Putting recent returns into perspective
While 2021-2022 may not have been a stellar year for the majority of investors, it’s worth remembering that the worst performing asset class one year can be the best the next, and vice versa. That’s why successful investing benefits from having a good balance.
The last financial year, particularly the first half of 2022, saw a sharp rise in volatility on global investment markets.
It was hardly surprising. Stock markets, bond markets, commodities markets, and currency markets all found themselves caught up in a turbulence, shaped by a series of unsettling events.
They included the ongoing spread of COVID-19, with China forcing many of its major cities and manufacturing hubs back into lockdowns, and the start of the Russia-Ukraine war this year.
Inflation levels were already starting to rise in the second half of 2021, but the combination of these events has intensified the pressure on already strained global supply chains in 2022.
With the prices of goods and services rising at their fastest pace in decades, central banks have quickly begun raising their official interest rates in a bid to dampen demand.
Reflecting the stormy conditions – and the widespread sell-offs on financial markets over recent months – most investment asset classes recorded losses over the 12 months to 30 June.
A turbulent financial year
| Australian share market | -6.8% |
| U.S. share market | -10.7% |
| International shares | -6.5% |
| Australian bonds | -10.5% |
| Australian listed property | -11.4% |
| Cash | 0.1% |
Note: Asset class percentage return calculations are based on market open levels on 1 July 2021 and closing levels on 30 June 2022 for the S&P/ASX All Ordinaries Accumulation Index. MSCI World ex-Australia Net Total Return Index. S&P 500 Total Return Index. Bloomberg AusBond Composite 0+ Yr Index. S&P/ASX 200 A-REIT Accumulation Index. Bloomberg AusBond Bank Bill Index.
Putting 2021-22 into perspective
2021-22 was anything but a stellar financial year for the majority of investors.
That’s especially the case when you compare it with 2020-21, when the Australian share market gained 30.2 per cent, the U.S. share market grew by 29.1 per cent, and international shares recorded a 27.5 per cent return.
But the last financial year wasn’t the first period where returns have been negative across most key asset classes.
Think back to the Global Financial Crisis in 2008 and 2009, when most investors recorded back-to-back negative returns.
The Australian share market fell 12.1 per cent in the 2007-08 financial year, and then by a further 22.1 per cent in 2008-09.
Over the same two-year period the U.S. share market fell 23.2 per cent and 12.4 per cent, while the returns from Australian listed property were negative 28.6 per cent and 31.2 per cent.
Then, as economies around the world emerged from the GFC, financial markets embarked on a growth spurt for the best part of the next decade.
Even in early 2020, when financial markets fell heavily as the spread of COVID sparked widespread investor panic, returns from most asset classes had started to recover by 30 June 2020.
Five years of returns
Another point to keep in mind that asset class returns vary from year to year. The best performing asset class one year can be the worst the next.
The above table has the best performing asset class for each year highlighted in green, and the worst performing in red.
In 2021-22, cash was the only asset class to deliver a positive return – albeit that after inflation, the purchasing value of cash savings declined.
In 2020-21 cash was once again the worst performing asset class.
The bottom line
Returns from asset classes are never consistent. Successful investing benefits from having a good balance.
Rather than trying to pick the winning investment each year, spreading your investments across a wide range of assets can help to reduce the risk of loss over longer periods that could occur if you had all your capital tied to just one asset class.
Investors who are well diversified tend to enjoy a smoother investment ride over the long term.
Long-term returns data also proves that time in the market will deliver consistent growth over longer periods despite periods of short-term volatility.
Making additional contributions and harnessing the power of compounding returns can make an enormous difference over time.
And it’s never too late to start doing this to give yourself the best chance of investment success.
If you would like to discuss your investment portfolio in light of recent market volatility, please call us today.
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.
Three top strategies for setting goals you can actually achieve
Setting goals for yourself and your business is sometimes easier said than done. Productivity coach, Chelsea Pottenger, shares some handy tips to set effective goals – and achieve them!
A new financial year is a great time to pause, review and evaluate your goals. Asking yourself and your team if you are on the right track? If your daily activities match your goals? Whether you even set up the right goals to start with?
A mistake we can all fall into is setting up big goals, only to discover we aren’t following through to achieve them. You can stop that happening by using a framework that will not only help you set up your goals but achieve them as well.
So, what is a goal?
