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Do you struggle to control your spending around your friends and family? If the urge to ‘keep up’ with a certain lifestyle is stretching your finances, it could be time to take action. From splitting the bill at an expensive restaurant, to having the ‘right’ house, car and clothes, many of us fall victim to overspending. But if you regularly suffer from buyer’s remorse, or spend over and above your means, it’s time for a serious reality check. Overspending can quickly spiral into long-term debt, especially if you use credit cards to try and bridge the gap. Young Australians are particularly at risk, taking on debt at a far earlier age and carrying it longer than ever before. Research by RateCity shows that 42 per cent of those aged under 24 have between $10,000 and $30,000 in personal debt, not including a mortgage. Even if you’re not living paycheck to paycheck, overspending will prevent you from reaching your longer term financial goals, like financial security and financial freedom. Fortunately spending habits are just that – habits – and they can be changed. Here’s how to avoid the debt spiral and get your finances on track. Identify your risky behaviours Do a financial health check and work out where the majority of your overspending happens. Is it a penchant for designer clothes? An addiction to expensive electronics? Or a love of fine dining? We all have vices that threaten to throw us off track, so look at the numbers and be honest with yourself about which behaviours are forcing your finances off course. If those behaviours are closely associated with certain friends, family or work colleagues, it could be time to re-evaluate your unhealthy relationships. Associate with people who share your values Once you know what’s driving your poor spending habits, use it to take action. Distance yourself from any negative influences and find others who better fit in with your long term plans. Being surrounded by likeminded people will help restore your bank balance in no time. Find alternatives If your social life is at the centre of your overspending it could be time to make some healthy swaps. Try suggesting low-cost alternatives such as bush walking, art classes or the beach. You might even meet new people who share your values. Lead by example and encourage good financial practices among your friends and family. Be upfront about your goals and values, without being pushy. True friends will be supportive and want to spend time with you anyway. Make a financial plan Taking control of your spending starts with evaluating your priorities and setting long-term goals. By making a financial plan, you’ll identify what is really important to you – and the steps you need to take to get there. You can do much of the groundwork on your own, although consulting a financial planning professional can help you to nail the details and act on your plans. You could be experiencing financial freedom sooner than you realise. Stick to a budget It’s much easier to maintain your new spending habits and make a real change if you have a budget in place. Make sure to allocate funds for clothing, entertainment and ‘fun’, so that you still get to indulge in some of your favourite interests. Create a ‘want to buy’ list Every time something comes up that you want to buy, add it to your list then wait at least seven days before purchasing the item. In the meantime, find at least three prices for the same item. This reduces the risk of splurging on things you don’t really need and makes it more likely that you’ll get a good deal. Focus on the bigger picture It’s easy to get carried away trying to keep up with a certain lifestyle and you may not even realise it’s happening until you’re already in debt. Good financial planning and a focus on the bigger picture will help keep your overspending in check. Source: Money & Life

Christmas is a wonderful time of year in Australia, filled with summer foods, decorations and of course, gift giving. Here are a few ideas to help you stretch your Christmas gift budget further, so you can enjoy more family time, without the financial hangover. Overspending at Christmas time is commonplace in Australia, with many people taking on debt that they have no way to repay. Add to that, global supply issues have worsened in recent months, which means we’re likely to face shipping delays and product shortages this Christmas. The ARA says that could lead to higher prices at the register. So if you’d like to avoid a budget blowout and have a more ‘conscious’ Christmas this year, here a few alternative ideas to help you celebrate.  Buy local If you want to avoid price rises and shipping delays this silly season (not to mention helping the planet) one of the best things you can do is buy locally. By purchasing from small businesses, artisans and producers in your local area, you’ll help to create jobs and keep more of the money in your community. Local suppliers often also have different and unique products for sale that aren’t available from national chains. So look out for your local Christmas market, craft fair or farmers market, or choose gifts from a small businesses nearby. Get creative If you enjoy making things, this is for you. What could embody the spirit of giving more than creating your own beautiful handmade gifts? This is the perfect activity to do with kids (or without!). Baked goods, scrapbooks, drawings, paintings, jewellery, soaps, candles, even face masks can all be made. Not only will you save money, giving will feel more meaningful when you’ve put your own time into it. Give an experience Even better than material goods, why not give the gift of an experience? Experiences are more memorable, offering the recipients a chance to connect