Uncategorized

When you’re still employed and earning a salary, there’s money coming in you can rely on. In retirement, in the absence of a regular salary you’ll need to find a new way to secure enough income to cover your living costs. Investing your money is one way to make the most of your savings and provide an income in retirement but if you’re expecting savings and investment earnings to help cover your expenses, it’s important to get your strategy right. Why timing matters When accumulating super for retirement, you can afford to be patient. With years ahead to top up your super, you can stay invested during falls in the share market and wait for markets and your assets to bounce back. For the few years just before and after retirement, it’s a different story. This period, known as the ‘retirement risk zone’, is the time when you have most to lose from a fall in the value of investments. Your super has likely reached its peak in value and you want to make the most of these savings for your future retirement income. In order to protect your savings and provide you with income throughout your retirement, it’s important to be aware of three key risks: Living longer Australians are living longer than ever before. Life expectancy has grown by more than 30 years in the last century1. Living off retirement savings for 20-30 years or more introduces the very real risk of running out of money. So it’s no wonder more than half of Australians aged 50+ are worried about outliving their savings according to a 2019 National Seniors Australia survey. We’re lucky that we live in a country that if your retirement savings run out; the Age Pension is there as a safety net but these regular payments may not be enough to maintain the lifestyle you’ve been enjoying in retirement. You could also be left with limited funds and options for aged care, if you should need it. That’s why it’s so important to make a financial plan early in your retirement so that you can help to protect your income now and in the future. Inflation Inflation measures the change in the cost of living over time and represents an important and often underestimated risk to your financial security in retirement. Given your retirement could last 20 plus years, there’s a good chance your savings and income will be affected by inflation. At an average annual inflation rate of 2.5%2, a dollar today is worth roughly half what it was 25 years ago. Even this modest year on year rise in the price of goods and services can put you at risk of having an income that no longer covers your living expenses from year to year. Share market performance Share market performance is a risk for investors with exposure to investments such as shares, bonds and commodities. If you’re worried about market collapses similar to the Global Financial Crisis (GFC) in 2008, you’re not alone. A 2018 National Seniors Australia survey found that 7 out of 10 older Australians share your concerns. Falls in the value of investments are impossible to predict and can make a big difference to income and financial security throughout your retirement. When investments earn negative returns, your retirement savings are falling in value. Crucially, if you also need to make regular withdrawals to pay for living expenses, it’s a twofold blow for your overall financial position in retirement. Less savings now means more potential for outliving those savings later in life. Protecting your income and future in retirement Diversifying your investments – balancing growth and defensive assets for example can limit the impact of market risks and inflation on your retirement savings. However, even with a well diversified portfolio, your super and Age Pension may not provide you enough income for your entire retirement. If you’d like the peace of mind that comes with a regular income for life, a lifetime annuity might be right for you. Using a portion of your savings or super, you can invest in a lifetime annuity and receive regular income payments for life. It can act as a safety net ensuring that you will receive income for life, regardless of how long you live. Talk to an adviser about the benefits of a lifetime annuity and whether it might be right for you. [1] Australian Bureau of Statistics, Life Expectancy improvements in Australia over the last 125 years, 18 October 2017. [2] Australian Bureau of Statistics, 70 years of inflation in Australia, Andrew Glasscock, 2017. Fig 2. Source: Challenger

The mix of investments that is right for an SMSF will depend on very personal factors, including SMSF members’ age, lifestyle, attitude to risk and personal goals. And it’s not a case of set and forget – SMSF trustees’ approach to SMSF investing may need to change over time as retirement approaches and priorities change. Why is diversification so important to SMSF investing? Diversifying an SMSF investment portfolio means having money invested across a range of different investments so that the SMSF is not over exposed if particular areas of the market fall in value. That might mean spreading money across different asset classes, regions, industries and investment managers. Asset classes behave differently at different times – some asset classes will rise in value while others fall. Diversifying across different asset classes helps an SMSF to smooth out overall returns. On the one hand, this could mean missing out on some ‘upside’ if the SMSF is not fully invested in the best