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Choose investments that are right for you. When it comes to choosing an investment option when you join a super fund, there are several key questions you should ask yourself: Do I understand how asset classes work? What is my level of comfort with risk? What type of returns am I looking for? How long is my investment timeframe? All investments are designed to make a return and are subject to different levels of risk, depending on the asset class. This means that as well as making money, there’s also a chance that you could lose it. You might also think of risk as the possibility that your investments don’t achieve your financial objectives. As a general rule, the bigger the potential investment return, the higher the investment risk and the longer the suggested investment timeframe. Consider your age when determining how long you expect your money to remain invested (that is, your investment timeframe). This will help determine the most appropriate investment mix and asset allocation for your circumstances. If you are young, you may be able to invest your money for longer and can therefore weather the short term fluctuations that can occur when investing in higher risk options such as shares. If you are older and need to access your money sooner, it may be more appropriate to protect your money by investing in lower risk options such as fixed interest. With so many options available, knowing what to choose may feel overwhelming. While your fund can explain the different investment options available to you, speaking to a financial adviser can help you choose options that may suit your personal circumstances and financial objectives. Source: CFS  

Saving money doesn’t come naturally to everyone. Some people are wired to save – for others it takes a bit more discipline; but developing good savings habits can do so much for both your financial wellbeing and your future security. Just like money compounds over time, so do our habits. The more we see progress, the more progress we make but often it’s getting started that’s the hardest part. We share seven habits that can shake up your saving – and if you think you’ve heard them all before, read on for a new take that could see you start to change your ways. Lessons from Japan The Japanese are well known for their ability to master the art of minimal living. Decluttering (or Marie Kondo-ing) the home turned into a global craze as people caught on to the benefits of going back to basics. When it comes to budgeting and savings, the Japanese have nailed that too, with a super simple yet effective journaling method called Kakeibo – pronounced “Kah-keh-boh”. The power in Kakeibo comes from being mindful with your spending and saving – sitting down at the beginning of each month and reflecting on what you want to achieve and how you plan to get there. The process focuses on four key areas: How much do you have to spend? How much would you like to save? How much money are you spending? How can you improve next month? If Kakeibo sounds like something you could work with, use a notebook to jot down your thoughts on the four questions each month. Taking time to check in on your spending and saving priorities is a great first step towards behaviour change. Mapping out your milestones As humans, we like making progress and it gives us the confidence and motivation to keep going. That’s why taking on too much and trying to get from 0 to 100 overnight is never a good idea. Just like building up your fitness, building your savings stamina takes time and training. The beauty of having your goals and milestones mapped out is that you can stop to look at your plans before you make a sudden spending choice. It helps you keep the big picture in mind and if you happen to fall ‘off the wagon’, you have a roadmap to get you back on track. Creating your money mantra Self talk is an extremely powerful tool and it can work for or against us. Repeating a mantra to yourself when thinking about a purchase – and intermittently throughout the day – can help keep you focused and in control of your spending. Here are some examples of what a money mantra could look like: “I spend wisely and with purpose” “I am in control of my spending at all times” “I make good money decisions every day” Interrupting the click and repeat cycle Living in a world where services are subscription based or on repeat does make life convenient but it can take away some of our control over what we’re spending because we’re not actively deciding to spend the money – it just happens over and over again. Many subscriptions, such as Netflix, don’t offer an alternative but that doesn’t mean you should ignore just how much these regular expenses can add up. Make a habit of putting your monthly subscriptions under the microscope and think about whether you really need them or if you can get a better deal. Avoid ‘urge surfing’ by taking the one week test Sometimes it’s hard to know what we really need and what we can do without. Rather than spending too long thinking about it, or just giving in to every impulse buy, use the one week test as your filter. Pay yourself first each month It might sound counter intuitive but rewarding yourself for your efforts can be a great way to keep you motivated. Let’s say you pay yourself 10% of your income each month for spending on whatever you like. If the 90% leftover, is enough to cover your monthly expenses you can feel pretty good about splurging with that 10%; and if that 90% of your income still leaves you short, maybe it’s time to find out if you can save on those fixed costs like rent, subscriptions and bills. Modern day tools in your savings toolkit If manually tracking your spending sounds like hard work, there’s plenty of tech available to help you. Apps such as the Canstar app, Pocketbook, Goodbudget and MoneyBrilliant are just some of the options to help track your spending and set goals for savings with ease. And if an app isn’t your bag, a trusty Excel spreadsheet will do the job just fine but you’ll need to remember to keep it up to date.   Source: Insignia