and enjoy themselves. The possibilities are endless, so you’re sure to find something that suits. You could go traditional with restaurant vouchers, movie tickets, zoo or aquarium passes, or more unusual, like hot air ballooning, art or cooking classes or even a weekend away. Give your time If you can’t afford an elaborate gift, you still have something everyone needs – time! Giving your time without expecting anything in return is the perfect way to embrace the spirit of the holidays. Perhaps you could gift an elderly relative with some help around the house, offer to babysit your sister’s kids for a night, finish a DIY project for your mum, or stock someone’s freezer with enough meals for a week. There are lots of thoughtful and creative options that will keep your budget intact. Make a donation  If the people you love truly don’t need anything, perhaps they’d appreciate you donating a gift on their behalf. Here are a few options: Give the gift of learning to a child in need through The Smith Family’s charity gift range. Help end global poverty with a gift from Oxfam’s charity gift shop. Support equality for girls around the world through Plan International’s Christmas Appeal. Remember, less is more Aussies are a generous lot, and we’re each planning to spend $726 on gifts alone this Christmas! Now we all want to give people the world, but perhaps it’s worth taking that more literally this year. In most cases, one simple gift is enough and can even be more appreciated. You’ll be doing them, the environment, and your budget a big favour. Of course, if you’d prefer to focus on spending time together rather than doing the Christmas shopping, that’s ok too! Discuss how you feel with those closest to you and let them know you’ll be prioritising time together over physical gifts. It could help you start the new year in a better financial position than ever.   Source: Money and Life

What’s the meaning of Christmas in your household? While it can sometimes feel like spending a small fortune on gifts and food is non-negotiable, it’s not the only option. And, if you have kids, the holidays are a great time to teach them about the value of money – while having a heap of fun along the way! Lavishly decorated homes, piles of presents under the tree and children waiting excitedly for Santa are much-loved Christmas traditions in Australia. But if the idea of consuming your own bodyweight in food doesn’t hold the same excitement for you this year, it could be time to re-evaluate what really matters. After all, if there ever was a year to embrace the ‘true meaning’ of Christmas, surely it’s this one? What’s the real meaning of Christmas anyway? From the celebration of Yule and the winter solstice in Scandinavia, to the Roman festival of Saturnalia, and the later Christian tradition, this is one holiday with a rich history. Many of our traditions are rooted in values like giving to the less fortunate or needy, and giving thanks for what we have. Are we losing sight of the value of the holidays? But since the mid-1800s, the focus has shifted sharply onto Santa and the exchange of gifts. So much so that it’s become a major economic driver for our economies. Teaching the value of money at Christmas There’s no two ways about it, Christmas celebrations can get expensive. For kids, the meaning of Christmas can get lost in the excitement of receiving piles of presents or gorging on Christmas goodies. But there are lots of ways to save your cash and shift the focus back onto healthier values. Here are nine ideas to get you started. Include the whole family in your plans We often leave our kids out of the budgeting, thinking ‘they don’t need to know’ about the finances, or doing the Christmas shopping without them. But there’s real value in allowing them to observe and participate in your discussions about the Christmas finances. Not only do they learn how to apply budgeting skills in a real-world situation, they’ll experience the finite nature of money first-hand; and learn to allocate it accordingly. So make a time to sit down as a family and talk through your Christmas spending. Set a spending limit for each gift recipient to help you stay on track. Remember that spending less on your immediate family means you’ll be able to give more generously to others – another valuable Christmas lesson for kids. Put the kids in charge Giving kids control over their finances from a young age can help set them up for better money management down the track. At Christmas, you can involve your kids by having them write a list of everyone you need to give gifts to, along with the agreed budget. Then brainstorm together to come up with gift ideas and take them shopping. They’ll learn how to compare prices, stick to a budget and even save money if you find a good price! Get saving If you start early enough, you can teach your kids the value of saving up for major expenses like Christmas. If they have regular pocket money, get them to put some aside each week or month to spend on special gifts. Talk about what they’ll do with any money they receive as presents. How much will they spend and save? If they don’t have a savings account, now is a good time to set one up. Start with giving Giving your time or money without expecting anything in return is the perfect way to embrace the spirit of the holidays. And for kids, this is a chance to switch the focus onto giving, rather than receiving. Here are some options. Instead of buying gifts for family and friends, you could give the gift of learning to a child in need through The Smith Family’s charity gift range. Or volunteer your time to help sort, pack and deliver toys and gifts to kids in need! What could be more Christmassy than playing Santa? If donating cash is more your thing, The