A goal is simply a future desired outcome. Your goal could be to ‘increase yearly revenue by 25 per cent’ or ‘to create a more connected culture’.
Whatever your goal is, it’s important to consider how you want to feel, the specific action of the goal and how you are going to achieve it.
Clearly articulated goals help trigger new behaviours, which prompt new habits, allowing you to work more efficiently and effectively towards achieving your goals.
Three steps to successful goal setting
Step 1: Start with your values
Your values are your ‘why’. They are the things you believe are important. They determine your priorities and help measure whether you are fulfilled. Your values will help guide why you are making the goals you are, and ensure they are aligned with the purpose of the business.
Write down three values and then process why they are important.
Step 2: Determine how you want to feel
This part may not seem that important, however cognitive therapy tells us that when we can harness the emotion we would feel by achieving our goals, we will better understand our ‘why’ and intrinsic motivation, prompting us to put more energy into achieving them.
Ask yourself:
-
Do you want to feel successful?
-
Do you want to feel abundant?
-
Do you want to feel energetic?
Before writing down your goals, clearly identify how you want to feel and return to this feeling when finding your intrinsic motivation.
Step 3: Set S.M.A.R.T Goals
S.M.A.R.T goal setting is a widely proven formula for success. The acronym ‘S.M.A.R.T’ stands for Specific, Measurable, Attainable, Relevant and Timebound.
Writing goals in this format prompts you to be crystal clear about what the desired outcome is and how you are going to achieve it. For example, if your goal is to support employee wellbeing, we would break down the goal like this:
-
Specific: Introduce a twice a week wellbeing program for my employees.
-
Measurable: I will survey my employees on what types of fitness and mindfulness they would like to be included in the wellness program.
-
Attainable: I will outsource a fitness trainer and meditation/mindfulness coach. I will spend two hours per week working with them to curate sessions for the program.
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Relevant: Supporting my employees’ wellbeing will increase their happiness, productivity and performance at work.
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Timebound: I will start working on the program tomorrow and have it up and running in six weeks time.
Now you have set your goals, you need to achieve them.
3 strategies to help you stick to your goals
1. Treats and rewards for the brain
Reward yourself along the way. Celebrate each milestone that gets you closer to your goal.
2. Pre commitment and accountability
Consider getting an accountability partner. This could be a spouse, friend, colleague – someone to celebrate the wins along the way and offer a fresh perspective.
3. Intrinsic motivation
Check on your ‘why’ and what motivates you. When our behaviours match our values, it means our goals are aligned with our purpose and we feel a stronger drive to achieve them.
Source: Flying Solo August 2022
This article by CHELSEA POTTENGER is reproduced with the permission of Flying Solo – Australia’s micro business community. Find out more and join over 100K others https://www.flyingsolo.com.au/join.
Important:
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. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take 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) ac www.flyingsolo.com.au
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.
2022 Year in Review
The year began on an optimistic note, as we finally began to emerge from Covid restrictions. Then Russia threw a curve ball that reverberated around the world and suddenly people who had never given a thought to the Reserve Bank were waiting with bated breath for its monthly interest rate announcements.
2022 was the year of rising interest rates to combat surging inflation, war in Ukraine and recession fears. These factors combined to create cost-of-living pressures for households and a downturn in share and bond markets.
Super funds also suffered their first calendar year loss since 2011. Ratings group Chant West estimates the median growth fund fell about 4 per cent last year.i While this is bad news for members, it’s worth remembering that super is a long-term investment, and that the median growth fund is still 11 per cent above its pre-Covid high of January 2020.ii
|
Australia key indices December |
Share markets (% change) Year to December |
||||
|
|
2021 |
2022 |
|
2021 |
2022 |
|
Economic growth |
4.6% |
*5.9% |
Australia All Ordinaries |
13.6% |
-7.2% |
|
RBA cash rate |
0.1% |
3.1% |
US S&P 500 |
27.0% |
-19.3% |
|
Inflation (annual rate) |
3.5% |
^7.3% |
Euro Stoxx 50 |
20.9% |
-11.7% |
|
Unemployment |
4.2% |
#3.45% |
Shanghai Composite |
4.8% |
-15.1% |
|
Consumer confidence |
104.3 |
82.5 |
Japan Nikkei 225 |
4.9% |
-10.9% |
*Year to September, ^September quarter # November
Sources: RBA, ABS, Westpac Melbourne Institute, Trading Economics
The big picture
Even though investors have come to expect unpredictable markets, nobody could have predicted what unfolded in 2022.