performing asset class. On the other hand, this could mean avoiding the potential impact of having all the SMSFs money invested in an asset experiencing a significant downturn. Asset classes that can be used to diversify an SMSF portfolio Diversification can be achieved through ‘asset allocation’ – the way money is spread across different types of investments. It involves identifying the investments that match SMSF members’ goals and risk tolerance, then allocating a certain percentage of the SMSF portfolio to each asset class. It’s important to understand the benefits and risks of different types of investments. Cash Cash generally refers to investments in the short term money market including short term bonds issued by high quality companies or governments. ‘Short term’ typically refers to investments that mature in less than 12 months. Cash has historically generated the lowest returns of the four major asset classes over the longer term and values may be eroded by inflation. Fixed interest Fixed interest assets (also called ‘fixed income’) include corporate and government bonds. They work like a loan from the investor to the bond issuer and offer benefits such as regular income returns at a set interest rate, over a fixed term. Fixed interest investments generally involve lower risk than shares and property but sit higher on the risk spectrum than cash. Corporate bond investors risk losing all or part of their initial investment if the company issuing the security fails. Listed property Listed property trusts provide a simple way to invest in residential and commercial property without tying up a large proportion of money directly in real estate. Because investment is through the share market, investors can sell securities relatively easily if necessary (unlike direct property investments). Like shares, units in listed property trusts can rise and fall in value. Returns are affected by fluctuations in the supply and demand for properties and consequential changes in rental levels, as well as by interest rates. Global property securities can also be affected by social, economic or political factors, differing tax structures in foreign tax jurisdictions and foreign regulatory requirements. Shares Shares, also called stocks or equities, enable investors to buy a slice of a public company. As part owners, investors may be entitled to a stake in the company’s profits in the form of dividends. As the company’s business grows over time, the value of the shares may grow and this can provide capital growth for shareholders. Share prices can rise and fall and the payment of dividends and the return of capital are not guaranteed. Investors face the risk that a company, or the industry in which it operates, may not perform as well as expected or that there may be adverse changes in a company’s financial position. How else can an SMSF portfolio be diversified? Managed investments can be a solution for investors seeking professional expertise and a strong level of diversification. Managed investments take the hard work out of selecting which assets to buy and sell and when to do it – instead a professional investment manager does this. Managed investments can invest across the full spectrum of asset classes, including cash, fixed income, property and shares. They can focus on a specific asset class such as shares, a particular industry, or even a specific country. Managed investments can provide a level of diversification well beyond the reach of most direct investors. An Australian share fund, for example, could hold shares in dozens of Australian companies; a property fund can hold major assets like a commercial office block. Two types of managed investments SMSF trustees may want to consider are: Managed funds – investment vehicles where the money contributed by a large number of investors is pooled and managed as one overall portfolio by a professional investment manager. Investors purchase units in the fund which entitles them to an interest in a pool of assets with the other unit holders. Managed portfolio – similar to managed funds except that instead of owning an interest in a pool of assets, a portfolio of assets is bought specifically by the SMSF trustee on behalf of the SMSFs members and the SMSF is the beneficial owner of all the assets in the portfolio. This means the SMSF receives the potential benefits of income, dividends, franking credits and potential capital growth, as well as some tax benefits. However, along with the risks outlined above for individual asset classes, managed investments carry the additional risk that the investment manager(s) chosen may not perform as expected. Source: BT