Salvation Army runs an annual Christmas appeal to help families in need. Or if you’re keen to volunteer your time, you could help wrap Christmas gifts in the lead up to the big day, or serve Christmas lunch at a local homeless shelter. Seek Volunteer has lots of opportunities listed, or contact your local charities. The major retailers also run food drives and in-store Christmas promotions where you can purchase Christmas presents for people in need. Prioritise family activities There’s no shortage of great events and activities you can do with your family and friends to really bring Christmas to life. Look out for local Christmas carols or concerts, or take a trip to see the best Christmas lights in town. Have a games night, or movie marathon on Christmas eve, and focus on spending quality time together. Your kids will thank you! Make your own gifts What could embody the spirit of giving more than creating your own beautiful handmade gifts? This is the perfect activity to do with kids (or without!). If you’re feeling keen, try substituting regular gift giving with handmade gifts in your family. It’s bound to end in lots of laughter and your kids will be so proud when you open their beautiful presents. Baked goods, photo albums, scrapbooks, drawings, paintings, jewelry, soaps… even face masks are on the list this year. Not only will you save money, giving will feel more meaningful when you’ve put time into it. Make your own decorations Making your own decorations helps everyone get into the spirit and celebrate the meaning of the holidays. Again, this activity can be adapted for any age. From paper wreaths to a hand printed Christmas tree, bon bons or a gorgeous front door wreath, there are endless options for all ages and abilities. Explore other traditions Just like Australia, many other countries have developed their own unique Christmas traditions. You … Read more

If you’ve thought about how much money you need to save so you can retire comfortably, it might feel a little daunting. Maybe so much so, you’d rather not think about it at all. But, according to AMP Technical Strategy Manager John Perri, there are three simple rules anyone can follow that make saving for retirement a lot easier. Follow the sleep test All investments come with a level of financial risk. Understanding your risk appetite, says John, is essential when setting goals for your superannuation and retirement savings. “I look at it from the perspective of whether you can invest and sleep at night. If you’re not sleeping, then the level of risk you have is not for you.” Generally, the higher the expected return, the greater the risk. And lower risk means lower expected returns. Risk appetite is often linked to age and how far away a person is from retirement because this influences their ability to recover from financial losses. For example, someone close to retirement may be more risk-averse than a younger person, who can perhaps pursue a higher risk strategy, knowing that the market is most likely to deliver in the long term. For younger investors, they typically have the luxury of time to recover from any short-term blips. Super funds usually offer a range of investment options with varying risk, so you can choose the one that’s right for you. These include: Growth options – aim for higher returns over the long term but come with higher risk Balanced options – aim for moderate returns and come with moderate risk Conservative options – aim to reduce the risk of market volatility, so may generate lower returns but are lower risk Cash options – aim to generate stable returns to safeguard the money you’ve accumulated and are usually the lowest-risk option offered by super funds. If you’re thinking about switching investment options, it’s important to do your research so you can be confident it’s the right decision. If you have a financial adviser, it’s worthwhile seeking their opinion so you might avoid locking in losses that are difficult to recover from. Make the most of tax benefits in super The second rule that makes saving for retirement easier is understanding that Australia’s superannuation system has been designed to create incentives, and that means there are tax advantages in saving through super rather than investing outside of it. “Super is a structure that is purpose-built to acquire investments for retirement, and it’s not necessarily an investment in itself,” says John. Earnings you make on the money invested inside super are taxed at 15% on income and 10% on capital gains. This is lower than the marginal tax rate paid by many Australians, which can go as high as 45%. “Once you’re retired, you can use those savings as an income stream in the form of regular pension payments. And the tax rate on investment earnings inside the income stream is nil,” says Perri. Plus, “there’s no tax on the income stream payments if you are over 60 years of age.” How super is taxed depends on your age, contributions and other factors, so it’s important to understand the different tax implications that could apply to your nest egg. You can learn more about tax on super here. Use compound interest to your advantage The famous physicist Albert Einstein once described the ability to understand compound interest as the eighth wonder of the world. Building up a healthy super balance is aided by the principle of compound interest, which delivers its best rewards to people who invest early and stay in the market. “The rate of return on a super balance is calculated on a potentially higher balance over time because your employer makes contributions, or you’re making contributions yourself,” says Perri. “But your balance may also rise due to investment returns, so the following month you will receive returns on those returns.” “Given the long-term view with super, and starting early, the longer you have your super invested, the longer it has to grow and compound over time,” he says. And if you make extra contributions, then the benefits of compound interest are exponential. In times of uncertainty, it can pay to take control of your finances, so you feel peace of mind that you’re prepared for the future. And you don’t have to do it alone. Speak to us today.   Source: AMP