While there has not officially been any death duties in Australia for decades, they definitely still exist, albeit under another name – superannuation death benefit taxes. As superannuation assets and individual balances continue to grow, more and more Australian families will receive a rude shock after the death of a family member in the form of up to a 17% tax bill on a portion of the deceased superannuation benefits. In some rare cases, tax of 32% could be levied. That is up to $160,000 on a superannuation balance of $500,000! This is a direct tax payable on the taxable component of the superannuation balance. It is a tax that is normally inflicted on non dependents as defined by the Income Tax Assessment Act, usually adult children. Dependent beneficiaries, such as a spouse, would receive any superannuation balance tax-free. This means that if the deceased’s superannuation balance contains a taxable component it could be passed on to any non-dependent beneficiaries. As a result, they will be liable to pay a tax of at least 15% – this is the superannuation death benefit tax. The tax-tree component on the other hand, as the name suggests, is paid tax-free to any non-dependent beneficiaries. While the entire member balance may not be classified as taxable, chances are a large proportion is, as the taxable component consists primarily of concessional contributions which includes contributions made from employment. Re-contribution strategy This tax can be reduced with a re-contribution strategy, which involves withdrawing money from superannuation and depositing it back in as an after-tax, non-concessional contribution. A re-contribution strategy may be used to gradually convert a member balance from taxable to tax free. Due to superannuation legislation this strategy is only available for members who are over age 59; however it is particularly beneficial for anyone who is retired and under 75. For example, a retired individual aged 60 could withdraw a lump sum of $330,000 tax-free and recontribute the amount back into the fund immediately. This will reduce the taxable component and increase the tax-free component. Other ways to avoid this tax Aside from not dying and having an appropriate beneficiary nomination in place, a way to avoid this tax is to have nothing in superannuation at the time of death. The timing of any withdrawal prior to death for this purpose is difficult, however it is a relatively simple strategy to understand. After age 65, or possibly before, a member is usually able to withdraw their superannuation tax-free and continue investing in their own name. The benefit is that upon death, the balance will no longer reside in superannuation and therefore be passed on tax-free regardless of the beneficiary’s dependent status. The disadvantage is the funds will no longer reside in the tax-effective superannuation system however the benefit of the tax-free threshold and the various tax offsets available to a senior may result in a similar tax structure. Appropriate beneficiary nomination Superannuation does not form part of the deceased estate upon death by default. Therefore an appropriate binding death benefit nomination is vital to ensure that not only the deceased member’s wishes are carried out but also to strategically reduce or eliminate the death benefit tax by nominating dependents. What can you do? Seek advice now! The potential tax liability could be large, additionally strategies to reduce this amount are extremely complicated and involved. Viability is determined by a number of factors including the member’s age, employment status and eligibility to contribute etc. Furthermore, it can take a number of years to implement. Only the advice of a professional superannuation adviser should be sought as an error can have significant ramifications. Source: Bell Potter, ATO  

Key points US regional bank failures have added to uncertainty about the investment outlook flowing from inflation and rate hikes. Specific issues with the failed banks and action to protect depositors may limit broader problems for US banks. The wider risks are high and its normal for problems like this after rapid rate hikes. Given the now high risk of recession (which would curtail inflation) it makes sense for central banks (including the RBA) to pause rate hikes. Share market falls are painful for investors but the best approach for most is to stick to a long term strategy. Introduction Shares have hit turbulence again with worries about inflation, interest rates, recession and now, problems in US banks. After rallying strongly at the start of the year the US share market has reversed much of its year-to-date gain leaving it down 20% from its January high last year and at risk of a retest of its October lows when it was down 25%. Non-US shares are holding up better with Eurozone shares down by 7% and Australian shares also down 9% from their record highs but are vulnerable to moves in US shares. This update looks at the key worries and what it means for investors. Are we going to see systemic problems in US banks? Three