Investment bonds are long term investments that may offer tax efficiency to investors on a high marginal tax rate and those investing for children or grandchildren. Unlike traditional investment products, such as managed funds, bonds are a ‘tax paid’ investment. This means that tax on investment earnings is paid at the applicable company rate of 30 percent by the bond issuer – not by you, the investor. Investors receive ‘tax paid’ returns provided they meet certain conditions – most notably that the investment is held for at least ten years and contributions do not exceed the 125% rule. 125% rule Bonds have a valuable taxation status; as long as any additional investments you make do not exceed 125 percent of the investments made in the previous year, then the taxation status will not be jeopardised. This is called the 125% rule. By using the 125% rule, a bond investment becomes even more tax effective because it gives you the opportunity to make additional investments (or contributions to a savings plan) each year. The level of additional contributions you can make continues to increase until the end of the tenth anniversary, after which all withdrawals from the bond are tax-free. For example, if you invest $10,000 in year one, then, using the 125% rule, $12,500 (125%* 10,000) may be invested in year 2 and so on. A tax effective alternative The following table shows the tax benefits of an investment bond. Investment bond Managed Fund Investment earnings $10,000 Investment earnings $10,000 Tax paid by bond manager $3,000 Tax paid by fund manager $0 Net return (at maturity) $7,000 Assessable income $10,000 Assessable income $0 Tax paid by investor $4,500 After tax return $7,000 After tax return $5,500 What investment choices are available? While different investment bonds have different investment menus, generally they include a wide range of diversified funds, multi manager funds, Australian share funds, international shares, fixed income and capital guaranteed investments. Who should consider an investment bond? Investment bonds may be suitable for: investors with a long term investment horizon (at least 10 years) investors who have contributed as much concessional contributions to super as possible parents or grandparents who wish to invest on behalf of the next generation investors who do not require access to their funds, as investment bonds reinvest distributions. Source: Insignia Financial

This article looks at some longer term structural trends in the economy and their impact on economic growth and investments. A decline in routine based jobs Fear of technology replacing jobs has been around for years, although concern around this risk appears to have waned in recent times, as impacts of the pandemic on labour markets has taken focus. New technology is constantly displacing some jobs but it is also creating new ones in its place. The jobs most at risk are routine based jobs, because this type of work can be replicated, learned and taught by machinery and automatic intelligence. In Australia, there has been a long term decline in manual and cognitive routine based jobs. In the late 1980s, routine manual jobs were 40% of the workforce and are now around 26% of the workforce while routine cognitive jobs were 26% of the workforce in the late 1980s and are now worth 19% (see chart). Similar medium term trends are evident across other developed countries. Non routine jobs (either manual or cognitive) are less at risk of being displaced by technology because they are harder to replicate and often need a human element (for example in jobs related to health, childcare or teaching). Problems in recent years with self driving cars also shows the difficulties associated with technology. Middle income households tend to be most susceptible to routine based jobs so this trend will increase inequality and could put downward pressure on wages growth in the long run. The OECD (Organisation for Economic Co-operation and Development) in a report done in 2018, estimated that around 14% of jobs (in the OECD) are at high risk from automation, with large variations across countries (countries at higher risk include Slovakia, Slovenia, Greece and Spain while the countries at the lowest risk include Norway, Australia, Finland and Sweden). The workforces that are more at risk tend to have a lower educated workforce, a weak tradeable services sector and have a low urbanisation rate. In Australia, around 7% of jobs are estimated to be at high risk of automation and in the US its slightly higher at 10%. The government has a role to play in ensuring that the transition to new types of employment for impacted employees is managed through training programs, appropriate university curriculum and ensuring that funding is targeting those areas at the highest risk of job losses due to automation. An ageing population and an increase in the ‘dependency ratio’ The global population, especially in major developed countries, is ageing which has been a long term trend as the birth rate has declined. In Australia, the share of the prime working age population (those aged between 25-54) peaked at 44% of the population in 1999 and has been falling slowly since then, currently at around 41% and projected to be around 40% by the end of the decade. In contrast, the share of the population that is aged 65+ is expected to keep climbing to just under 20% by 2030, up from 17% now (see chart). An ageing population will put upwards pressure on the ‘dependency ratio’ (the sum of those aged under 15 and over 65 as a share of the whole population) which will detract from national savings (people who work increase savings while the very young and old drain savings) which is inflationary in the long term. A decline in business investment as a share of GDP but a lift in intellectual property as a share of investment In many developed countries, private business investment is declining as a share of the economy, in place of a rising services sector which is less investment intensive. In Australia, business investment often goes through cycles because of the dominance of the mining sector (at its peak mining investment reached 11% of GDP). After the last mining investment boom (which ended in 2012 