E-News August 2011
Update on Global Share Markets
Global share markets fell sharply over the last few days. This has flowed through to the Australian share market, with the S&P/ASX200 currently down to 3,897 points.
The sovereign debt issues in Europe and recent poor economic data out of the United States have led to considerable market volatility in recent days and months. The sovereign debt issues in Europe cross two complex and associated issues.
The first issue is a solvency issue. Greece is effectively insolvent and Portugal and Ireland have potential solvency issues. The good news is that the European Union and the European Central Bank have finally recognised the insolvency issue in Greece. The new Greek bailout package is a fundamental step in the right direction. The package materially reduces Greece’s financial burden via the extension of loan terms and the reduction in interest rates; these measures were also extended to Ireland and Portugal. This reduction in Greece’s debt burden is a fundamental step in putting Greece on a path to sustainability.
The second issue engulfing Europe is a potential sovereign debt liquidity crisis affecting larger European countries, particularly Italy and Spain. It does not appear that either Spain or Italy are insolvent, however a collapse in bond market confidence could push yields on sovereign debt to levels that create a true liquidity crisis. In our view monetary union presents particular challenges to addressing this situation. For a country that has its own currency and an independent central bank able to readily print money, this situation would be addressable. In such circumstances the central bank could print money and buy bonds on the open market to drive down yields and monetise government funding requirements.
We feel it is unlikely that these liquidity issues will result in a financial Armageddon scenario and that correct policies will eventually be pursued. However there are differing views on the correct path of action and therefore we could see a sustained period of considerable volatility until this is resolved.
The recent decision to raise the US debt ceiling has removed considerable risk in the short term and we are confident that the US will take action over the next few years to ensure it is on a sustainable long term fiscal path. Economists are now focusing on the strength of the US economy.
Despite the economic turmoil in global markets, the Australian economy remains in relatively good financial health thanks to a strong resource sector. It should be noted that Australia has the strongest GDP growth, lowest unemployment, and strongest AAA rated balance sheet in the OECD.
The Australian Bureau of Statistics yesterday released data that showed Australia produced a $2 billion-plus trade surplus for June, resulting in a $22.4 billion surplus for the 2011 financial year. This is the biggest surplus in raw terms over the 40 year period that records have been kept.
Economists have commented that the unusually buoyant trade conditions for Australia are a result of near-record commodity prices for much of the country's resources and help explain why the central bank can't rule out further interest rate rises.
The official interest rate in Australia currently stands at 4.75 percent, which is significantly higher than most other developed countries. This provides the Reserve Bank of Australia (RBA) with scope to cut official interest rates to stimulate the domestic economy. Most major western countries cannot cut interest rates dramatically as they are already near zero and governments cannot provide great wads of fiscal stimulus the way they did in the Global Financial Crisis (GFC) as they are deeply in debt.
Recent volatility in global markets is expected to result in the RBA putting off interest rate hikes indefinitely, with the possibility the next move in interest rates may be down. Some economists are even suggesting that the RBA may hold a special meeting next week to cut interest rates. This would be similar to what happened in 2008 during the GFC, when the RBA made a series of “emergency” rate cuts.
Any reduction in interest rates would provide a major boost to the struggling retail sector, which is suffering from weak discretionary spending and competition from online stores.
While it is impossible to pick the bottom of the market, there are a number of Australian companies that are attractively priced at current levels and have strong growth outlooks. For those investors with overweight cash holdings, now might be the time to consider dollar cost averaging into the market.
No one can ever pick the bottom of the market cycle and it always seems ‘darkest before the dawn’. It takes a great deal of courage to invest when shares are at their cheapest valuations. Rather than trying to time markets, a strategy of agreeing on a certain percentage of your portfolio always being maintained in shares, property and fixed interest and systematically rebalancing is a far superior strategy. This allows you to consistently buy more of an asset class when it is low and to reduce it when it is high. It takes the emotion out of the process.
We are committed to providing the maximum support and advice during difficult times and encourage you to discuss any concerns you may have with your adviser.
Make the most of life with a little advice
Real freedom in life comes from being able to do what you want to do, when you want to do it. That means making choices that suit you or your family, not your employer or your bank manager, or even your clients.
Choices like leaving work when you’re ready, not when you can finally afford it. Or paying off your mortgage sooner, so you can really enjoy your money. But how do you achieve this?
The short answer is by making the most of your money. That means knowing:
- how to save money - by minimising your loan interest or tax
- how to make money - by investing in shares, property, super, or something else
- how and when to borrow money
- how to protect everything you’ve saved so far and to safeguard your future.
Anyone can do it
It’s not about having a lot of money in the first place. You don’t need to be earning an executive salary. You don’t need to have won lotto either.
You might want to have plenty of money later on. Or you might just want enough to do the things you’ve always wanted to do.
It’s your life - and you can make the most of it with a little advice.
How does an adviser help you?
