much what it says on the label. That is, investments that support and benefit the environment and society more broadly, rather than those whose products or way of conducting business have a negative impact on the world.
Millennials driving growth in sustainability
The trend toward responsible investment has grown rapidly in recent times. According to the Responsible Investment Association of Australasia (RIAA), Australians invested $1.2 trillion in responsible assets in 2020, and we’re not alone.ii The global figure was $47.8 trillion in 2020.iii
The trend has accelerated in recent years, with money flowing into Australian sustainable investment funds up an estimated 66 per cent in the year to June 2021.iv
Responsible investing is particularly popular among millennials, now in their late 20s and 30s and beginning to get serious about building wealth. Many in this group are getting a foot on the investment ladder via exchange-traded funds (ETFs). A recent survey of the Australian ETF market found 28 per cent of younger investors had requested more ethical investments.v
More sustainable investment options
As awareness of responsible investing grows, so does the availability of sustainable investment options, beginning with your super fund.
Most large super funds these days offer a sustainable option on their investment menu. While relatively rare even 10 years ago, the availability and performance of sustainable options has grown strongly over the past three to five years.
According to independent research group, SuperRatings, the top performing sustainable options now surpass their typical balanced style counterparts in some cases.vi
If you run your own self-managed super fund (SMSF) or wish to invest outside super, there is a growing number of managed funds that actively select sustainable investments, or ETFs that passively track an index or sector.
There were 135 sustainable funds in Australia and New Zealand in 2021, so there is plenty of choice.iv
How to screen
But how do you find the ethical investments that best suit your values?
There are several methods used with the most common being negative screening where you exclude investments in companies engaged in unwelcomed activities.
The most common exclusions are companies involved in gambling, tobacco, firearms, animal cruelty, human rights abuses or fossil fuels industries.
Positive screening is the opposite, where you actively seek out investments in companies making a positive contribution to the planet. Some examples might be companies involved in renewable energy, health care or education.
Another criterion is to look at companies that monitor their environmental, social and governance risks as part of their existence. This cuts across all industries and is more about the way the company conducts its business.
Environmentally they may monitor their carbon emissions or pursue clean technology; socially they may be active in ensuring a safe workplace; and on the governance front they may pursue board diversity or anti-corruption policies.
Environmental themes the most common positive screens for investors
Source: RIAA
Climate plays a role
A survey by UBS found that four of the five top themes for responsible investing were related to climate with respondents citing such themes as renewable energy and efficiency, climate change mitigation and pollution prevention.vii
As the popularity of responsible investing grows, so do concerns about the practice of so-called greenwashing. This is where a company or fund overrepresents the extent to which its practices live up to their promises. The Australian Securities and Investments Commission (ASIC) recently announced a review into the use of greenwashing in Australia, prompted in part by the demand for such funds.
Another trend is impact investing in companies or organisations helping to finance solutions to some of society’s biggest challenges. This might include investments in areas such as affordable housing or sustainable agriculture.
At the end of the day, each method can be used separately or in a more holistic approach.
Solid returns
While some investors are driven by their values alone, many more want value for their money. The good news is that it’s possible to have it both ways.
The RIAA survey found super funds that engage in responsible investments outperformed their peers over one, three and five years. While the top performing ethical ETF turned in an impressive return of almost 37 per cent in the 12 months to March 2021.i
Clearly responsible investing is a trend that is gaining momentum, with the financial performance of sustainable investments attracting a wider following.
If you would like to discuss your investment options and how they might fit within your overall portfolio, don’t hesitate to get in touch.
i https://www.canstar.com.au/investor-hub/ethical-investing/
ii https://responsibleinvestment.org/resources/benchmark-report/
iv https://www.morningstar.com.au/funds/article/australias-sustainable-funds-market-is-growin/214505
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Is an SMSF right for you?
As anyone who has joined the weekend crowd at Bunnings knows, Australians love DIY. And that same can-do spirit helps explain why 1.1 million Aussies choose to take control of their retirement savings with a self-managed superannuation fund (SMSF).
As well as control, investment choice is a key reason for having an SMSF. As an example, these are the only type of super fund that allow you to invest in direct property, including your small business premises.
Other reasons people give are dissatisfaction with their existing fund, more flexibility to manage tax within the fund, plus greater flexibility in estate planning.
What type of person has an SMSF?
If you think SMSFs are only for wealthy older folk, think again.