While an exposure to hedge funds can provide a lift to a portfolio’s performance, they also offer the potential to generate high returns – at a risk. Hedge funds play a very important role in investment markets and come in many shapes and sizes. Because of this, it’s important for investors to understand what they are, how they operate and the role they play in a fully functioning market. What is a hedge fund and how do they work? Hedge funds typically play an important role in financial markets. In fact, when markets are volatile, hedge fund managers are often able to spot, and take advantage of, interesting investment opportunities and inconsistencies in markets that can generate extra returns for a portfolio. Alfred W Jones is widely considered to have started the first hedge fund in 1949 in the US when he raised US$100,000 to start his fund. Of this money, US$40,000 was his. Jones’ aim was to use some of the money he raised to establish the fund to minimise its losses. Back then, the fund was known as a ‘hedged’ fund. That is, it tried to hedge its investments by using different types of financial instruments to offset the risks it took on its positions. This is a trait of hedge funds that continues to this day. Hedge funds can invest in many different asset classes – shares, bonds, listed property trusts, as well as all the derivative instruments they use to hedge their positions such as options, futures and foreign exchange contracts. They can also invest in listed and unlisted investments. This style of fund also has a number of other defining features, such as investors needing a large minimum amount to invest (an initial outlay of $50,000 or more is typical). Usually only sophisticated investors or professional fund managers allocate money to them, because of the significant risks to which hedge funds are exposed – they have the potential to make, but also lose, lots of money. So it’s not usually appropriate for retail investors to have significant exposure to them, unless it’s through an investment fund managed by professionals. Hedge funds are also relatively illiquid. This means it can be hard to withdraw money from them at short notice. They are often largely unregulated, which also increases the risks to which they are exposed. For instance, unlike other managed funds, they don’t have to produce extensive disclosure documents that clearly outline their risks. In terms of fees, hedge fund managers are rewarded for the returns they produce. So while their fees can be quite high, so too can their returns. How do they invest? Let’s take a look at some of the common strategies hedge funds use: Long/short strategies This is a classic hedge fund strategy. It involves going ‘long’ on a position, and at the same time going ‘short’ on an associated position to offset any potential risks.   A common example is to buy one stock in a sector in the belief its share price will rise and short, or, sell another stock in the same sector in the belief its share price will decline. Global macro fund Global macro fund managers make their investments based on their views on what’s happening in different markets around the world, often trading off a positive view about a market with a negative view about a market. For instance, if a fund manager thinks economic growth in Asia will outstrip economic growth in Europe, it might invest in Asian shares and sell European shares. This style of fund is similar to a pure long/short fund, but typically, it’s far more leveraged. In other words, the fund manager will borrow large amounts of money to take bets on various investment themes it can express in markets right around the world. Macro funds also use derivatives to express an investment view and manage risk. Distressed debt Some hedge funds look to take positions in fixed income investments issued by businesses that are under stress or not rated as investment grade. These bonds often pay a relatively high interest rate and offer guaranteed income for the life of the bond, which can help support the hedge fund’s returns. The fund manager applies its skill to identify assets that have the potential to generate healthy returns over time, in line with its risk profile. Hedge fund of funds Another approach to hedge fund investing is to allocate to a ‘fund of funds’. This is a fund that invests in a group of hedge funds, all with different exposures and risk tolerances. The reason why investors choose to invest in a hedge fund of funds is to diversify their exposure, while maximising their potential for gains. How are hedge funds used in an investment portfolio? An allocation to hedge funds can provide an important source of diversification, not just when markets are volatile, but over time. Hedge funds invest in many different strategies that are uncorrelated to equities markets, such as fixed income funds and emerging markets opportunities, so an exposure to hedge funds has the potential to smooth out a portfolio’s returns over time. There are many, many different types of hedge funds, all with different target returns and investment profiles. So it’s often useful to delegate the choice of hedge funds to professional managers who are able to select funds based on their risk/return profile, to suit the investor’s objectives.   Source: BT   What to check before you invest in a hedge fund Read the product disclosure statement Hedge funds vary in risk and complexity. The fund manager will give you a PDS before you invest. This sets out the features, benefits, costs and risks of the fund. Make sure you understand the investment before you go ahead.   Check your understanding of the fund Use these questions to check your understanding of the fund: Strategy — What are the investment goals? How will the fund achieve these goals? Investment manager — Who manages the fund? Does … Read more