Russia’s invasion of Ukraine in February triggered a series of unfortunate events for the global economy and investment markets. It disrupted energy and food supplies, pushing up prices and inflation.
Inflation sits around 7 to 11 per cent in most advanced countries, with Australia and the US at the low end of that range and the Euro area at the higher end.iii
As a result, central banks began aggressively lifting interest rates to dampen demand and prevent a price and wages spiral.
Rising inflation and interest rates
The Reserve Bank of Australia (RBA) lifted rates eight times, taking the target cash rate from 0.1 per cent in May to 3.1 per cent in December.iv This quickly flowed through to mortgage interest rates, putting a dampener on consumer sentiment.
Australia remains in a better position than most, with unemployment below 3.5 per cent and wages growth of 3.1 per cent running well behind inflation.v
Despite the geopolitical challenges, Australia’s economic growth increased to 5.9% in the September quartervi before contracting to an estimated 3 per cent by year’s end, in line with most of our trading partners.vii
Volatile share markets
Share investors endured a nail-biting year, as markets wrestled with rising interest rates, inflation, and the war in Ukraine.
Global shares plunged in October on interest rate and recession anxiety only to snap back late in the year on hopes that interest rates may be near their peak. The US market led the way down, finishing 19 per cent lower, due to its exposure to high-tech stocks and the Federal Reserve’s aggressive interest rate hikes. Chinese shares (down 15 per cent) also had a tough time as strict Covid lockdowns shut down much of its economy.
Australian shares performed well by comparison, down just 7 per cent, thanks to strong commodity prices and the Reserve Bank’s relatively moderate interest rate hikes.
Energy and utilities stocks were strong due to the impact of the war in Ukraine on oil and gas prices. On the flip side, the worst performers were information technology, real estate and consumer discretionary stocks as consumers reacted to cost-of-living pressures.
Property slowdown
After peaking in May, national home values fell sharply as the Reserve Bank began ratcheting up interest rates. The CoreLogic home value index fell 5.3% in 2022, the first calendar year decline since the global financial crisis of 2008.
As always though, price movements were not uniform. Sydney (-12 per cent), Melbourne (-8 per cent) and prestige capital city properties generally led the downturn. Bucking the trend, prices continued to edge higher in Adelaide (up 10 per cent), Perth (3.6 per cent), Darwin (4.3 per cent) and many regional areas.
Rental returns outpaced home prices, as high interest rates, demographic shifts and low vacancy rates pushed rents up 10.2 per cent in 2022. Gross yields recovered to pre-Covid levels, rising to 3.78 per cent in December on a combination of strong rental growth and falling housing values. However, it’s likely net yields fell as mortgage repayments increased.
Despite the downturn, CoreLogic reports housing values generally remain above pre-COVID levels. At the end of December, capital cities combined were still 11.7 per cent above their March 2020 levels, while regional markets were a massive 32.2 per cent higher.
Looking ahead
While the outlook for 2023 remains challenging, there are signs that inflation may have peaked and that central banks are nearing the end of their rate hikes.
Even so, the risk of recession is still high although less so in Australia where the RBA has been less aggressive in applying the interest rate brakes.
Issues for investors to watch out for in the year ahead are:
-
A protracted conflict in Ukraine
-
A new COVID wave in China which could further disrupt supply chains across the Australian economy, and
-
Steeper than expected falls in Australian housing prices which could lead to forced sales and dampen consumer spending.
If you would like to discuss your investment strategy in the light of prevailing economic conditions, don’t hesitate to get in touch.
Note: all share market figures are live prices as at 31 December 2022 sourced from: https://tradingeconomics.com/stocks.
All property figures are sourced from: https://www.corelogic.com.au/news-research/news/2022/corelogic-home-value-index-australian-housing-values-down-5.3-over-2022
i https://www.chantwest.com.au/resources/another-strong-month-for-super-funds-as-recovery-continues/
ii As above
iii https://tradingeconomics.com/country-list/inflation-rate
iv https://www.rba.gov.au/statistics/cash-rate/
v https://www.rba.gov.au/snapshots/economy-indicators-snapshot/
vii https://www.rba.gov.au/publications/smp/2022/nov/economic-outlook.html
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.
8 retirement mistakes and how to avoid them
Retirement is a phase of life most of us look forward to. It’s a chance to pursue other interests, travel and maybe do some part-time work or volunteering.