after business investment was 19% of GDP), investment has been on a gradual decline and is now 9.4% of GDP (see chart). While there may be ups and downs in the cycle from the mining investment contribution and the usual wear and tear associated with depreciation, private business investment is likely to decline further as a share of GDP because of the changing nature of business investment. The typically large scale buildings and structures, machinery and equipment type of investment is being replaced with less ‘heavy’ types of investment, like intellectual property with the rising importance of the tech sector in all industries. A less capital intensive economy could weigh on long run productivity growth, although the impact is probably marginal as intellectual property investment should still boost productivity growth. A multi polar world means more geopolitical risks The US economy has been increasing in importance to the global economy since the end of the Second World War. The rising significance of the US economy to global trade, cultural influences, military presence and economic power has been increasingly consistent with a unipolar world, especially as the United Kingdom and the Eurozone have had challenging economic conditions in the past decade. However, the balance of power has been shifting in recent years as the Chinese economy grows and becomes a larger share of the global economy (see chart). In purchasing power parity (PPP) terms (which adjusts individual country prices into a global comparison after accounting for exchange rates and purchasing power in each country which allows a better sense of living standard comparison) the Chinese economy is already the largest in the world (at 19% versus the US at 16%). If we also account for India then China and India make up 26% of the global economy compared to the US, UK and the Eurozone at 27% (in PPP terms). But we are currently at a crossroads, with China and India about to take over as a larger share of the global economy. On our estimates China and India will be 34% of the global economy by 2045, versus 22% for the US, UK and … Read more

Risk assets performed strongly in January, following further indications that inflation may have peaked in key regions. Global economic growth forecasts were lowered by both the World Bank and the IMF, but investors appeared to brush off these concerns. Instead attention was focused on the central bank meetings, to see whether interest rates would continue to be raised. Most global share markets added between 5% and 10% over the month, although strength in the AUD eroded returns from overseas exposures for Australian investors. Locally, the S&P/ASX 200 Index returned 6.2% and closed the month close to its all time highs. Fixed income performed well too, with downward movements in government bond yields aiding returns from Australian and global bond markets. The generally strong risk appetite among investors also enabled credit to generate pleasing returns over the month. Australia Unlike in other regions, inflation still appears to be accelerating in Australia. Headline inflation rose at an annual rate of 7.8% in the December quarter, while the ‘trimmed mean’, the favoured measure among Reserve Bank of Australia officials, quickened to 6.9% year on year. This was the highest level since the series was introduced in 2003. Prices for ‘discretionary’ items surged over the period, with particularly strong demand and prices seen for cars, clothing, and travel. Despite sluggish retail sales in December, the latest inflation data will almost certainly concern policy makers and suggest the Reserve Bank of Australia will continue to raise interest rates in the months ahead. New Zealand The quarterly Survey of Business Opinions suggested firms are expecting profitability to collapse this year. This does not augur well for the investment and growth outlook. Consumer confidence is also subdued, owing to higher mortgage interest costs and general weakness in the residential property market. The volume of home sales was 39% lower in December from the previous year and prices were down 7.2%. US The annual rate of inflation in the US has now slowed for six straight months. In turn, there were suggestions that the Federal Reserve was preparing to slow the pace of its policy tightening cycle. Interest rates were raised by a quarter of a percentage point on 1 February. This compared to the past six rate hikes, all of which saw borrowing costs increased by either 0.5 or 0.75 percentage points. Consensus forecasts suggest US officials might raise borrowing costs once or twice more in the next six months or so but any further moves are expected to be modest. That said, policy makers have emphasised the need for interest rates to be held at elevated levels for an extended period. In other news, US GDP growth slowed less than expected in the December quarter, to an annual rate of 2.9%. So far, the economy has been more resilient than anticipated following significant increases in interest rate hikes in 2022. Some other indicators were less encouraging. A closely watched gauge of activity levels in services sectors deteriorated, for example. Europe The weather in Europe in the Northern hemisphere winter has been milder than anticipated. This has resulted in lower than expected demand for energy for heating and, in turn, seen wholesale energy prices trend lower. The outlook for inflation in the months