The average age of people establishing an SMSF has been coming down and is currently between 35 and 44. Around half of all SMSF trustees own or have owned a small business and over 50 per cent have had their fund for over 10 years.i
They’re also dedicated. The majority of SMSF trustees say they spend 1 to 5 hours a month monitoring their fund.ii
But an SMSF is not for everyone. There has been ongoing debate about how much you need to have in your SMSF to make it cost-effective and whether the returns are competitive with mainstream super funds.
So is an SMSF right for you? Here are some things to consider.
The cost of control
Running an SMSF comes with the responsibility to comply with superannuation regulations, which costs time and money.
There are set-up costs and a range of ongoing administration and investment costs. These can vary enormously depending on whether you do a lot of the administration and investment yourself or outsource to professional services providers.
A recent survey by Rice Warner of more than 100,000 SMSFs found that annual compliance costs ranged from $1,189 to $2,738. These are underlying costs that can’t be avoided, such as the annual ASIC fee, ATO supervisory levy, audit fee, financial statement and tax return.iii
If trustees decide they don’t want any involvement in the administration of their fund, the cost of full administration ranges from $1,514 to $3,359.
There is an even wider range of ongoing investment fees, depending on the type of investments you hold. Fees tend to be highest for funds with investment property because of the higher costs of servicing direct property and higher administration costs for accounting and auditing.
Median total fees for SMSFs with and without direct property
| Balance | All funds | Funds with no direct property | Funds with direct property |
| $50,000 | $2,002 | $1,958 | $9,352 |
| $100,000 | $2,298 | $2,220 | $9,003 |
| $200,000 | $2,898 | $2,603 | $10,398 |
| $300,000 | $3,140 | $2,861 | $10,044 |
| $400,000 | $3,235 | $3,034 | $9,887 |
| $500,000 | $3,339 | $3,207 | $9,969 |
| $1 million | $3,558 | $3,476 | $10,619 |
| Over 5 million | $12,461 | $6,746 | $32,641 |
Source: Rice Warner
By comparison, the same report estimated annual fees for industry funds range from $445 to $6,861 for one member and $505 to $7,055 for two members. Fees for retail funds were similar. It’s worth noting that fees for SMSFs are the same whether the fund has one or two members.
Size matters
As a general principle, the higher your SMSF account balance, the more cost-effective it is to run.
According to the Rice Warner survey:
- Funds with $200,000 or more in assets are cost-competitive with both industry and retail super funds, even if they fully outsource their administration.
- Funds with a balance of $100,000 to $200,000 may be competitive if they use one of the cheaper service providers or do some of the administration themselves.
- Funds with $500,000 or more are generally the cheapest alternative.
Returns also tend to be better for funds with more than $500,000 in assets. While returns will depend on the investments in your fund, average returns for the sector have tended to lag those for other types of super funds.iv
Even though SMSFs with a balance of under $100,000 are more expensive than industry or retail funds, they may be appropriate if you expect your balance to grow to a competitive size fairly soon.
In 2019, only 8.5 per cent of SMSFs held less than $100,000 in assets. Most of these small funds tend to grow quickly via ongoing contributions, or close, once retirees in pension phase wind down their fund.
Increased responsibility
While SMSFs offer more control, that doesn’t mean you can do as you like. Every member of your SMSF has legal responsibility for ensuring the fund complies with all the relevant rules and regulations, even if you outsource some functions.
SMSFs are regulated by the ATO which monitors the sector with an eagle eye and hands out penalties for rule breakers. And there are lots of rules.
The most important rule is the sole purpose test, which dictates that you must run your fund with the sole purpose of providing retirement benefits for members. Fund assets must be kept separate from your personal assets and you can’t just dip into your retirement savings early when you’re short of cash.
Don’t overlook insurance
If you considering rolling the balance of an existing super fund into an SMSF, it could mean losing your life insurance cover.
Large super funds often provide life cover at discounted group rates. So to ensure you and your family are not left with inadequate insurance you may need to arrange new policies. Some people leave a small amount in their previous fund to maintain their cover.
If you would like to discuss your superannuation options and whether an SMSF may be suitable for you, don’t hesitate to call.
iii https://www.ricewarner.com/wp-content/uploads/2020/11/Cost-of-Operating-SMSFs-2020_23.11.20.pdf
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
2020 Year in Review
Just as we were recovering from the long drought and the worst bushfires on record, the global coronavirus pandemic took hold and changed everything.
Suddenly, simple things we took for granted, like going to the office or celebrating special occasions, were put on hold. While life is still not back to normal, Australia is in better shape financially than many people expected at the height of the economic shutdown.