As you age and your health starts to deteriorate, having a financial safety net and protecting your nearest and dearest may become even more important. So, how old is too old for insurance, and do you or your parents still need cover if they are nearing retirement or no longer have an income? The answer is there could still be benefits from keeping personal insurance cover. Why you (or your parents) might still need insurance As you get older, a lot of the reasons for having Life, TPD or income protection insurance might no longer apply. Perhaps you’ve stopped working, paid off your mortgage and no longer have family members to look after financially. You might now have enough income from super savings to save you from worrying about covering your living expenses in the future. But before cancelling an existing Life or TPD policy to save on the premiums, it’s worth taking a closer look at your (or your parents’) situation. Maybe you still have life goals and responsibilities that could benefit from having insurance cover in place. Plus, there could be health problems looming that will make demands on income and savings. While health insurance is key in covering the cost of a hip replacement or cataract removal, life insurance can still have its benefits later in life, especially if you or ageing parents. Meeting the cost of care Some of us may find ourselves with ageing parents that will depend on us almost as much as our children.  But there may come a time when the time and support you can offer isn’t enough. And while there is some funding available from the government to help with aged care, there are some costs that won’t be covered. If one of your parents needed to pay for their move into an aged care facility, for example, the only practical solution they may have to meet this cost is selling the family home. Having a TPD policy that offers them a payout when they lose capacity to care for themselves due to injury or illness could give them the choice not to sell. Consider a health-check before cancelling Even when you or your parents are in a pretty good position financially-speaking, state of health is something to keep in mind when choosing whether to keep life or TPD cover. Before cancelling, consider organising a comprehensive medical check-up to make sure there aren’t any health problems that could spell trouble in the near future. When do insurance policies expire? Most policies will continue to accept new applications and provide ongoing cover for people up to around the age of 64 years old, provided there are no serious pre-existing conditions. Applying for cover later in life might mean a medical exam or blood test is required. But when it comes to taking out new cover later in life, it’s important to keep in mind that premiums on a policy will be far higher for cover in your 50s and 60s. When looking at an existing insurance policy, or are thinking about getting a new one, there are two important terms to be aware of: Maximum entry age Most life insurance companies will set a cut-off age for getting a new life insurance policy or for switching to a new one. This is usually between 60-75 years of age but it will depend on the insurance provider and type of policy. Policy expiry age This is the age when the life insurance policy will automatically end. This is usually 65 years for TPD cover, 70 years for Trauma and Income Protection and 99 years of age for Life (Death) cover – but again it will depend on the insurance provider and type of policy. This could mean that continuing to pay for a life insurance policy during retirement could provide 30+ years of cover. That’s a lot of peace of mind and potential for a lump sum payout. However, it’s important to remember that you have to keep paying the premiums to get the benefits of cover. Just because you’ve paid for cover for a long time doesn’t mean you can’t stop now – don’t let the sunk cost fallacy steer you towards a decision that isn’t in your best interests.   Source: IOOF

The impacts of interest rate hikes on consumers are well known; higher interest means that mortgage debt servicing costs will go up which is negative for consumer spending. Rate hikes are also bad news for home prices, which will create another negative for households via the destruction of wealth and the associated “wealth effect”. Housing as a Source of Wealth Household wealth is a measure of the value of physical assets owned like homes and the land they sit on and business premises as well as financial assets like shares. Housing is both a source of wealth but also a form of consumption. Households can be a homeowner while non-homeowners “consume” housing through paying rent. As a result, changes in home prices do not have an equal impact across households, which can make measuring a direct wealth effect difficult. For example, higher home prices are positive for investors and homeowners with no plans to upgrade but are negative for households looking to get into the market or upgrade. Renters may also be worse off as higher home prices could lead to higher rents. However, the composition of home ownership in Australia means that the majority of the population benefits from higher home prices, with two thirds of households (or around 7 million households) either