ahead is therefore not as bleak as some observers had previously feared. Gas storage in Europe has risen quite sharply; from the lower end of the historical range a year ago when Russian gas was flowing freely, to the higher end of the historical range during a period when Russian supplies have almost entirely ceased. Lower energy prices are also feeding through to official inflation data. Consumer prices rose at an annual rate of 9.2% in the Eurozone in December, below the double digit annual inflation rates seen in each of the previous three months. Nonetheless, European Central Bank officials remain steadfast in their fight against inflation and raised official interest rates by half a percentage point on 2 February. The Bank of England raised borrowing costs by a further half percentage point the same day, taking the base rate to 4.0%. UK interest rates are now expected to peak around 4.5%. In other news, the UK will be the only economy in the G7 group of nations to shrink in 2023, according to the IMF. Asia The ‘China reopening’ story dominated attention in Asia. Officials finally appear to be softening their stance on COVID, removing a range of virus related restrictions. The Chinese economy grew ‘only’ 3.0% in 2022; the second slowest annual growth rate since the 1970s and well below Beijing’s 5.5% annual target. Activity levels could accelerate immediately following the Lunar New Year celebrations as restrictions are relaxed. This could be good news for neighbouring countries in the Asia Pacific region, including Australia, which tend to be reasonably reliant on growth in China to drive their own economies. Australian dollar The general ‘risk on’ tone benefited the AUD. The currency strengthened by 3.6% against the US dollar, closing January above 70 US cents for the first time in nearly six months. The AUD has now appreciated by more than 10% against the US dollar in the past three months. The ‘Aussie’ also appreciated against other currencies, including the euro, the UK pound and the Japanese yen. Collectively, the AUD gained 1.6% against a trade-weighted basket of currencies, adding to strength from late 2022. Australian equities Australian shares started 2023 positively, with all but one sector posting gains. As a whole, the S&P/ASX 200 Accumulation Index added 6.2%. A combination of moderating inflation expectations, lower bond yields both locally and offshore and an increasing number of large international firms announcing cost cutting initiatives helped spur a renewed sense of optimism. The Consumer Discretionary sector (+9.9%) was the strongest performer over the month. Market sentiment towards mining stocks improved on expectations that an acceleration in growth in China will benefit demand for bulk commodities. This supported index heavyweights with increases of more than 8.0%. Strong performances from lithium companies also supported an … Read more

Latest news Why investing for retirement is different When you’re still employed and earning a salary, there’s money coming in you can rely on. In retirement, in the absence of a regular salary you’ll need to find a new way to secure enough income to cover your living costs. Investing your money is one way to make the most of your savings and provide an income in retirement but if you’re expecting savings and investment earnings to help cover your expenses, it’s important to get your strategy right. Why timing matters When accumulating super for retirement, you can afford to be patient. With years ahead to top up your super, you can stay invested during falls in the share market and wait for markets and your assets to bounce back. For the few years just before and after retirement, it’s a different story. This period, known as the ‘retirement risk zone’, is the time when you have most to lose from a fall in the value of investments. Your super has likely reached its peak in value and you want to make the most of these savings for your future retirement income. In order to protect your savings and provide you with income throughout your retirement, it’s important to be aware of three key risks: 1. Living longer Australians are living longer than ever before. Life expectancy has grown by more than 30 years in the last century1. Living off retirement savings for 20-30 years or more introduces the very real risk of running out of money. So it’s no wonder more than half of Australians aged 50+ are worried about outliving their savings according to a 2019 National Seniors Australia survey. We’re lucky that we live in a country that if your retirement savings run out; the Age Pension is there as a safety net but these regular payments may not be enough to maintain the lifestyle you’ve been enjoying in retirement. You could also be left with limited funds and options for aged care, if you should need it. That’s why it’s so important to make a financial plan early in your retirement so that you can help to protect your income now and in the future. 