regional US lenders have collapsed or closed in recent days. Silicon Valley Bank (SVB), which had a deposit base from tech (and some crypto) companies and customers, collapsed after running into trouble as deposits were withdrawn in the face of tough conditions in the tech and crypto sectors. Silvergate Capital and Signature Bank, crypto friendly banks, also closed after they were made vulnerable after the collapse of FTX crypto exchange. These closures have led to concerns they may reflect the start of broader problems in US banks. This is quite possible as Fed rate hiking cycles by tightening financial conditions invariably trigger financial stresses – think the tech wreck and Global Financial Crisis (GFC). That banks exposed to tech and crypto either for deposits or lending are in trouble is not surprising as both sectors benefitted from the pandemic and easy money but have been hard hit by reopening and rate hikes. And it’s made worse where banks have concentrated investments in long term bonds which have fallen in value as SVB did – so if they have to sell them to meet withdrawals it’s at a loss. For example, there are reported to be $US620b of unrealised losses on securities at US banks – of course it’s only a problem if they have to sell them. But at this stage it’s too early to know if problems at these lenders reflect isolated problems in the tech and crypto sectors they’re exposed to, made worse by undiversified deposit bases and concentrated holdings of bonds that have fallen in value or are a sign of a broader problem in the US financial system. Fortunately, there are some reasons to suggest that worst case scenarios involving a flow on more broadly in the US and beyond may be limited: US authorities have moved quickly to guarantee deposits (beyond the $US250,000 usually covered by deposit insurance) and the Fed has unveiled a Term Funding Facility that enables banks to borrow cheaply from the Fed in order to avoid selling their bonds at a loss. This should help reduce the risk of runs on banks and avoid a fire sale of bonds; and it should help minimise bigger problems for companies that had deposits at these banks – like layoffs and not paying creditors. Following the GFC, large US banks now have to maintain large capital buffers, have less risky exposures or at least less concentrated asset exposures and have more diverse deposit bases than regional banks. Unfortunately, restrictions were eased for smaller banks in 2018. It should also be remembered that US regional bank failures are common – there were 8 in 2018-20, albeit they were much smaller. All Australian banks are required post GFC to maintain much stronger capital buffers and have tougher restrictions in terms of what they can invest in. They also have very diverse deposit bases so are less at risk of high deposit withdrawals than regional US banks. And they won’t have as much exposure to the vulnerable tech and crypto sectors. And Australian bank deposits are implicitly (if not explicitly) protected but of course, they are vulnerable to defaults by Australian home borrowers particularly if the property market falls precipitously. However, it will take a while to determine the full impact and for the dust to settle. Either way banks are likely to see a tougher environment ahead as growth slows and higher rates cause more financial stress for borrowers. It probably also means even tighter lending conditions for tech and crypto and for illiquid businesses like private equity and commercial property – and it’s a sign that Fed tightening has got traction! But what about inflation? Past financial crisis in the US have resulted in an end to Fed tightening cycles. At this point it’s not clear that we are seeing a full blown crisis unfold or not and high inflation is a bit of a barrier on what the Fed can do. As a result, so far, it’s just gone down the path of making it easier for banks to access cheap funding, so they don’t have to sell bonds at a loss. But how far the Fed and other central banks can support economies will at least partly be impacted by inflation. Right now, it’s too high but it looks to have peaked. US and Canadian inflation peaked around mid last year, inflation in Europe later last year. Australian inflation likely peaked in December. Supply bottlenecks have improved, freight costs have fallen and slowing demand will reduce demand side inflation. As is often the case goods price inflation is leading with services price inflation more sticky reflecting still tight labour markets but these are showing signs … Read more

There are many asset classes you can invest in and shares are just one type that you might find in an investment portfolio. But what are shares and how do they work? What are shares? Shares (also known as stocks or equities) are a portion of ownership in a company. Shares are generally issued by a company when it wants to raise money to help expand or fund its operations. How can you access shares? Shares are bought and sold through share markets or stock markets. In the past, shares were bought and sold through physical orders. Today it’s all done electronically – either through a broker or using an online platform which allows people to buy and sell shares themselves. Investors can own shares directly or access them through structures like a managed fund or trust. A super fund may invest in shares as part of its investment strategy to help members grow their super balance. What is a share market and how does it work? Share markets are global marketplaces where investors can buy and sell. In Australia, we have many different