owning a home outright or paying a mortgage. Housing is the largest single source of wealth for households, at 65% of total household wealth. National home prices peaked in April 2022 and have fallen by nearly 5% to mid-September. We expect a peak-to-trough decline in prices of 15-20% with prices declining into 2023 before stabilising late next year. Our expectations for a further fall in home prices means we also expect household wealth to decline. The Wealth Effect The “wealth effect” is an economic concept referring to a change in consumer spending following an adjustment to household wealth. The historical relationship between wealth and consumer spending shows that rising wealth coincides with rising consumer spending and vice versa. Intuitively this makes sense – when you feel like your assets are worth more, you feel more confident to spend. Our expectations for declining home prices in 2022/23 and, as a result, household wealth, means that consumer spending growth will also slow. We expect a weakening in consumer spending to just under 1% (year on year) by December 2023 which will weigh on GDP taking it well below normal levels of around 3% growth in consumer spending. Other Impacts of Falling Home Prices There are also other impacts of falling home prices including: Higher risk of negative equity loans (which means that the market value of the home is less than the debt taken against the home) which increases the risk that the household will default if they can’t repay the debt by selling the property. Lower bank profitability and increased risk of bank stress. Declines in home prices mean lower lending which is negative for banks as housing makes up 60% of bank lending. Falling home prices also increases the risk of defaults, which means that banks could take a hit to their capital. The loans which are most at risk are those with high loan-to-value ratios but the share of new lending to these areas is low (at around 5% of new lending). Conclusion So far, consumer spending has held up well in Australia despite high inflation (especially on essential items), rising interest rates, a collapse in consumer confidence and the negative wealth effect. Spending is holding up thanks to high household savings, housing prepayments, a shift in spending from goods to services and lags of changes in RBA interest rates to minimum housing repayments. In our view, consumer spending is set to slow down significantly in 2023 as consumers start to feel the impacts of rate rises, household wealth deteriorates and accumulated savings decline. On our forecasts, annual growth in consumer spending will be under 1% by late 2023, well below its usual levels of around 3% per annum. This will weigh on GDP growth (household consumption is over 50% of GDP) and we see GDP growth slowing to under 2% per annum by late 2023.   Source: AMP Capital

Once a staple investment allocation, the traditional balanced portfolio of shares and bonds has had some challenges in delivering positive returns in today’s market environment. Institutional investors, such as superannuation funds and endowments have been investing in alternatives for many years and it is a rapidly growing asset class in the global investing landscape. Individual investors are now looking to alternative asset classes to help diversify their portfolios and improve the probability of meeting their long-term objectives. What are alternative assets? Alternatives cover a broad range of asset types, which can include almost anything that does not fit into traditional, market-traded equity and bond securities. These include assets such as real estate, infrastructure, shares in private companies, private loans and debt, as well as alternative trading strategies, such as hedge funds and absolute return funds. Why invest? Each of these sub-categories can have very different risk and return drivers to each other as well as to traditional equities and bonds. By including an allocation to these asset classes, the diversification benefit can improve the expected risk-adjusted returns of the portfolio as a whole. It is important to note that these asset classes are less liquid and more complex than traditional equities and bonds. Whilst it’s expected to generate additional returns or better risk outcomes for investors; the illiquid and private nature of many alternative assets generally suit investors with a longer investment time horizon. We consider them appropriate for investors with a minimum investment horizon of five years and recommend a moderate portfolio allocation of 5-20% depending on the investment objectives of the portfolio. Not all alternatives are the same For most investors, a diversified allocation covering a wide range of alternatives can lead to better outcomes over the longer term. Illiquid or private assets mean that investment managers can take advantage of inefficiency or less transparent asset prices to generate more skill-based, idiosyncratic returns. Conservative or more cash-flow based valuations can provide more portfolio stability and less sentiment driven ‘noise’ compared to the daily ‘mark-to-market’ price returns in equity and bond markets. Alternative trading strategies can generate returns, even when markets are declining in value, by selling stocks ‘short’ or using other types of derivative instruments. Overall, these assets and funds can contribute to better returns, reduce volatility and build in more downside risk protection for portfolios. The right mix and allocation of alternatives will vary, and the benefits of these asset classes also come with a different set of risks to consider which may not be suitable for all investors.   Source: Perpetual