2. Inflation Inflation measures the change in the cost of living over time and represents an important and often underestimated risk to your financial security in retirement. Given your retirement could last 20 plus years, there’s a good chance your savings and income will be affected by inflation. At an average annual inflation rate of 2.5%2, a dollar today is worth roughly half what it was 25 years ago. Even this modest year on year rise in the price of goods and services can put you at risk of having an income that no longer covers your living expenses from year to year. 3. Share market performance Share market performance is a risk for investors with exposure to investments such as shares, bonds and commodities. If you’re worried about market collapses similar to the Global Financial Crisis (GFC) in 2008, you’re not alone. A 2018 National Seniors Australia survey found that 7 out of 10 older Australians share your concerns. Falls in the value of investments are impossible to predict and can make a big difference to income and financial security throughout your retirement. When investments earn negative returns, your retirement savings are falling in value. Crucially, if you also need to make regular withdrawals to pay for living expenses, it’s a twofold blow for your overall financial position in retirement. Less savings now means more potential for outliving those savings later in life. Protecting your income and future in retirement Diversifying your investments – balancing growth and defensive assets for example can limit the impact of market risks and inflation on your retirement savings. However, even with a well diversified portfolio, your super and Age Pension may not provide you enough income for your entire retirement. If you’d like the peace of mind that comes with a regular income for life, a lifetime annuity might be right for you. Using a portion of your savings or super, you can invest in a lifetime annuity and receive regular income payments for life. It can act as a safety net ensuring that you will receive income for life, regardless of how long you live. Talk to an adviser about the benefits of a lifetime annuity and whether it might be right for you.   [1] Australian Bureau of Statistics, Life Expectancy improvements in Australia over the last 125 years, 18 October 2017. [2] Australian Bureau of Statistics, 70 years of inflation in Australia, Andrew Glasscock, 2017. Fig 2. Source: Challenger

Latest news What are asset portfolios? 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. [1] http://www.afr.com/personal-finance/why-its-time-to-rebalance-your-portfolio-20160321-gnnbrt 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    

Latest news Ways to expand SMSF investment horizons The mix of investments that is right for an SMSF will depend on very personal factors, including SMSF members’ age, lifestyle, attitude to risk and personal goals. And it’s not a case of set and forget – SMSF trustees’ approach to SMSF investing may need to change over time as retirement approaches and priorities change. Why is diversification so important to SMSF investing? Diversifying an SMSF investment portfolio means having money invested across a range of different investments so that the SMSF is not over exposed if particular areas of the market fall in value. That might mean spreading money across different asset classes, regions, industries and investment managers. Asset classes behave differently at different times – some asset classes will rise in value while others fall. Diversifying across different asset classes helps an SMSF to smooth out overall returns. On the one hand, this could mean missing out on some ‘upside’ if the SMSF is not fully invested in the best performing asset class. On the other hand, this could mean avoiding the potential impact of having all the SMSFs money invested in an asset experiencing a significant downturn. Asset classes that can be used to diversify an SMSF portfolio Diversification can be achieved through ‘asset allocation’ – the way money is spread across different types of investments. It involves identifying the investments that match SMSF members’ goals and risk tolerance, then allocating a certain percentage of the SMSF portfolio to each asset class. It’s important to understand the benefits and risks of different types of investments. Cash Cash generally refers to investments in the short term money market including short term bonds issued by high quality companies or governments. ‘Short term’ typically refers to investments that mature in less than 12 months. Cash has historically generated the lowest returns of the four major asset classes over the longer term and values may be eroded by inflation. Fixed interest Fixed interest assets (also called ‘fixed income’) include corporate and government bonds. They work like a loan from the investor to the bond issuer and offer benefits such as regular income returns at a set interest rate, over a fixed term. Fixed interest investments generally involve lower risk than shares and property but sit higher on the risk spectrum than cash. Corporate bond investors risk losing all or part of their initial investment if the company issuing the security fails. Listed property Listed property trusts provide a simple way to invest in residential and commercial property without tying up a large proportion of money directly in real estate. Because investment is through the share market, investors can sell securities relatively easily if necessary (unlike direct property investments). Like shares, units in listed property trusts can rise and fall in value. Returns are affected by fluctuations in the supply and demand for properties and consequential changes in rental levels, as well as by interest rates. Global property securities can also be affected by social, economic or political factors, differing tax structures in foreign tax jurisdictions and