share markets, including the ASX or Cboe Australia (CXA). Different markets may have access to different products or specialise in certain types of equities. Many countries have their own share market for investing and can be classified differently. Developed markets include established nations like Australia, the United States and the United Kingdom. Emerging markets are nations whose economies are growing and developing, including Mexico and China. Companies listed in share markets are often organised into sectors, like communication services, consumer staples, energy, information technology, financials, health care, real estate or utilities. In Australia, supermarkets like Coles fall under the consumer staples sector while companies like Telstra fall under the communication services sector. What is the ASX 200 or the S&P 500? To track the performance of investments over time, investors use a benchmark or index. A benchmark serves as a standard against which the performance of a specific asset class is measured. There are hundreds of benchmarks that correspond to different share markets. Two that are commonly quoted in the media include the ASX 200, which is the official benchmark for the top 200 stocks listed on the Australian share market; and the S&P 500, which tracks the performance of the top 500 stocks listed on the United States stock market. Benchmarks help investors understand how share markets are performing generally. What can impact share prices? Share prices may increase or decrease over time. There are many factors that influence a share price, like the value or performance of the underlying company. It can also fluctuate based on demand – if a lot of investors are all interested in a particular share, the limited supply will drive the price up. External factors can also influence share prices, including industrial and economic developments, wars, pandemics, civil unrest – and even the weather! These fluctuations make shares one of the higher risk asset classes. In exchange for this risk, shares have the potential to deliver higher investment returns to investors over the long term compared to less risky investments. How do shares generate investment returns? By owning shares in a company, you are entitled to a portion of the profits that the company makes – generally paid as dividends. The share’s value can also increase over time, meaning you can sell the share for a higher price than you paid originally which is a return through capital growth. Why invest in Australian and Global shares? Australian and global shares have the potential to provide strong returns over a long period of time. They also bring with them a risk of potential loss in the short term. For this reason, many investors with decades to retirement may choose investments in shares since they generally have more time to ride out market fluctuations and generate returns. Your willingness to face that loss can be driven by a number of factors called your risk profile. This includes your age, years to retirement and personal circumstances. Note: There may be tax implications involved with investing in shares that could have an impact on an individual’s returns. Speak to a financial adviser for more information.   Source: Colonial First State (CFS)

With the number of unpredictable events that have happened in the past few years, from COVID to inflation, being financially prepared for a crisis has never been more important. If an emergency were to happen, like an unexpected job loss, car repair or illness, having an emergency fund can help you maintain your everyday life as you navigate through it, without causing you to tumble into debt. Here are some tips for building an emergency fund so you can weather the financial challenges life may throw your way. What your emergency fund could cover Your emergency fund should cover the basics so you can still meet your financial obligations if your circumstances change unexpectedly. Some of the basic expenses you may want to consider are: mortgage or rent utility costs (electricity, gas, internet and phone bills) basic food and household items travel expenses like petrol or public transport car, home, health and life insurance if applicable personal loan and credit card repayments urgent car repairs or medical bills. How to save for your emergency fund It can be hard to squeeze out a few dollars from each pay cheque to funnel into an emergency savings account, especially if you’re barely able to make ends meet. Here’s a few tips that may help keep you on track to meet your savings goal: Create a budget: this will help you understand what you’re currently earning versus spending and where you may be able to make savings to allocate to your emergency fund. Set a low initial target: start with a low target for your emergency fund like $1,000. This may be enough to pay for an emergency repair. You can then work your way up slowly. For instance, if you were to save around $85 each month, you could reach $1,000 in a year. Funnel your extra cash: when you receive an income tax refund or bonus at work, instead of spending the extra cash, you can use this extra money to boost your emergency savings fund. Automate deposits: approach your fund as a bill by making regular payments into it. This will help you prioritise where your money goes. Consider cutting back on your expenses: review your utility providers to make sure you’re getting the best deal and plan out your meals to reduce wasting food. How much should you save This is really dependant on your basic living costs and what you think you’ll need to get