Thanks to more than 30 years of compulsory superannuation, we are also retiring with more savings than previous generations and have higher expectations of the lifestyle we wish to enjoy. But that also brings its challenges.
According to the government’s Retirement Income Review, the average age of retirement in Australia is around the ages of 62 to 65.i At the same time, today’s 65-year-old men and women can expect to live to 85 and 88 respectively, on average, and many will live well into their 90s.
To make the most of your retirement years, it’s important to have confidence that your savings will last the distance. The best way to achieve that is to have a plan that will help you avoid some common and preventable retirement mistakes.
Mistakes people make
While it’s impossible to predict what financial challenges lie ahead, these eight common retirement mistakes remain the same:
1. Not knowing your living costs
When you are receiving a regular income, you may be tempted to focus less on keeping a track of your living costs. When the regular income stops at retirement, you can be unaware of whether your investment income and/or pension payments will support your lifestyle costs.
Knowing what your living costs are before you retire can help manage expectations accordingly.
2. Not looking at your super until just before retiring
What if your super was invested in conservative assets throughout your working life? It could mean that your super would not have grown to the level needed to fund your retirement. What if your super’s insurance premiums and fees consumed the returns?
It is vital to review your super account as early and as regularly as possible to ensure it is appropriate for each stage of your life.
3. Underestimating the impact of inflation
Australia’s rate of inflation hovered around 1 per cent to 3 per cent per year between June 2012 and early 2020. Since the onset of the global pandemic in March 2020, inflation has jumped to more than 7 per cent.ii This along with a disruption to the global supply chain and the Russia-Ukraine war has lifted the cost of living to levels that require you to reassess your retirement planning.
4. Not understanding your government entitlements
If you’re age 66 or older, you may be eligible for a full- or part-Age Pension. However, even if your level of wealth puts you above the pension limits, you may still be eligible for other entitlements.
These can include the Seniors Card, Pensioner Concession Card, income tax offsets or pensioner stamp duty exemption/concession.
5. Letting the noise affect your investment decisions
Negative news grabs headlines, such as talk of billions being wiped off share markets, but you rarely read about the billions made during the rebound. There is no denying that the financial markets face volatility during periods of uncertainty. However, as history has shown, over the long run the market trends upwards.
All this noise makes it difficult to stick your long-term strategy, when in fact such events can present opportunities in the markets too.
6. Trying to time the financial markets
“We haven’t the faintest idea what the stock market is gonna do when it opens on Monday — we never have,” said legendary share investor Warren Buffett. Say you invested $10,000 in the ASX 200 index by trying to time the market and you missed the 40 best days between October 2003 to October 2022, your investment would be worth $9,064, whereas if you remained fully invested it would be worth $46,099.iii
Trying to time the markets is never a good idea, especially with your retirement savings.
7. Being asset rich and cash poor
You may have built up a strong balance sheet of assets, but in retirement it is income you require. For many Australians, their family home could be their biggest asset and its value is sometimes unlocked by downsizing into a smaller home, but many Australians remain living in a family home that has surged in value while they struggle to find enough income to live on.
Are your assets generating enough income to support your lifestyle? This income can include rent from an investment property, share dividends or managed fund distributions. If the income is insufficient, you may have to sell some of your assets to provide that liquidity or tap into the equity in your home by taking out a reverse mortgage-style loan.
8. Not consulting professionals
Financial advisers, accountants and other financial professionals can help set you on the right path by navigating the complexities of superannuation, investments, constant rule changes and other factors that affect your retirement. A good retirement plan, implemented correctly, can set you up for life.
Start Planning
Whether it’s due to lack of time or awareness, too many people tend to make these same mistakes when entering retirement which can lead to unwanted financial surprises.
A phase of life you have looked forward to for so long deserves careful planning. So please get in touch if you would like to review your retirement income needs.
i Retirement Income Review Final Report, July 2020 page 63 Retirement Income Review Final Report (treasury.gov.au)
iii From 31 Oct 2003 to 04 Oct 2022, Fidelity Australia Timing the market | Fidelity Australia
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.
Market movements & review video – February 2022
Stay up to date with what’s happened in Australian markets over the past month.
January is normally a quiet month on the economic scene, but not this year. Inflation and speculation about rising interest rates dominated the month, sending global shares tumbling.
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.
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.