foreign regulatory requirements. Shares Shares, also called stocks or equities, enable investors to buy a slice of a public company. As part owners, investors may be entitled to a stake in the company’s profits in the form of dividends. As the company’s business grows over time, the value of the shares may grow and this can provide capital growth for shareholders. Share prices can rise and fall and the payment of dividends and the return of capital are not guaranteed. Investors face the risk that a company, or the industry in which it operates, may not perform as well as expected or that there may be adverse changes in a company’s financial position. How else can an SMSF portfolio be diversified? Managed investments can be a solution for investors seeking professional expertise and a strong level of diversification. Managed investments take the hard work out of selecting which assets to buy and sell and when to do it – instead a professional investment manager does this. Managed investments can invest across the full spectrum of asset classes, including cash, fixed income, property and shares. They can focus on a specific asset class such as shares, a particular industry, or even a specific country. Managed investments can provide a level of diversification well beyond the reach of most direct investors. An Australian share fund, for example, could hold shares in dozens of Australian companies; a property fund can hold major assets like a commercial office block. Two types of managed investments SMSF trustees may want to consider are: 1. Managed funds – investment vehicles where the money contributed by a large number of investors is pooled and managed as one overall portfolio by a professional investment manager. Investors purchase units in the fund which entitles them to an interest in a pool of assets with the other unit holders. 2. Managed portfolio – similar to managed funds except that instead of owning an interest in a pool of assets, a portfolio of assets is bought specifically by the SMSF trustee on behalf of the SMSFs members and the SMSF is the beneficial owner of all the assets in the portfolio. This means the SMSF receives the potential benefits of income, dividends, franking credits and potential capital growth, as well as some tax benefits. However, along with the risks outlined above for individual asset classes, managed investments carry the additional risk that the investment manager(s) chosen may not perform as expected. Source: BT

Latest news Investing in investment bonds Investment bonds are long term investments that may offer tax efficiency to investors on a high marginal tax rate and those investing for children or grandchildren. Unlike traditional investment products, such as managed funds, bonds are a ‘tax paid’ investment. This means that tax on investment earnings is paid at the applicable company rate of 30 percent by the bond issuer – not by you, the investor. Investors receive ‘tax paid’ returns provided they meet certain conditions – most notably that the investment is held for at least ten years and contributions do not exceed the 125% rule. 125% rule Bonds have a valuable taxation status; as long as any additional investments you make do not exceed 125 percent of the investments made in the previous year, then the taxation status will not be jeopardised. This is called the 125% rule. By using the 125% rule, a bond investment becomes even more tax effective because it gives you the opportunity to make additional investments (or contributions to a savings plan) each year. The level of additional contributions you can make continues to increase until the end of the tenth anniversary, after which all withdrawals from the bond are tax-free. For example, if you invest $10,000 in year one, then, using the 125% rule, $12,500 (125%* 10,000) may be invested in year 2 and so on. A tax effective alternative The following table shows the tax benefits of an investment bond. Investment bond Managed Fund Investment earnings $10,000 Investment earnings $10,000 Tax paid by bond manager $3,000 Tax paid by fund manager $0 Net return (at maturity) $7,000 Assessable income $10,000 Assessable income $0 Tax paid by investor $4,500 After tax return $7,000 After tax return $5,500   What investment choices are available? While different investment bonds have different investment menus, generally they include a wide range of diversified funds, multi manager funds, Australian share funds, international shares, fixed income and capital guaranteed investments. Who should consider an investment bond? Investment bonds may be suitable for: investors with a long term investment horizon (at least 10 years) investors who have contributed as much concessional contributions to super as possible parents or grandparents who wish to invest on behalf of the next generation investors who do not require access to their funds, as investment bonds reinvest distributions.   Source: Insignia Financial