through an emergency. Ideally, you want to have enough stashed away to cover all your daily expenses for a few months. This might take a while to build up, so it’s important to start out small and build from there. Where should you keep it It’s a good idea to have a dedicated account for your emergency funds so you don’t feel tempted to access the money unless it’s for emergency reasons. If you have a mortgage, you could consider using an offset account. By depositing money into an account attached to your home loan, you can reduce your interest as the loan principal is balanced out by this additional sum. Alternatively, you could set up a savings account with high interest and no ongoing fees so your money is still growing while in hibernation. Bottom line: having an emergency savings fund means if, for example, your car breaks down or you’re made redundant, you won’t have to squeeze those expenses onto a credit card. Instead, you can take care of the bills yourself without having to depend on borrowed money.   Source: Insignia (IOOF)

A helpful guide to understanding the basics of super. Superannuation, commonly known as ‘super’, is money set aside while you’re working so you’ll have money for retirement. Your money is put into a fund, where it’s invested on your behalf by a trustee, to help you earn returns and grow your savings. The amount of super you’ll end up with when you retire depends on a number of factors including: how much has been made in contributions how long you super’s been invested the type of investment option you’ve selected the investment returns your money has earned and the amount you’ve paid in fees and insurance premiums. Many people think of their super as an investment that takes care of itself but the choices you make about your super and investments could make a big difference to your quality of life in retirement. What are super contributions? A super contribution is money that’s deposited into your super account, either as an ongoing payment or as a one off. Usually made by you or your employer. What is the superannuation guarantee? Your employer is required to contribute 10.5% of your before-tax income into a super fund. These payments are known as super guarantee (SG) contributions (also known as employer super contribution) and they form the foundation of your super. Employer super contributions are taxed at a lower rate than most income tax brackets, so it’s important to provide your tax file number (TFN) to your super fund to avoid extra tax being taken out. You’ll also need to provide your TFN if you want to make any personal super contributions. How can I make other contributions into my super? In addition to your SG contributions, you can also contribute more money to your super account in the form of voluntary contributions. You can make these contributions using either before-tax or after-tax money. In many cases, they’re taxed at a lower rate than your income, so they can be a good way to build your retirement fund while being tax efficient. Keep in mind that there are caps to the amount you can contribute depending on your age and circumstances. What types of super funds are available? There are a number of different types of super funds on the market including: Retail super funds – typically owned and run by financial services companies and open to anyone to join. Industry super funds – usually tied to a specific industry. Some are open to anyone, while others are only open to employees in that industry. Corporate super funds – typically arranged by a company for its employees. Some are operated by the employer (under a board of trustees), while others outsource their operation to a retail or industry fund. Public sector super funds – usually only open to employees of federal and state government departments. Self-managed super funds (SMSFs) – private superannuation funds that are managed by members (one to six people). In most cases, you can choose which fund you’d like your super to be invested with – so it pays to do your homework and find a super fund that offers the investment options and features you’re looking for. How do I choose a super fund? Most employees can choose their own super fund when they start a new job. You’ll typically have a choice between your employer’s default fund or one you select, which could be a super fund you joined with a previous employer, an SMSF or a new fund altogether. If you don’t choose a super fund, your SG contributions will be paid into your ‘stapled fund’. SG contributions will only be paid into your employer’s default fund if you don’t have a stapled fund. A stapled fund is an existing super fund that generally has previously received contributions from you. If you have more than one super fund the Australian Taxation Office (ATO) will determine which one is your stapled fund. There are a few things to consider when choosing a super fund. These include the fees charged; investment options; insurance cover available and its cost; and the fund’s investment performance. It’s a good idea to compare super funds online and weigh up your options. Also remember that most super funds charge fees – so it might be worthwhile sticking to one fund even if you change employers to avoid doubling up on costs. If you think you might have lost or unclaimed super, you can search for it via the ATO super search service. What’s MySuper? Many super funds offer a simple and cost effective super account called MySuper, which comes with low fees, basic features and a simple, default investment option. You always have the option of moving your super to an account