Take superannuation. Far from being a wipeout, the average superannuation growth fund is on track to finish 2020 with a positive return of 3 per cent.i But it’s been a wild ride along the way.
| Australian Key Indices December 2020 | Share Markets (% change) Jan – Dec 2020 | ||
| Economic growth* | -3.8% | Australia All Ordinaries | 0.71% |
| RBA cash rate | 0.1% | US S&P 500 | 16.37% |
| Inflation | 0.7% | Euro Stoxx 50 | -5.14% |
| Unemployment | 6.8% | Shanghai Composite | 13.87% |
| Consumer confidence | 112.00 | Japan Nikkei 225 | 16.01% |
* Year to September 30, 2020 Sources: RBA, Westpac Melbourne Institute, Trading Economics as at December 31
The big picture
Globally, the US presidential election and Joe Biden’s victory removed a major element of uncertainty overhanging global markets. As did the UK finally signing a post-Brexit agreement on trade and other matters with the European Union just before Christmas. However, trade tensions with China remain an ongoing concern.
The pandemic dragged an already sluggish global economy into recession, and we were not immune. In Australia, drought, bushfires, storms and the health crisis took their toll as we entered recession in for the first time in 28 years.
The economy contracted 7 per cent in the June quarter alone, the biggest fall since World War II, before rebounding in the September quarter. Even so, in the year to September our economy contracted 3.8 per cent.ii
Final figures for 2020 are not in yet but an annual fall of 2.8 per cent is forecast, putting us in a better position than most developed nations.iii This is due in part to Australia’s relative success at containing COVID-19, and massive financial support from Federal and State Governments and the Reserve Bank.
Interest rates lower for longer
After starting the year at 0.75 per cent, the official cash rate finished the year at an historic low of 0.1 per cent. The Reserve Bank has indicated it will keep the cash rate and 3-year government bond rate at this level for three years to encourage businesses to invest and individuals to spend.iv
It seems to be working. Consumer confidence bounced back to a decade high of 112 points in early December as Australia eased restrictions.v Business confidence also hit an almost three-year high in November, but unemployment remains at 6.8 per cent after peaking at 7.5 per cent.vi,vii
While low interest rates make life difficult for retirees and others who depend on income from bank deposits, they gave share and property markets a boost in 2020 as investors looked for higher returns than cash.
Shares rebound strongly
In February/March when the scale of the health and economic crisis became evident, sharemarkets plunged around 35 per cent. As borders and businesses closed and commodity prices collapsed, investors rushed for safe-haven investments such as bonds and gold.
But it soon became apparent that there were economic winners as well as losers, with global technology and health stocks the main beneficiaries.
By the end of 2020, US shares were up 16 per cent, with the tech-heavy Nasdaq index up 48 per cent.viii
Closer to home, Australian All Ordinaries index was up 0.7 per cent, or 3.6 per cent when dividends are included. Some of the best performers were small tech stocks, which helps explain why the ASX200, which is top heavy with banks, resources and property trusts, fell 1.5 per cent.
Elsewhere, European markets were mostly lower reflecting their poor handling of the pandemic. While China and Japan performed strongly, up 14 per cent and 16 per cent respectively.
Commodities boost the Aussie dollar
China’s economic rebound was another factor in the Australian market’s favour, with iron ore prices jumping 70 per cent.ix
Rising iron ore prices and a weaker US dollar pushed the Aussie dollar up 10 per cent to close the year at US77c.x
Gold prices hit a record high in August against a backdrop of ballooning government debt worldwide, but prices eased as sharemarkets surged, finishing 25 per cent higher at US$1,898.ix
At the other end of the scale, oil was one of the biggest losers as economic activity and transport ground to a halt. Oil prices fell more than 20 per cent despite OPEC producers restricting supply.ix
Property surprises on the upside
Despite dire predictions of a property market collapse earlier in the year, residential property values rose 3 per cent in 2020 and 6.6 per cent when rental income is included.xi
Melbourne was the only city to record a price fall (down 1.3 per cent), with combined capital cities up 2 per cent.
The real action though was in regional areas where average prices lifted 6.9 per cent. While regional markets lagged over the past decade, 2020 saw more Australians embrace working from home and the possibility of living outside crowded cities.
Looking ahead
As 2021 gets underway, Australia is inching back to a new normal on growing optimism about the global rollout of vaccines to contain the spread of the coronavirus and allow more movement of people and goods.