Latest news Five long term global trends and implications for markets This article looks at some longer term structural trends in the economy and their impact on economic growth and investments. 1. A decline in routine based jobs Fear of technology replacing jobs has been around for years, although concern around this risk appears to have waned in recent times, as impacts of the pandemic on labour markets has taken focus. New technology is constantly displacing some jobs but it is also creating new ones in its place. The jobs most at risk are routine based jobs, because this type of work can be replicated, learned and taught by machinery and automatic intelligence. In Australia, there has been a long term decline in manual and cognitive routine based jobs. In the late 1980s, routine manual jobs were 40% of the workforce and are now around 26% of the workforce while routine cognitive jobs were 26% of the workforce in the late 1980s and are now worth 19% (see chart). Similar medium term trends are evident across other developed countries. Non routine jobs (either manual or cognitive) are less at risk of being displaced by technology because they are harder to replicate and often need a human element (for example in jobs related to health, childcare or teaching). Problems in recent years with self driving cars also shows the difficulties associated with technology. Middle income households tend to be most susceptible to routine based jobs so this trend will increase inequality and could put downward pressure on wages growth in the long run. The OECD (Organisation for Economic Co-operation and Development) in a report done in 2018, estimated that around 14% of jobs (in the OECD) are at high risk from automation, with large variations across countries (countries at higher risk include Slovakia, Slovenia, Greece and Spain while the countries at the lowest risk include Norway, Australia, Finland and Sweden). The workforces that are more at risk tend to have a lower educated workforce, a weak tradeable services sector and have a low urbanisation rate. In Australia, around 7% of jobs are estimated to be at high risk of automation and in the US its slightly higher at 10%. The government has a role to play in ensuring that the transition to new types of employment for impacted employees is managed through training programs, appropriate university curriculum and ensuring that funding is targeting those areas at the highest risk of job losses due to automation. 2. An ageing population and an increase in the ‘dependency ratio’ The global population, especially in major developed countries, is ageing which has been a long term trend as the birth rate has declined. In Australia, the share of the prime working age population (those aged between 25-54) peaked at 44% of the population in 1999 and has been falling slowly since then, currently at around 41% and projected to be around 40% by the end of the decade. In contrast, the share of the population that is aged 65+ is expected to keep climbing to just under 20% by 2030, up from 17% now (see chart). An ageing population will put upwards pressure on the ‘dependency ratio’ (the sum of those aged under 15 and over 65 as a share of the whole population) which will detract from national savings (people who work increase savings while the very young and old drain savings) which is inflationary in the long term.   3. A decline in business investment as a share of GDP but a lift in intellectual property as a share of investment In many developed countries, private business investment is declining as a share of the economy, in place of a rising services sector which is less investment intensive. In Australia, business investment often goes through cycles because of the dominance of the mining sector (at its peak mining investment reached 11% of GDP). After the last mining investment boom (which ended in 2012 after business investment was 19% of GDP), investment has been on a gradual decline and is now 9.4% of GDP (see chart). While there may be ups and downs in the cycle from the mining investment contribution and the usual wear and tear associated with depreciation, private business investment is likely to decline further as a share of GDP because of the changing nature of business investment. The typically large scale buildings and structures, machinery and equipment type of investment is being replaced with less ‘heavy’ types of investment, like intellectual property with the rising importance of the tech sector in all industries. A less capital intensive economy could weigh on long run productivity growth, although the impact is probably marginal as intellectual property investment should still boost productivity growth. 4. A multi polar world means more geopolitical risks The US economy has been increasing in importance to the global economy since the end of the Second World War. The rising significance of the US economy to global trade, cultural influences, military presence and economic power has been increasingly consistent with a unipolar world, especially as the United Kingdom and the Eurozone have had challenging economic conditions in the past decade. However, the balance of power has been shifting in recent years as the Chinese economy grows and becomes a larger share of the global economy (see chart). In purchasing power parity (PPP) terms (which adjusts individual country prices into a global comparison after accounting for exchange rates and purchasing power in each country which allows a better sense of living standard comparison) the Chinese economy is already the largest in the world (at 19% versus the US at 16%). If we also account for India then China and India make up 26% of the global economy compared to the US, UK and the Eurozone at 27% (in PPP terms). But we are currently at a crossroads, with China and India about to take over as a larger share of the global economy. On our estimates China and India … Read more