of your choice. How can my super be invested? When it comes to how your money is invested in super, many funds offer various investment options that you can choose from. Choosing the most suitable option will typically come down to your goals for retirement, your attitude to risk and the time you have available to invest. For example, you might decide to take on higher risk investments with the potential for higher returns at a younger age and transition to more stable investments like cash deposits as you move towards retirement. When can I access my super? You usually can’t access your super money until you reach what’s known as your ‘preservation age’. However, if you’re a first homebuyer and make extra contributions, you could be eligible to withdraw $50,000 from your contributions and put it towards a home deposit under the First Home Super Saver Scheme. Source: AMP

Save it. Invest it. Pay down debt. When it comes to deciding how to invest $10k, there are plenty of options to consider. Whether you’ve won the lottery or received an inheritance, $10,000 is a significant amount of money. So, what should you do with it? Save it. Invest it. Pay down debt. Add value to existing asset. The answer will depend on your individual circumstances so it’s a good idea to get some advice first. Getting started With any financial decision, think about your goals and timeframe to make smarter choices when deciding where and how to invest. If the idea of losing money, even a small amount, causes you sleepless nights, then you’re probably not the type of investor who will enjoy taking risks with their money. Or, if you’re likely to need access to money in the short term, it’s perhaps not sensible to put it into a fixed term account where you might be penalised for making a withdrawal. Save your $10k Savings accounts and term deposits Good for short term savings or emergency funds, many financial institutions offer savings accounts and term deposits. They’re typically a lower risk option and may offer promotional and/or higher interest rates if deposits are made regularly and/or withdrawals are restricted. Every household should have some funds they can call on immediately if the unexpected happens. Invest your $10k Exchange Traded Funds (ETFs) or passive investing Sometimes used to dip your toe into the world of investing, ETFs are a type of investment fund that typically hold assets like shares and bonds. They aim to track or outperform a specified index, such as the ASX 300. ETFs are typically one of the lower cost investment strategies, offering exposure to a wide range of asset classes. But because performance is tied to the index it is tracking, your money will go up and down in the same way. Managed funds (active or passive investing) For those thinking about how to invest over a longer time horizon, managed funds can be an effective option, offering professional investment expertise and a good level of diversification. You can usually choose to invest into one or more asset classes like shares, property and bonds, with the benefit of a professional investment manager making the important investment decisions about what underlying assets to buy and when. You generally pay an annual management fee for their expertise. Shares Australians seem to enjoy dabbling in the share market – it makes for good barbeque chatter. But those who do, know it’s not for the faint hearted and you should be prepared to experience periods of both ups and downs. Shares (also called stocks or equities) allow you to buy a slice of a public company. A share has a listed share price that changes daily, so if you have $10,000 and a company’s share price is $1, you could buy 10,000 shares. There are several reasons people invest in shares. Capital growth: if the company does well over time its share price will likely increase, so if it increases from $1 to $2 per share, your $10,000 investment would then be worth $20,000. But be aware, if the company hits hard times, the share value will almost certainly fall… and so will the value of your investment. Income: as a shareholder, you may be entitled to receive regular dividends – basically a share of the company’s profits (assuming it’s doing well). These can provide a potential income stream but there is no guarantee a company will pay dividends. Tax benefits: you may also receive franking credits on shares where the company has already paid tax on the dividend – effectively acting like a tax rebate. This only applies to Australian shares. However, investing in shares comes with added risk as growing your money is linked to one company. This is why many people have a share portfolio where they invest into several different companies and maybe across different industries, even countries. Pay down debt with your $10k When the world is booming, it’s a great place to be. Good job. Nice house. Regular holidays. But there will also be hard times and the recent COVID-19 pandemic has brought this home to many. When thinking about how to invest $10k, it might be best not to invest at all. Instead, consider paying down some debt to give yourself some breathing space for times when household finances come under strain. Think about prioritising your debt and address this first. Where are you paying the highest interest rate or fees – typically credit cards or personal loans? While a home loan might be your largest debt, it’s also considered ‘good debt’ because you have a valuable asset sitting underneath it. If you have an offset account linked to your home loan, any money you have sitting in here will also be helping reduce the amount of interest you’re paying. Spend your 10k Spending money on existing assets can reap long term rewards. You’re investing for the future by improving their value. Think about the difference spending $10,000 on home improvements could make – a new kitchen, updated bathroom, landscaped garden. Even some simple repairs could make a difference to the market value. But as with all investment decisions, it’s a good idea to get some advice. After all, the aim is to add value and you don’t want to overcapitalise. Adding a swimming pool is a classic example of something that looks beautiful but may not significantly change the value of your home.   Source: BT