Our economy is forecast to grow by 5 per cent this year, but there are bound to be bumps along the way, with the potential for new waves of the virus and ongoing trade tensions with China.xii
In the meantime, the Federal Government and Reserve Bank stand ready to continue stimulus measures to support jobs and the economy.
After the year that was, a return to something close to normal can’t come quick enough.
i https://www.chantwest.com.au/resources/november-surge-drives-funds-into-black-for-2020
ii https://tradingeconomics.com/australia/indicators
iii https://www.commsec.com.au/content/dam/EN/ResearchNews/2021Reports/January
vi https://business.nab.com.au/monthly-business-survey-november-2020-43972/
viii https://tradingeconomics.com/stocks
ix https://tradingeconomics.com/commodties
x https://tradingeconomics.com/currencies
xii https://tradingeconomics.com/australia/gdp-growth-annual
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
What the US election means for investors
Democrat Joe Biden is pressing ahead with preparations to take the reins as the next President of the United States. Despite legal challenges and recounts, the early signs are that markets are responding positively.
In fact, the US sharemarket hit record highs in the weeks following the November 3 election as Biden’s lead widened.
The state of play
As things stand, Joe Biden has 306 electoral college votes, comfortably ahead of the 270 he needs to win. He also leads the popular vote. With 99 per cent of votes counted, Biden has 80.1 million votes to Donald Trump’s 73.9 million.i
As well as voting for President, Americans also voted for the US Senate. While Democrats will control the House, it appears likely that Republicans will retain control of the Senate if they win at least one of the two Senate seats up for grabs in Georgia in January as expected.
The upshot is that come inauguration day on January 20, the US will most likely have a Democratic President and House with a Republican Senate which would act as a check on Biden’s more contentious policies.
So what can we expect from a Biden Presidency?
Biden’s key policies
The policies Joe Biden took to the election which stand to have the biggest impact on the US economy and global investment markets include the following:
- Corporate tax increases. The biggest impact on corporate America would come from Biden’s plan to lift the corporate tax rate to 28 per cent. This would partially reverse President Trump’s 2017 cut from 35 per cent to 21 per cent. Biden is also considered more likely to regulate the US tech giants to promote more competition. These plans may face stiff opposition from a Republican Senate.
- Stimulus payments to households. Biden supports further fiscal stimulus to boost consumer spending. While there were hopes that this could be delivered before the end of the year, action now seems unlikely until after January 20.
- Infrastructure program. Biden has promised to rebuild America’s ageing public infrastructure, from roads, bridges, rail and ports to inland waterways. This would stimulate the construction and engineering sectors.
- Climate policy. Biden is expected to rejoin the Paris Climate Accord and join other major economies pledging zero net carbon emissions by 2050. To achieve this, he would likely promote renewable technologies at the expense of fossil fuels.
- Expand affordable healthcare. Biden wants to create affordable public health insurance and lower drug prices to put downward pressure on insurance premiums.
- Turn down the heat on trade. Biden will continue to put pressure on China to open its economy to outside investment and imports. But unlike President Trump’s unpredictable, unilateral action, he is expected to take a more diplomatic approach and build alliances with other countries in the Asian region to counter China’s expansionism.
While a Republican Senate may oppose measures such as higher corporate taxes and tougher regulation of industry, it is expected to be more open to some of Biden’s other policy initiatives.
The outlook for markets
The general view is that further stimulus spending should support the ongoing US economic recovery which will in turn be positive for financial markets.
While Biden is committed to heeding expert advice in his handling of the coronavirus, a return to lockdown in major cities may put a short-term brake on growth.
Longer-term though, recent announcements by pharmaceutical company Pfizer and others have raised hopes that vaccines to prevent COVID-19 may not be far off. This would provide an economic shot in the arm and continued support for global markets.
However, as sharemarkets tend to be forward looking, the US market appears to have already given Biden an early thumbs up with the S&P500 Index hitting record highs in mid-November.
Lessons of history
Despite the Republicans’ more overt free market stance, US shares have done better under Democrat presidents in the past with an average annual return of 14.6 per cent since 1927. This compares with an average return of 9.8 per cent under Republican presidents (see graph).
While the past is no guide to the future, it does suggest the market is not averse to a Democratic president.
What’s more, shares have done best during periods when there was a Democrat president and Republican control of the House, the Senate or both with an average annual return of 16.4 per cent.ii
US share market returns by political configuration
Source: AMP
Implications for Australia
Australian investors should also benefit from a less erratic, more outward-looking Biden presidency.
