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One of the biggest retirement challenges is ensuring that the savings accumulated during your working years lasts as long as you do.

         

 

If you had invested $10,000 in Australian shares on 31 October 2009 without any further contributions or withdrawals, you would have experienced an average of 8.3% annualised rate of return and ended up with $22,278 a decade later on 31 October 2019.

Obviously, the numbers change once you start withdrawing income.

Unforeseen events such as market downturns can shorten the lifespan of your retirement portfolio if you withdraw funds to pay bills during a period of falling share values. The market downturn not only impacts the value of your portfolio but the regular withdrawal of funds to pay for everyday expenses (exactly what your retirement portfolio was meant to do) means that the capital left in your portfolio to help earn gains when the market eventually rebounds, is also diminished.

If the market downturn continues into the beginning of your retirement years, during which a high proportion of negative returns occur, it can have a lasting negative effect, ultimately reducing the amount of income you can withdraw over your lifetime. This is known as the sequence of returns risk.

Fortunately, there are number of straightforward strategies that can limit the odds that investors will fall into the downturn trap.

An approach that has been rather successful in the US is the target date fund model, which works to derisk an investment portfolio based on a 'target date' for retirement with the fund. The concept has been gaining momentum here in Australia and superannuation funds typically base these products on a 'lifecycle design'.

Vanguard's US target date fund glide-path takes place over four stages and constructs a portfolio based on balancing market, inflation, and longevity risks in an efficient and transparent manner over an investor's life cycle. Investors are generally split into four phases beginning at those aged 40 years and younger, and gradually moving towards the fourth and final retirement phase. The first phase considers the time horizon of an investor in the early stages of their career, thus allocating up to 90 percent of the portfolio to equities. Phases 2 and 3 gradually de-risk the portfolio away from equities before the retirement phase.

Phase 1 starts with an allocation of around 90 percent to equities and then commences de-risking during the mid to late career phase. Phase 3 encompasses the transition to retirement phase, where the portfolio de-risks further before reaching a landing point in the final retirement phase.

While this is a sound concept, it could have adverse effects if not implemented properly. For instance, being too conservative in the investment approach during the early years of one's career or too aggressive as one approaches retirement. The objective of this asset allocation model is to avoid being either extreme end of the spectrum and to adequately diversify where possible.

Having a proper asset allocation strategy will improve the odds that your retirement portfolio will endure but you may want to investigate other methods that also achieve this goal. 

Whichever strategy you choose, finding a way to curb the effects of volatility on your retirement portfolio may improve your odds of retiring on your own terms and not the market's.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
09 December 2019​
vanguardinvestments.com.au

 

 

 

At the end of 2018, after a dismal fourth quarter – in fact, the worst quarterly performance in seven years – the Australian share market closed at a two-year low.

         

 

No doubt, many investors at the time were probably anticipating a mediocre year ahead.

Yet, seven months later, the Australian share market had not only recovered all its 2018 fourth-quarter losses, but breached its all-time peak set back in November 2007.

And, while ongoing geopolitical tensions and economic fears, overshadowed by the US-China trade war, have continued to rattle global financial markets through 2019, it's been a relatively solid investment year.

The message from us at Vanguard to investors, as always, has been to tune out from the daily market noise, and to remain disciplined and diversified, irrespective of shorter-term volatility.

Many investor portfolios are well ahead on where they started 12 months ago. In fact, just about every major asset class barring cash has delivered strong year-to-date returns.

Driving that has been an insatiable hunt for yield. With interest rates at record lows, investors globally have been searching for investments generating higher returns. Concurrently, investors seeking a degree of safety have diverted capital into the more defensive asset classes such as bonds.

That's driven huge capital inflows into shares, listed property and fixed income assets. In turn, that demand has driven strong price appreciation across global financial markets.

Strong double-digit returns

Those with broad exposures to Australian, US and international shares, and to Australian and international listed property, have achieved double-digit 12-month returns. Even bonds have returned close to 10 per cent so far this year.

You can see the relative returns of a range of different asset classes over the year, and all the way back to 1970, by accessing and bookmarking the Vanguard Interactive Index Chart.

Of course, past performance is never an indicator of future performance. The best and worst performing asset classes will often vary from one year to the next.

Australian listed property was the best-performing asset class return in the financial year to 30 June, 2019, delivering 19.3 per cent. But, in 2018, the best performer was US shares, and the financial year before it was hedged international shares.

In fact, the last example of the same asset class delivering the best returns in two consecutive years was more than a decade ago, back in 2008 and 2009, when hedged international bonds returned 8.6 per cent and 11.5 per cent respectively.

Taking a longer-term look

Although shorter-term returns analysis can be somewhat useful, it's only when one does a much longer examination of investment trends that a more meaningful picture emerges.

This year marks two decades since the turn of the century, so it's an opportune time to capture almost a full 20 years of investment returns across eight different asset classes.

The chart data below goes up to the end of October (the latest chart data available) – which is broadly in line with total returns through to the middle of December.

You can replicate the same data through our Index Chart. Using a base investment figure of $10,000, and assuming all distributions are fully reinvested, the first broad observation is that investors have achieved consistent growth over time.

As expected, returns across different asset classes over the last 20 years have varied. Most notably, the 2007 to 2009 period shows the sharp deterioration in asset values stemming from the 2007 US subprime crisis that precipitated the global financial crisis. After reaching an all-time high in November 2007, the Australian share market dropped 54 per cent over the 14 months to February 2009 before starting its long-term recovery run that finally saw the S&P/ASX 200 Index surpass its previous record in July this year.