It’s natural to feel nervous when markets fall. News about inflation and rising interest rates may prompt you to make an emotional investment decision. But history tells us that markets trend upwards in the long run – and switching investment options at the wrong time can have a negative impact on your overall long-term investment return. If you feel anxious when you see your balance drop and worry about your retirement savings, know that it’s a common reaction. And it’s natural to consider switching your super into a more defensive portfolio mix to avoid market turmoil. But doing so could mean locking in losses and missing out on the recovery which follows. A year with a negative return can be stressful, although the general long-term trend is for markets to grow, not contract. The Australian share market has only recorded five negative years in the three decades since compulsory superannuation was introduced in 1992. Here are three examples of market falls, and their following recoveries. The COVID Crash 2020 Why did this happen? In March 2020, the world started to realise how serious the rapid spread of COVID-19 really was. Governments enforced lockdowns, air travel was all but outlawed and investors desperately sold off their shares fearing these restrictions would hurt companies’ growth plans and profit margins. What did it mean for investors at the time? It all came to a head on 16 March 2020, when the ASX 200 recorded its worst day ever (down 9.7%) while in the US, the S&P500, Dow Jones Industrial Average and NASDAQ indices all lost 12% or more. What was the best thing investors could do at the time? Investors who switched to cash at the end of March, hoping to protect themselves, were 22% to 27% worse-off on average than those who held on through the drop. Share markets didn’t just recover – they grew to new highs. And people who stayed invested benefited from that growth. Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 31 August 2017 to 30 June 2022. Global Financial Crisis 2007 – 2009 Why did this happen?  The mid 2000s was a prosperous period for developed countries and mortgage lending became a lucrative business for banks. With house prices rising and regulators unworried about the potential risks, banks in the US began lending increasingly large sums to borrowers. included lending to borrowers with a high risk of default. US banks packaged up and on-sold those risky loans to investors. Then in 2007 interest rates rose and house prices fell. Homeowners found themselves unable to make the repayments on their mortgage and owed more than their homes were now worth. As people walked away from their obligations, banks quickly racked up massive losses. The investors who’d bought the risky loans also lost money. The interconnectedness of global finance meant banks around the world experienced significant losses with some collapsing. The resulting fallout remains one of the worst economic downturns since the Great Depression of the 1930s. What did it mean for investors at the time? The Australian share market fell 54% – a painful, drawn-out decline over 16 months from November 2007 to March 2009. But by 2013, US markets had returned to their pre-crisis highs. Australia took a little longer to regain its losses, finally breaking back above its pre-crisis levels in 2019. This may be because Australian companies pay a greater share of their earnings as dividends to investors compared with US companies. What was the best thing investors could do at the time? Staying invested during the Global Financial Crisis proved the best strategy, despite testing investor nerves. Yet anyone who switched their investments to cash locked in those original losses and missed out on the multi-year gains that followed.   Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 31 January 2007 to 31 December 2012. September 11 attacks 2001 Why did this happen? Almost 3000 lives were lost when four planes were deliberately crashed into strategic locations around the US on 11 September 2001. Almost all of these deaths were in New York, where al-Qaeda destroyed the World Trade Centre towers which sat at the heart of the financial district. What did it mean for investors at the time? In the days after the attack, markets dropped. The S&P500 fell 11% (extending the losses from the tech wreck earlier that year) while in Australia, the ASX200 lost 4.11% in a single session, before reaching a bottom on 24 September, 9.79% below its pre-attack level. What was the best thing investors could do at the time? Both the US and Australian share markets recouped all these losses only a month later. By taking a long-term view of investing, you can ride out any short-term dips in the market and take advantage of growth opportunities over the long term. Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 30 June 1997 to 31 May 2002. So, what’s the key thing to take away from these three examples? When markets fall sharply, it’s only natural to be concerned and think about moving money to less risky investment options – with a plan to switch back later. Yet as history has shown, it is important to consider staying invested at times of market volatility to enable your investments to benefit when the market rebounds. Source: Colonial First State   https://www.cfs.com.au/personal/news-and-updates/intelligent-investing-hub/learn-about-market-volatility/reasons-to-stay-invested.html  