Any reduction in trade tensions with China would be positive for our exporters and Australian shares. While a faster US transition to cleaner energy might put pressure on the Morrison government and local companies that do business in the US to do the same, it could also create investment opportunities for Australia’s renewables sector.
Ultimately, what’s good for the US economy is good for Australia and global markets.
If you would like to discuss your overall investment strategy as we head towards a new year and new opportunities, don’t hesitate to contact us.
i https://www.abc.net.au/news/us-election-2020/
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
December 2020
December and summer are finally here, along with a renewed sense of optimism that strict lockdown measures will ease by Christmas. It’s been a tough year, but once again Australians have proved extremely resilient. We wish all our clients and their families a relaxed and happy Christmas.
November was an extraordinarily action-packed month for the global and local economy. Joe Biden’s US election victory released a pressure valve on global markets, with US shares reaching new historic highs and Australian shares up more than 9% over the month.
Markets also responded positively to the potential early release of effective coronavirus vaccines despite a rise in global cases. Oil prices were quick to respond to the prospect of borders reopening, with Brent Crude up almost 22% over the month.
In Australia, the Reserve Bank (RBA) cut its target cash rate and 3-year government bond yields from 0.25% to 0.1%, or one tenth of one percent. The RBA is not expecting to increase rates for at least three years. Early indications are that swift action by the government and the RBA have limited the impact of the COVID recession. Economic growth is now forecast to contract 4% in 2020, before rebounding 6% in the year to June 2021. Unemployment, which rose slightly to 7% in October, is forecast to peak at 8% this year but to remain at a relatively high 6% in December 2022. This is reflected in the fall in annual wages growth from 1.8% to 1.4% in the year to September. The Aussie dollar rose 5% on US dollar weakness in November, to close at US74c. The US currency is falling as a spike in coronavirus infections and delays in government stimulus raise the prospect of more money printing.
‘Tis the season for wise spending decisions
The traditional festive holiday season is likely to be a little different this year, but one thing is likely to remain the same – the temptation to spend and the post-Christmas budget hangover.
Last year Australians spent about $1000 each for Christmas on presents, decorations, travel and charity donations. For 28 per cent of us, this expenditure meant using credit cards or buy now pay later (BNPL).i
While many will use credit again this festive season, the current economic circumstances may make us think twice about our spending. It’s not just what you spend, but how you spend that could make all the difference.
So, if you plan to use credit to help manage your Christmas spending, what are the options?
Buy now, pay more later?
Even before COVID, more and more people were turning away from the traditional credit card and opting instead for a buy now, pay later payment method. BNPL providers in Australia include companies such as Afterpay and Zip, but there are many more.
The use of BNPL may be due to convenience or an aversion to debt, or a bit of both.
In a recent report, the Australian Securities and Investments Commission (ASIC) found BNPL transactions jumped by 90 per cent to 32 million in the 2018-19 financial year.ii
Meanwhile, the number of credit card accounts fell 7 per cent in the 12 months to March 2020 from 14.6 million to 13.6 million.iii
But for those who still use a credit card, it is estimated that more than 2 million Australians have gone over their limit since March this year as the economic slowdown takes its toll on household finances.iv
Initially BNPL was popular with millennials, but over time more baby boomers and Gen X have opted for this form of credit which boasts that it is interest free. Compare that with interest on credit card balances which are mostly in double digits and can even be as high as 20 per cent.
But don’t be fooled.
Watch for fees
There may be no interest rates on buy now pay later, but there are fees and these can quickly add up.
All BNPL providers have slightly different terms and conditions, but fees may include:
- Late fees of up to $15 a month
- Monthly account keeping fees of up to $8 a month
- Payment processing fee of $2.95 every time you make an extra payment
- Establishment fees can range from zero to $90.v
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Of course, that does not mean you should avoid buy now, pay later offerings. If you meet all your payments on time, then it can be a useful form of credit. The key is to be cautious.
For instance, do not run up debt with multiple providers. Not only can that prove expensive, but it can also be difficult to manage. It can soon become expensive if you have late payment fees to pay to several providers.
ASIC research found one in five BNPL users missed payments in the 2018-19 financial year. This translated into fee revenue of $43 million for providers, a jump of 38 per cent over the year and financial hardship for 21 per cent of users. As a result, ASIC said some people were cutting back on meals and other essentials or taking out additional loans to make BNPL payments on time.