Over the past 20 years the ASX has returned more than 8 per cent per annum, turning a hypothetical $10,000 investment made in January 2000 into just over $49,000. That's a 390 per cent return, excluding any fees, expenses and taxes.

A $10,000 investment into international listed property over the same time frame would have returned 10.2 per cent per annum and be worth more than $68,000, using the same assumptions as above. That equates to a 580 per cent total return. Investors in any of the major asset classes would have done well over the past 20 years, and obviously those with investments across multiple asset classes would have achieved the smoothest returns.

But you didn't need '2020 vision' back in the year 2000 to know that total asset class returns would increase over time. It's a basic rule of compounding that when investment returns are reinvested over a long period that the value of a portfolio also will increase.

You can replicate this same pattern over other periods of time. Having a regular investment contributions strategy will amplify returns, in the same way as compulsory and voluntary superannuation contributions add to members' account balances in accumulation phase.

The importance of diversification

Heading into 2020, financial markets most likely will remain decidedly jittery. A US-China trade truce still appears distant, and escalating trade and cross-border tax issues between the US and other countries will add to markets pressure.

Asset class returns will vary, as they always do, depending on these and other catalysts.

As can be gleaned from the index chart, especially from a longer-term perspective, spreading your money across a range of investments is one of the best ways to reduce your exposure to market risk.

This way you are not relying on the returns of a single asset class.

Ways to diversify are:

  • Include exposure to different asset classes, like shares, fixed interest and property.
     
  • Hold a spread of investments within an asset class, like different countries, industries and companies.
     
  • Invest in a number of funds managed by different fund managers. For example, consider blending active with index managers.

The right mix of asset classes or investments for you will depend on your goals, time frame and tolerance for risk.

If you don't use one already, consider seeing a professional financial adviser to help you determine the optimal asset allocation for your individual needs.

 

Tony Kaye
Personal Finance Writer Vanguard Australia
09 December 2019
vanguardinvestments.com.au

 

 

The ATO has renewed its commitment to making sure super is “visible, valued and owned” in 2020, naming consolidation of member accounts and reducing the incidence of SG non-payment as some of its key priorities for the coming year.

         

 

In a recent statement published to the ATO website, ATO deputy commissioner James O’Halloran said the regulator would keep an eye on ensuring the implementation of any reforms in the super space were “fit for the future” in terms of the impact they would have on practitioners going forward.

“Just like many of our readers, we’re in the business of turning concepts into reality; the implementation of any major reform must not only be designed to be ‘fit for purpose’ but also ‘fit for the future’,” Mr O’Halloran said.

“Or to put it another way, super is about people and their future. So, we’ll keep the client experience front and centre of all we do, because we know our approach and actions impact your members’ plans for their investments and their retirement.”

Mr O’Halloran added that the ATO would continue to scrutinise employers around SG non-payment in the new year, a process that had been made easier by the rollout of the Single Touch Payroll system over the course of 2019.

“Aided by the introduction of Single Touch Payroll and fund event-based reporting, we now have an unprecedented level of ‘visibility’ of super information at the account and transaction level and we’re increasingly using this capability,” he said.

Mr O’Halloran also touched on the introduction of myGovID as a key achievement for the year that would continue to roll out in 2020.

“We’ve recently launched myGovID, the federal government’s digital identity solution which aims to transform how Australians interact with government,” he said.

“It will be faster and easier to prove who you are when accessing government online services.”

He added that while the ATO “can’t predict the next wave of reform”, it would focus on ensuring super was “visible, valued and owned” by Australians in the coming year.

 

 

Sarah Kendell 
30 December 2019
accountantsdaily.com.au

 

 

 

 

 

 

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Access all this data here.

 

 

tradingeconomics.com/australia

SMSF auditors are expected to focus more clearly on specific details and evidence around a fund’s investment strategy in the coming year as the industry continues to feel the ripple effects from the ATO’s diversification letter campaign of 2019.

       

 

SMSF trustees could expect a “more conservative approach” from their auditors this year, meaning it was likely further evidence and documentation could be requested during their fund’s annual audit process.  SuperConcepts general manager of technical services and education Peter Burgess told SMSF Adviser recently.

“Trustees may be asked to provide further evidence of transactions, asset ownership and valuations of assets, particularly whether the fund has unlisted investments,” Mr Burgess said.

“Where the fund has a large exposure to a single asset or asset class, the trustees may be asked to provide further evidence via a trustee minute, addendum or revised investment strategy that they have properly considered the fund’s investment objective, the risks of making the investments, asset diversification and the liquidity and cash-flow needs of the fund.”

SMSF auditor and Tactical Super director Deanne Firth said the ATO’s letter campaign to 17,000 trustees last year had shaken many in the industry out of their complacency when it came to constructing a detailed investment strategy.

“For years, trustees have used a set and forget approach to their investment strategies or had the [asset] ranges so broad that they didn’t need to update the strategy,” Ms Firth told SMSF Adviser.

“In fact, a lot of investment strategies date back to the fund establishment where they signed the strategy that came with the deed. Now the ATO has made it clear to trustees that they want to see evidence of consideration and, especially if the fund isn’t diversified, evidence that they understand the risks of their strategy.”

Ms Firth said she expected 2020 to be “the year of investment strategy updates”, with trustees taking the time to review their strategy and potentially further diversify their portfolio.

 

By: Sarah Kendell
Source: Peter Burgess and Deanne Firth
06 January 2020
smsfadviser.com

 

 

 

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