Our financial advisers are qualified professionals with a broad range of skills and experience. One of their key skills is problem-solving - looking for unique solutions for unique people.
You can achieve the maximum benefit from a financial adviser if you have a long term relationship with them, not unlike your relationship with your investments.
That’s because an adviser will be your guide through the inevitable changes ahead – changes in financial markets, in rules and regulations and even the changes in your life.
A good way to think about an adviser is to see them as your personal ‘GPS’. They will find the best way forward for you – which may not always be the quickest way – and help you avoid obstacles or heavy traffic, as well as a few ‘toll roads’.
The four steps to financial advice
Financial advice involves four simple steps.
The first step is to meet with you and your partner if you have one. It’s about getting to know you and understanding where you are at and what you want in life – in the short and longer term.
The second step is to look at your current financial situation. Your adviser needs to understand all of your earnings and outgoings, loans and debts and any investments or assets you may have.
The third step is where your adviser discusses strategies and options they think are suitable for you, given what you’ve told them about your current situation and future goals. This will be done as simply as possible because it’s important that you understand everything they are recommending.
The fourth step is to formalise the discussions and your adviser’s subsequent research and modelling by providing you with a plan. Your plan sets out your stated goals and the advice you’ve been given to help you achieve them. This is presented to you in a comprehensive document called a ‘Statement of Advice’.
Regular reviews
Of course, your plan can and will change over time. So your adviser will keep in touch with you and suggest a review – either where they see a need for changes based on what they see ahead, or what you tell them about changes in your life.
The stronger the relationship with your adviser, the more likely you’re able to make the most of your life.
Transition to Anything
We’ve talked about the benefits of a strategy called ‘Transition to Retirement’ or TTR, for some time now and more and more people are paying attention for a variety of compelling reasons. Some people still haven’t caught on, but we think we know why.
It’s probably because of the name - especially the last part, that ‘R’ word.
Anyone who’s in their 40’s for example, would hear ‘retirement’ and think, “Too early for me, thanks” and switch off. Even people who are in their 60’s might be less interested in what sounds like the end of their working life.
We should be calling the strategy ‘Transition of Retirement’ because the definition of retirement has changed in the past 20 years. The world of work has transformed dramatically, much of it due to the unstoppable march of technology. It means many more people can work from home or anywhere else for that matter. It also means they can choose to work hours outside the traditional ‘9 to 5’ and employers can offer more part-time or casual opportunities.
In addition to this shift, people are generally living longer, healthier lives than the pre-boomer generation and the idea of dropping out of work completely, is unthinkable. They may not need the financial benefits to the same degree as when they were younger, but other factors like the social interaction and mental stimulation remain important to them. For some, there is a financial imperative to continuing to work, even up to age 70 or beyond.
Transition to Anything
Given these changes and in recognition of the flexibility and choices people now have in their working lives, the strategy should probably be renamed TTA – Transition to Anything. Like anything financial, it comes down to individual situations – individual wealth, individual goals and individual choices.
Whatever we choose to call it, this strategy should be of interest to a broad range of age groups, for the reasons that follow.
If you’re now aged 55 or over and still working, you must speak to an adviser as soon as you can. People above 60 and working have possibly the most to gain from the Transition to Retirement strategy.
Where are you at?
If you’re 45+ and potentially at your peak earning capacity, it's a good time to look at how much - and how - you’re contributing to your super. You can’t directly take advantage of the TTR strategy yet, because you haven’t reached what’s called your ‘preservation age’.
However, you should be aiming to have a healthy balance by the time you reach this age, so planning ahead now is a smart move.
If you’re 50+ there’s still time to give your super a boost in the lead up to your preservation age – which is 55. This might mean selling an asset and contributing proceeds to your super, for example. You could also consider salary sacrificing to improve your super balance.
There are things to watch out for, like concessional and non-concessional limits on any super contributions you make, but you should act now and talk to us soon.
If you’re
55+ the TTR strategy is already open to you. This means you can now access your super and receive a regular income without having to ‘retire’ - or reduce the number of hours you work.
There are significant financial benefits and greater flexibility because you can:
- Boost your income - by receiving a retirement income stream from an allocated pension, as well as your normal salary
- Boost your super - by continuing to work and sacrificing some of your salary to super
- Reduce your hours, or change job responsibilities - without reducing your income
Or you can use a combination of these options. And, if your situation changes and provided you are still working, you can roll funds from your allocated pension fund back into super too.
You should talk to an adviser about your current situation and your goals for your working and broader life.
If you’re 60+ you get the best piece of news. There’s now no tax payable when you draw a pension from your super fund, even if you’re still working.
A TTR strategy can mean you’re able to retire earlier than you expected, if that’s what you want, or potentially retire with more super than you thought possible. This is because you can continue to contribute to your super at the concessional tax rate of 15% (concessional and non-concessional limits apply), while you withdraw a tax-free pension income from your super fund.
Talk to your adviser soon about how this can apply to your situation.