Profile Blog - Category ‘Financial Planning’

 

COVID-19 has completely, and mercilessly, dictated the direction of economies and financial markets through most of this year. So, as we rapidly approach the end of an extremely unpredictable and volatile year, what's in store for 2021?

 

         

COVID-19 has completely, and mercilessly, dictated the direction of economies and financial markets through most of this year.

So, as we rapidly approach the end of an extremely unpredictable and volatile year, what's in store for 2021?

It should come as no great surprise that the global economic outlook and the likely behaviour of financial markets remain hinged to COVID-19, and more specifically to health outcomes and responses.

That's a key finding from our just-released report: Vanguard Economic and Market Outlook 2021: Approaching the dawn.

Authored by senior economists and investment strategists from across Vanguard, the VEMO 2021 report highlights that the pace of economic recovery ultimately will be driven by the rate at which populations develop COVID-19 immunity.

As the human immunity gap narrows, the current reluctance gap – the fear of spending – will also narrow, leading to stronger economic growth.

Room for economic optimism

With the rollout of COVID-19 vaccines increasing, there is room for optimism.

In the VEMO report, we outline our base case that major economies will achieve infection immunity (when the person-to-person spread of COVID-19 becomes unlikely) by the end of 2021.

This would result in economic activity normalising by the second-half and output reaching pre-pandemic levels by the end of 2021. If infection immunity does not occur, economies may only see marginal progress from current levels.

But assuming immunity rates do rise, unemployment levels are set to fall, and a cyclical bounce in inflation is expected to occur around mid-year. This brings some risk that markets could interpret higher inflation with a more pronounced, but unlikely, inflation outbreak.

However, overall, there's more upside than downside to our economic forecast based on vaccine developments.

Country-specific economic growth rates will be varied, with our base case forecast for Australia at 4 per cent. This will trail the United States and the euro area, which are both forecast to grow at 5.4 per cent in 2021.

The strongest forecasts are for the United Kingdom at 7.4 per cent, albeit from a low base, and for strong growth of around 9 per cent in China due to its more successful navigation of COVID-19.

The outlook for markets

The key investment lessons to absorb from 2020 are that it's vital stay the course with your strategy and not become distracted by short-term market events, no matter how severe they are at the time, and that portfolio diversification will ultimately smooth out volatility.

The benefits of diversification played out over the most recent market cycle where investors holding a global equity portfolio would have outperformed someone holding an all-Australian equity portfolio by about 5 per cent in year-to-date terms.

In the period ahead, Vanguard predicts the Australian market should slightly outperform globally as economic conditions improve.

Vanguard's Capital Markets Model projections for global equity returns are in the 5 per cent to 7 per cent over the next decade, and in the 5.5 per cent to 7.5 per cent ranges for Australia over same period.

Although below the returns seen over the last few decades, equities are expected to continue to outperform most other investments and the rate of inflation.

In Australia, equity prices have rebounded roughly 40 per cent from the trough in March and valuations are considered to be in the middle of their fair value band.

US and China valuations are not overly stretched but at the higher end of their value bands given the recent stronger rebounds in those markets.

Despite rising equity valuations, the outlook for the global equity risk premium is positive and has increased since last year given record low bond yields.

Low interest rates will remain a feature in 2021, and Vanguard expects bond portfolios of all types and maturities will earn yield returns close to current levels.

But we continue to believe in the diversification properties of bonds, particularly high-quality bonds, even in a low or negative interest rate environment.

An investor holding a diversified portfolio (60 per cent equity and 40 per cent fixed interest) during the most recent market sell-off in March would have fared better than someone with an all-equity portfolio.

Rather than used as a returns enhancer, bonds are a risk reducer to balance out cyclical risks in portfolios.

In 2021, it will be important for investors to remain disciplined and focused on long-term outcomes, and to accept that current macro-economic events may mean medium-term investment returns will be lower than those recorded over recent decades.

 

 

15 Dec, 2020
By Tony Kaye
Senior Personal Finance Writer, Vanguard Australia
vanguard.com.au

 

 

Help to keep up with the ATO.

 

           

Visiting the ATO's website can be daunting but here is a page that links to information important to small businesses everywhere. 

For example:

  • Schemes such as Jobkeeper,
  • tips on claiming GST credits, 
  • information on expanding Single Touch Payroll (STP), and
  • much more.

 

Click here to access this resource.

 

 

ATO

 

 

 

In this Budget, the Government is taking decisive action to build our economic resilience to deal with future shocks.

 

 

The following links take you to a detailed explanation of the Federal Government's aims, objectives and methods across these sections of our economy.

 

 

Budget.gov.au

On behalf of all our staff we wish our clients a Merry Christmas, Happy New Year and a great holiday period.

Come back each day for an inspirational quote or poem about Christmas, summer and life in general from some of the great writers and poets.

(Please click on the image to open the Advent Calendar and then click on a date)

 

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

 

 

 

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