Building your wealth for the long term starts with a sound investment strategy; but with so many options outside your superannuation fund, from bonds to managed funds, where should you begin? Understand your risk profile and timeframe Almost every type of investment comes with some level of risk. There’s a risk you could lose money, as well as the possibility your investments won’t achieve your financial goals within the timeframe you need. As a general rule, the higher the risk the greater the potential return and the longer you should consider keeping that investment. So first you need to understand what type of investor you are and recognise that this may change as you get closer to retirement. When time is on your side, you may decide you can afford to take some calculated risks with your investment portfolio. That might place you at the ‘aggressive’ or ‘moderate to high growth’ end of the risk profile spectrum but if you’re planning to scale back on paid work soon, you may feel more ‘defensive’ or ‘conservative’ with your investment approach, to protect the value of the capital you’ve already built up. To work out your risk profile, think about how you feel about short term fluctuations in the value of your investments. Would it keep you awake at night or would you be comfortable riding it out? A market correction when you’re close to retirement could have a disproportionate impact on a larger portfolio so it’s also worth considering two risk profiles, one for your superannuation and one for your other investments. What are asset classes? An asset class is a type of investment – broadly speaking, these are cash, fixed interest, property or shares. Each has a different level of risk and return. Cash (defensive asset) Fixed interest (defensive asset) Investing in cash (such as term deposits) provides stable, low risk income (usually as interest payments). Traditionally, around 30 percent of assets are held in cash and term deposits[1]. It’s a good idea to have some cash available at short notice and these investments usually have a short timeframe. Investing in government or corporate bonds, mortgages or hybrid securities operate like a reverse loan – they pay you a regular interest payment over a fixed term. You usually hold fixed interest investments for one to three years. Property securities (growth asset) Australian and international shares (growth asset) You can invest in property that is listed on share markets, including commercial, retail, hotel and industrial property. The potential returns can be medium to high but you may need to hold these investments for three to five years. Shares (or equities) give you a part ownership of an Australian or international company. Your potential returns include capital growth (or loss) and income through dividends, which may be franked. Depending on the type of share, these are considered medium to high growth assets and you may need to hold them for up to seven years.   All about diversification Spreading your investments across a range of assets to reduce your risk is known as diversification – basically it lets you avoid putting all your eggs in one basket. Diversification can reduce the volatility within your portfolio and the risk of a large drop due to any market downturn. Given it can also take time to sell certain investments (such as property), it’s smart to have short term as well as long term investments within your portfolio. There are no guarantees – diversification won’t fully protect you against loss but it can even out your returns. Other ways to invest in shares Investing in a managed fund gives you access to different equities, bonds and other assets, with a focus on a specific investment objective. Pooling your money with a group of investors lets you invest in opportunities that would otherwise be out of reach and diversify your risk. There are many different types of managed funds, with different risk profiles and investment approaches, including single sector or multi sector funds or index funds. Review your investments regularly It’s important to keep an eye on your investments to make sure your portfolio is balanced and you’re on track to meeting your financial goals. If you invest in a managed fund, you may only need to review it once a year. If you are investing directly, you’ll need to monitor market changes much more frequently. It’s also worth getting advice from a financial adviser before you change your investment allocation, as selling assets may result in a tax liability. They can also give you an independent perspective on your investment goals and risk profile.   Source: Colonial First State [1] http://www.afr.com/personal-finance/why-its-time-to-rebalance-your-portfolio-20160321-gnnbrt  