Up until the 1980s the dominant theory was that financial markets were efficient. In other words, all relevant information was reflected in asset prices in a rational manner. While some think it was the Global Financial Crisis that caused faith in the so-called “Efficient Markets Hypothesis” (EMH) to begin unravelling, this actually occurred in the 1980s. In fact, it was the October 1987 crash that drove the nail in the coffin of the EMH as it was impossible to explain why US shares fell over 30% and Australian shares fell 50% in a two-month period when there was very little in the way of new information to justify such a move. It’s also hard to explain the 80% slump in the tech heavy Nasdaq index between 2000 and 2002 on the basis of just fundamentals. Study after study has shown share market volatility is too high to be explained by investment fundamentals alone. Something else is at play, and that is investor psychology. Individuals are not rational Numerous studies by psychologists have shown that people are not always rational and tend to suffer from various lapses of logic. The most significant examples are as follows. Extrapolating the present into the future: People tend to downplay uncertainty and assume recent trends, whether good or bad, will continue. Giving more weight to recent spectacular or personal experiences in assessing the probability of events occurring: This results in an emotional involvement with an investment strategy. If an investor has experienced a winning investment lately, he or she is likely to expect that it will remain so. Once a bubble gets underway, investors’ emotional commitment to it continuing steadily rises, thus helping to perpetuate it. Overconfidence: People tend to be overconfident in their own investment abilities. Too slow in adjusting expectations: People tend to be overly conservative in adjusting their expectations to new information and do so slowly over time. This partly reflects what is called “anchoring” where people latch on to the first piece of information they come across and regard it as the norm. This partly explains why bubbles and crashes in share markets normally unfold over long periods. Selective use of information: People tend to ignore information that conflicts with their views. In other words, they make their own reality and give more weight to information that confirms their views. This again helps to perpetuate a bubble once it gets underway. Wishful thinking: People tend to require less information to predict a desirable event than an undesirable one. Hence, asset price bubbles normally precede crashes. Myopic loss aversion: People tend to dislike losing money more than they like gaining it. Various experiments have found that a potential gain must be twice the potential loss before an investor will consider accepting the risk. An aversion to any loss probably explains why shares traditionally are able to provide a relatively high return (or risk premium) relative to “safer” assets like cash or bonds. The madness of crowds As if individual irrationality is not enough, it tends to get magnified and reinforced by “crowd psychology”. Investment markets have long been considered as providing examples of crowd psychology at work. Collective behaviour in investment markets requires the presence of several things: A means where behaviour can be contagious: Mass communication with the proliferation of electronic media is a perfect example of this. More than ever, investors are drawing their information from the same sources, which in turn results in an ever-increasing correlation of views amongst investors, thus reinforcing trends. Pressure for conformity: Interaction with friends, monthly performance comparisons, industry standards and benchmarking, can result in “herding” amongst investors. A precipitating event or displacement that gives rise to a general belief that motivates investors: The IT revolution of the late 1990s, the growth in China in the 2000s and crypto currencies more recently are classic examples of this on the positive side. The demise of Lehman Brothers and problems with some crypto currencies/markets are examples of displacements on the negative side. A general belief which grows and spreads: For example, a belief that share prices can only go up – this helps reinforce the trend set off by the initial displacement. Bubbles and busts The combination of lapses of logic by individuals in making investment decisions being magnified by crowd psychology go a long way to explaining why speculative surges in asset prices develop (usually after some good news) and how they feed on themselves (as individuals project recent price gains into the future, exercise “wishful thinking” and get positive feedback via the media, their friends, etc). Of course, the whole process goes into reverse once buying is exhausted, often triggered by contrary news to that which drove the rise initially. What does this mean for investors? There are several implications for investors. First, recognise that investment markets are not only driven by fundamentals, but also by the often-irrational and erratic behaviour of an unstable crowd of investors. The key here is to be aware of past market booms and busts, so that when they arise in the future you understand them and do not overreact (piling into unstable bubbles near the top or selling everything during busts and locking in a loss at the bottom). Second, try and recognise your own emotional responses. In other words, be aware of how you are influenced by lapses in your own logic and crowd influences like those noted above. For example, you could ask yourself: “am I highly affected by recent developments? Am I too confident in my expectations? Can I bear a paper loss?” Thirdly, to guard against emotional responses choose an investment strategy which can withstand inevitable crises whilst remaining consistent with your financial objectives and risk tolerance. Then stick to this even when surging share prices tempt you into a more aggressive approach, or when plunging values suck you into a defensive approach. Fourthly, if you are tempted to trade, do so on a contrarian basis. Buy when the crowd is bearish, sell when … Read more