Profile Blog

When I was in my 20s, I flirted with dreams of becoming a race car driver or a foreign correspondent.

         

 

Whether by choice or chance, neither dream eventuated into reality and somehow the lottery numbers that would deliver instant wealth never fell my way either.

What did eventuate however was starting my first full-time job and discovering the freedom of a steady income stream, the revelation that you could be paid while on holidays and a small but practical epiphany that water doesn’t flow from your taps without paying the monthly bill.

Your experience might have been similar to mine; our twenties are usually a period of substantial growth and for better or for worse, a time when we come face-to-face with new financial responsibilities.

Looking back life seems a lot simpler back then. Budgeting was primarily handled by remembering to go to the bank on a Friday to withdraw enough cash to get you through the weekend’s activities and phones were things screwed to the wall at home or housed in dedicated booths on major street corners. They certainly were not a source of instant cash.

But if I were to give some general financial advice to my twenty-something self, it’d probably be themed around the following:

Talk about money… often!

Money can often be an awkward topic to broach but it can also be a valuable conversation to have with friends and family. Starting a dialogue about finances with and getting advice from people you trust can encourage you to think more proactively about how you manage, save and invest your own money.

For example, if you are thinking of investing for the first time and unsure as to where to begin, it is likely that your peers are going through or have recently been through a similar experience. If that’s the case, they might often be a good source of information as the knowledge you share is more likely to be the right level of detail and complexity.

Alternatively, talking about finances with older family members can yield helpful tips and insights as they’d have had the benefit of hindsight. It is amazing the amount of new information you can pick up just by hearing from those around you.

Although one caveat here is that everyone has their own bias so good to challenge perceived accepted wisdom. In my case the family background was conservative and based around property and bank term deposits so attending an early ASX seminar on sharemarket investing was both an eye-opener and the start of a lifelong journey.

From savvy budgeting tips to providing the motivation you need to finally sort out your superannuation, simply having a chat about money can not only compound your interest in the topic, but might also set you up better for the lifestyle you want in the future.

If you are still unsure as to where best to start, sometimes having an initial discussion with a licensed financial adviser can help you better define and work towards your financial goals.

Don’t procrastinate

You may have heard the saying that the best time to invest was yesterday, or that time in the market beats market timing. While it is always important to do your research before making an investment decision, it is also easy to get caught up in the mountains of information out there and be paralysed by procrastination and choice. You can have the right intentions to be financially responsible but all intentions are merely that without the action.

The right time to sort out your finances is now and the right time to invest is when you feel that you are in a position to do so, not necessarily if the market is up or down. Because there is no hard deadline for when you need to consolidate your super and stop paying fees on three different accounts, or no crystal ball to predict the date you’ll experience a financial emergency, it’s easy to put it all off and continue to be financially complacent.

And of course being twenty something means you have something incredibly valuable – time to ride out market cycles because nothing is guaranteed.

It’s all about balance

Being financially responsible doesn’t mean never treating yourself. It’s about figuring out a balance that allows you to live your best life both now and in the future.

A widely-used rule is “60-20-20” where 60 per cent of your income goes towards daily living costs such as food, utilities, rent or mortgage, 20 per cent is allocated towards your savings and the other 20 per cent can be spent on discretionary items like entertainment, travel or dining out.

This rule is even easier to follow if you set up different bank accounts for each bucket and automate the transfers for when you receive your pay so it splits between accounts accordingly. Of course, this is only a general guide and you should find the allocation that works best for your financial situation.

The above might sound like just common sense but getting on top of your finances really is as simple as having a little interest and discipline. And who knows, being financially responsible earlier on might mean you have the resources later in life to finally become the race car driver of your dreams.

 

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard
27 January 2020
vanguardinvestments.com.au

 

The Value of Advice

A recent study by Fidelity International, titled The Value of Advice, proves once again that issues related to financial stress adversely affects the health and overall wellbeing of many Australians. It also showed that few do much about it and this lack of action is regardless of their financial situation. For example, the study found that more than 65 per cent of Australians worry about money at least monthly and this includes a significant number of respondents with at least A$1 million of investable assets.

2,228 individual Australians were surveyed, 594 retirees and 1,634 non-retirees. 502 are currently advised, 570 were previously advised, and 1,156 were unadvised.

Fidelity International’s Australian managing director, Alva Devoy, considers it surprising that “many people don’t ‘join the dots’ and realise that addressing financial issues is a step towards improving overall wellbeing”.

Despite studies of this ilk there is still a disconnect in the public’s mind between financial wellbeing and overall wellbeing. A disconnect that prevents many from addressing issues related to their finances when such help is readily available.

On the other hand, the study found that 88.5% of Australians receiving advice believe it has given them greater peace of mind financially. 86.2% believe it has given them greater control over their financial situation also.

“More than three-quarters (77.3%) of Australians have seen their GP to address personal wellbeing issues, and more than a third (35 per cent) have been to see a mental health professional for the same reason,” the report said.

However, only 24.4% indicated they had seen a financial planner to address financial worries even though financial stress is something that relates to a whole lifetime. Of these 24.4%, 49.9% say their mental health has benefited; 37.8% say their family life has improved; and 18.1% say their health has improved.

An added irony. Past PlannerWeb articles, based on research from Vanguard Investments, has shown that the overall improvement in a person’s financial position can be around 3% from professional financial help. The irony being that this is arguably enough to pay for the financial service itself as well as helping improve a client’s overall wellbeing.

For many it is time to look beyond the surface of financial planning and get professional assistance with building your financial future.

Peter Graham BEc MBA

General Manager

PlannerWeb

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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