Is an investment property the right choice for you in retirement? What you need to know about buying an investment property Buying a rental property is a very popular investment in Australia. For many investors, the appeal of owning an investment property is linked to their familiarity with this asset class – most of us either own or rent a house, apartment or villa. Over time, a quality, well located property could generate long term growth and decent income returns. Houses and units may be easier to understand as an investment than many other assets such as shares and bonds, yet owning an investment property is not a licence to print money. There are risks and costs budding landlords need to consider. The costs of having an investment property include property management fees, legal charges, mortgage interest payments and landlord insurance. You may also need to consider whether you could service the costs of owning the investment property if a tenant decides to move on and you’re left with a vacant property. If you’re not sure you could cope financially, you might need to rethink your investment strategy. Likewise, you need to be aware real estate prices can take a tumble. Downsizing to buy an investment property Downsizing into a smaller property or moving to a more affordable location could be a worthwhile way to help finance your retirement lifestyle. It can be a valuable strategy for empty nesters, some of whom may find maintaining a big and empty family home no longer makes sense financially or from a lifestyle perspective. By downsizing to a more affordable property such as an apartment or townhouse, you could unlock any significant capital tied up in the family home. With this extra capital, you may have the financial freedom to invest in either an investment property or another asset class. Before you make a move, be sure to speak to a financial adviser to determine whether a downsizing strategy is right for you. Take advantage of downsizer rules Downsizer rules may help older Australians who sell their family home to invest some of the proceeds into superannuation. From 1 July 2022 the eligibility age for downsizer contributions was reduced to 60 and from 1 January 2023 it is reducing further to 55. Under these rules, if you’re in the suitable age range you may make after-tax or non-concessional contributions into superannuation of up to $300,000 for an individual or up to $600,000 for a couple from the proceeds of selling your principal residence. The usual contribution caps of $110,000 per year ($330,000 under the bring forward rule) don’t apply and it doesn’t matter what your super account balance is (you would usually only be able to make after-tax contributions if your total super balance is less than $1.7 million on the previous 30 June)1. Understanding the costs of buying/selling a property The costs of buying a property include stamp duty for the property transfer and for the registration of your mortgage. Stamp duty is charged by state and territory governments so the amount you will pay depends on the location of the property and its price. To find a stamp duty calculator appropriate to your state, or territory, visit the ASIC Money Smart website. When buying property, you should also factor in the cost of pest and building inspections, which vary depending on the size and location of the property. Also don’t forget if you can save a deposit worth more than 20 percent of the value of your property you may not be required to paying lenders mortgage insurance (LMI). LMI is generally charged by a lender if your deposit is less than 20 percent of the value of the property. LMI enables lenders such as a bank or a credit union to lend you a larger percentage of the purchase price. The cost of LMI may be included either upfront or in your loan repayments so it’s spread out over the term of the loan. If you’re selling your current home and buying an investment, you’ll probably sell through a real estate agent and this means paying the agent a commission on the sale. Agents in your area will have different fees, so be sure to shop around. There are also legal costs for the transfer of a property from a vendor to a buyer. You’re likely to need the professional services such as a conveyancer to legally transfer ownership of the property you are buying or selling. Your conveyancer will also conduct property and title searches to ensure the seller is legally entitled to sell the property. There may be some minor charges for completing these searches, in addition to the conveyancer’s professional fee. There may be a range of fees levied by your lender such as application, valuation and settlement fees. Make sure you ask your lender or mortgage broker about these fees. Once you secure the property, you may also need to take out landlord insurance. This is insurance that may protect the building and its contents and cover if the tenant defaults on his or her lease obligations. How much can I borrow? To estimate what you can borrow to buy an investment property, you could use a mortgage or home loan calculator to help translate the loan amount into a corresponding monthly payment. Calculators give you the luxury of playing with interest rates, deposit amounts and loan term to help you figure out what may be affordable. They can be useful tools to crunch some numbers and get a ballpark estimate. Though it’s worth noting that many calculators won’t give a complete picture of all costs and it may be worth considering advice from a financial adviser before making any financial decisions. Once you know your borrowing power, you’ll have a better idea of what your next step will be. You’ll know whether you can afford an apartment or house near the CBD or out in the suburbs. How can financial advice help with your … Read more