Bank alternative
Now the big banks are meeting the challenge of BNPL to traditional credit cards head on, with the launch of interest free credit cards and partnerships with BNPL providers.
While the new interest free credit cards have no interest charges or late fees, they typically have a minimum monthly payment and a monthly fee in months where you don’t make a transaction.
Finding money for everyday items, let alone festive spending, has become a juggle for many this year. The gradual transitioning away from support payments such as Job Keeper and Job Seeker won’t make things any easier.
Whatever your financial circumstances, if you monitor your money carefully and make changes to your expectations, then there is no reason why this festive season can’t be just as good this year as last. One of the lasting benefits of 2020 may well be that it makes us more proactive about managing our money wisely.
i https://www.finder.com.au/australias-christmas-spending-statistics
v https://moneysmart.gov.au/other-ways-to-borrow/buy-now-pay-later-services
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Economic Update Video – October 2020
The biggest government stimulus program since WWII has resulted in a budget deficit of $85.3 billion in the 2019/20 FY, with more spending on the cards to drive economic growth.
The Reserve Bank has kept the cash rate at its current record low of 0.25%.
Please get in touch if you’d like assistance with your personal financial situation.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Federal Budget 2020-21 Analysis
Building a bridge to recovery
In what has been billed as one of the most important budgets since the Great Depression, and the first since the onset of the COVID-19 pandemic dragged Australia into its first recession in almost 30 years, Treasurer Josh Frydenberg said the next phase of the journey is to secure Australia’s future.
As expected, the focus is on job creation, tax cuts and targeted spending to get the economy over the COVID-19 hump.
The Treasurer said this Budget, which was delayed six months due to the pandemic, is “all about helping those who are out of a job get into a job and helping those who are in work, stay in work”.
The big picture
After coming within a whisker of balancing the budget at the end of 2019, the Treasurer revealed the budget deficit is now projected to blow out to $213.7 billion this financial year, or 11 per cent of GDP, the biggest deficit in 75 years.
With official interest rates at a record low of 0.25 per cent, the Reserve Bank has little firepower left to stimulate the economy. That puts the onus on Government spending to get the economy moving, fortunately at extremely favourable borrowing rates. And that is just as well, because debt and deficit will be with us well into the decade.
The Government forecasts the deficit will fall to $66.9 billion by 2023-24. Net debt is expected to hit $703 billion this financial year, or 36 per cent of GDP, dwarfing the $85.3 billion debt last financial year. Debt is expected to peak at $966 billion, or 44 per cent of GDP, by June 2024.
The figures are eye-watering, but the Government is determined to do what it takes to keep Australians in jobs and grow our way out of recession.
So, what does the Budget mean for you, your family and your community?
It’s all about jobs
With young people bearing the brunt of COVID-related job losses, the Government is pulling out all stops to get young people into jobs. Youth unemployment currently stands at 14.3 per cent, more than twice the overall jobless rate of 6.8 per cent.
As we transition away from the JobKeeper and JobSeeker subsidies, the Government announced more than $6 billion in new spending which it estimates will help create 450,000 jobs for young people.
“Having a job means more than earning an income,” Mr Frydenberg said.
Measures include:
- A new JobMaker program worth $4 billion by 2022-23, under which employers who fill new jobs with young workers who are unemployed or studying will receive a hiring credit of up to $10,400 over the next year. Employers who hire someone under 29 will receive $200 a week, and $100 a week for those aged 30-35. New employees must work at least 20 hours a week to be eligible.
- A $1.2 billion program to pay half the salary of up to 100,000 new apprentices and trainees taken on by businesses.
In recognition that the pandemic has had a disproportionate impact on women’s employment, the Budget includes the promised “Women’s economic security statement” but the size of the support package may disappoint some.
Just over $240 million has been allocated to “create more opportunities and choices for women” in science, technology, engineering and mathematics (STEM) as well as male-dominated industries and business.
Housing and infrastructure
As part of its job creation strategy, the government also announced $14 billion in new and accelerated infrastructure projects since the onset of COVID.
The projects will be in all states and territories and include major road and rail projects, smaller shovel-ready road safety projects, as well as new water infrastructure such as dams, weirs and pipelines.
The construction industry will also be supported by the first home loan deposit scheme being extended to an extra 10,000 new or newly built homes in 2020-21. This scheme allows first home owners to buy with a deposit as low as 5 per cent and the Government will guaranteeing up to 15 per cent.
Personal tax cuts
As widely tipped, the government will follow up last year’s tax cut by bringing forward stage two of its planned tax cuts and back date them to July 1 this year to give mostly low and middle-income taxpayers an immediate boost.
As the table below shows, the upper income threshold for the 19 per cent marginal tax rate will increase from $37,000 a year to $45,000 a year. The upper threshold for the 32.5 per cent tax bracket will increase from $90,000 to $120,000.
As a result, more than 11 million Australians will save between $87 and $2,745 this financial year. Couples will save up to $5,490.
| Marginal tax rate* | Previous taxable income thresholds | New taxable income thresholds |
| 0% | $0-$18,200 | $0-$18,200 |
| 19% | $18,201-$37,000 | $18,201-$45,000 |
| 32.5% | $37,001-$90,000 | $45,001-$120,000 |
| 37% | $90,001-$180,000 | $120,001-$180,000 |
| 45% | More than $180,000 | More than $180,000 |
| Low income tax offset (LITO) | Up to $445 | Up to $700 |
| Low & middle income tax offset (LMITO) | Up to $1,080 | Up to $1,080** |
*Does not include Medicare Levy of 2%
**LMITO will only be available until the end of the 2020-21 income year.
You don’t need to do anything to receive the tax cuts. The Australian Taxation Office (ATO) will automatically adjust the tax tables it applies to businesses and simply take less. It will also account for three months of taxes already paid from 1 July this year so workers can catch up on missed savings.
Business tax relief
In another move that will help protect jobs in the hard-hit small business sector, business owners will also get tax relief through loss carry back provisions for struggling firms. This will allow them to claim back a rebate on tax they have previously paid until they get back on their feet.
Businesses with turnover of up to $5 billion a year will be able to write off the full value of any depreciable asset they buy before June 2022.
Cash boost for retirees
Around 2.5 million pensioners will get extra help to make up for the traditional September rise in the Age Pension not going ahead this year. However, self-funded retirees may feel they have been left out.
Age pensioners and as well as people on the disability support pension, Veterans pension, Commonwealth Seniors Health Card holders and recipients of Family Tax Benefit will receive two payments of $250 from December and from March.
This is in addition to two previous payments of $750 earlier this year.
Health and aged care
After the terrible toll the pandemic has waged on aged care residents and the elderly, the Government will add 23,000 additional Home Care packages to allow senior Australians to remain in their home for as long as possible.
Funding for mental health and suicide prevention will also be increased by $5.7 billion this year, with a doubling of Medicare-funded places for psychological services.
Super funds on notice
Underperforming super funds are to be named and shamed with a new comparison tool called Your Super. This will allow super members to compare fees and returns.
All funds will be required to undergo an annual performance test from 2021 and underperforming funds will be banned from taking on new members unless they do better.
Looking ahead
As the underlying Budget assumptions are based on finding a coronavirus vaccine sometime next year, Government projections for economic growth, jobs and debt are necessarily best estimates only.
Only time will tell if Budget spending and other incentives will be enough to encourage business to invest and employ, and to prevent the economy dipping further as JobKeeper and JobSeeker temporary support payments are wound back.
Another test will be whether the Budget initiatives help those most affected by the recession, notably young people and women.
The Government has said it is prepared to consider more spending to get the economy out of recession. The Treasurer will have another opportunity to fine tune his economic strategy fairly soon, with the next federal budget due in just seven months, in May 2021.
If you have any questions about any of the Budget measures and how they might impact your finances, don’t hesitate to contact us.
Information in this article has been sourced from the Budget Speech 2020-21 and Federal Budget support documents.
It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Housing market: shaken but not stirred
With Australia in a COVID-induced recession, residential property is not immune to falling economic activity. Yet housing prices are proving surprisingly resilient.
Only months ago, economists were forecasting a housing price slump of 20 per cent or more. Now, most have revised their forecasts to price falls of between five and 10 per cent.
The more optimistic predictions are due to Australia’s success at containing the coronavirus, the gradual lifting of restrictions and government stimulus aimed at keeping Australians in work. The most recent of these measures is the HomeBuilder package.
Housing stimulus
The Morrison Government’s HomeBuilder package, announced on June 4, offers homebuyers a grant of $25,000 to build a new home worth less than $750,000. The grant can also be spent on renovations valued between $150,000 and $750,000 to an existing home valued at no more than $1.5 million.
The scheme is limited to owner-occupiers (not investors) on incomes below $125,000 for singles and $200,000 for couples. The amount of money on offer is uncapped, but the government expects it to cost about $688 million for roughly 27,000 grants.
To be eligible, renovators must sign a contract with a builder by the end of 2020. They will need to have plans drawn up, finance approved, and any building and development approvals secured.
The package has been well-received by the housing industry, which hopes it will encourage buyers to bring forward purchases and support construction jobs.
Construction activity in the doldrums
The value of residential construction work done in the March quarter fell 2.9 per cent, or 12.3 per cent over the year to March.i That’s a significant hit to the economy, given that construction is the third biggest contributor behind mining and financial services, and housing represents the lion’s share of all building activity.ii
While critics argue the HomeBuilder package is too limited in scope and time to make a significant impact, it is more likely to support house prices than harm them.
House prices marking time
According to CoreLogic, national home prices edged up 0.6 per cent in the three months to the end of May, at the height of the economic shutdown. Melbourne was the only market to lose ground during that period (-0.8 per cent) but all regions lost momentum.
However, sales activity bounced back by an estimated 18.5 per cent in May after a drop of 33 per cent in April. While the housing market remains subdued, the rise in sales coincided with an easing of social distancing restrictions, the arrival of JobKeeper payments in people’s pockets and growing consumer confidence. The ANZ-Roy Morgan consumer confidence index rose 42 per cent in the eight weeks following its trough in mid-March.
In another positive sign of increased economic activity, auction clearance rates recovered from a low of 30 per cent in April to 63 per cent in late May as restrictions on open homes and auctions eased.
On an annual basis, national home values rose 8.3 per cent in the year to May with Perth (-2.1 per cent) and Darwin (-2.6 per cent) the only capital cities where prices are still lower than a year ago.iii
Change in dwelling values
| Quarter | Annual | Gross yield | Median value | |
| Sydney | 1.1% | 14.3% | 3.0% | $885,159 |
| Melbourne | -0.8% | 11.7% | 3.2% | $686,798 |
| Brisbane | 0.8% | 4.3% | 4.4% | $508,386 |
| Adelaide | 1.1% | 1.8% | 4.4% | $441,184 |
| Perth | 0.1% | -2.1% | 4.3% | $443,669 |
| Hobart | 0.5% | 6.2% | 4.9% | $486,056 |
| Darwin | 2.1% | -2.6% | 5.8% | $393,939 |
| Canberra | 1.2% | 5.1% | 4.7% | $637,279 |
| Combined regionals | 1.1% | 3.5% | 4.9% | $397,388 |
| National | 0.6% | 8.3% | 3.8% | $557,818 |
Source: CoreLogic Home Value Index as at 31 May 2020
Rents and yields falling
Rents in every capital city except Perth fell in the two months to May. Inner city apartments were worst hit, due to a glut in supply and falling demand from international students and out-of-work locals.
Falling rents are welcome news for renters, especially in cities like Hobart where a booming property market and the conversion of long-term rentals into short-term Airbnb lets had priced many out of the market.
However, falling rents are not so good for property investors. Rental yields were 3.8 per cent nationally in May, although higher in regional areas (4.9 per cent) than capital cities (3.5 per cent).
According to CoreLogic, there is a strong chance that rents will fall more than housing values, putting further pressure on rental yields, with yields in Sydney and Melbourne already at or near record lows.iii
Looking ahead
While the outlook for the property market is brighter than feared, there are still challenges ahead.
One test will come after September when JobKeeper payments and loan repayment holidays are removed. There is a risk that mortgage arrears and distressed sales could increase at that time. While unemployment is now expected to peak at around 8 per cent, not 10 per cent as previously forecast, it is not expected to return to pre-pandemic levels for at least two years.iv
On the positive side, interest rates remain at record lows and the OECD expects the Australian economy will bounce back by 4.1 per cent next year (if the coronavirus is kept under control), after a contraction of 5 per cent in 2020. This is a better economic performance than almost any other nation.v
While the outlook for property is still uncertain, the stirrings of economic activity are encouraging. If you would like to discuss your property strategy in the light of current market developments, please get in touch.
i https://www.abs.gov.au/ausstats/abs@.nsf/mf/8755.0
ii https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/
v https://www.afr.com/policy/economy/australia-leads-on-economic-recovery-oecd-20200610-p5514b
Buachailli Pty Ltd ABN 57 115 345 689 atf Harlow Family Trust t/as Queensland Financial Group is a Corporate Authorised Representative of Synchron AFS Licence No. 243313 This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.