02 Newsletter – Winter 2021

Mentor Newsletter Winter
How to make a financial plan
Learning the lessons of 2020: An extraordinary year

When the COVID-19 pandemic hit Australia in March 2020 it brought immediate and severe financial gloom. Shares plunged 37% and the economy slumped to its first recession in nearly 30 years. However against that backdrop, 2020 turned out far better for diversified investors than initially feared.

The development of vaccines became the good news of the second half of 2020 and offered hope of a return to life as normal. The anticipation of economic recovery, paired with ultra-low interest rates, drove a rebound in many investment markets and we did see a strong growth rebound in the second half of the year.

In 2021, we expect to see solid returns as markets shift from pandemic winners to cyclical investments, but the gains will likely be slower than seen coming out of the March pandemic lows of 2021.

For investors, 2020 was better than feared

The list of negatives brought about by the COVID-19 pandemic cannot be ignored. Unemployment surged, with severe disruption to industries like airlines, retail and the office sector. Globalisation took a further blow and tensions rose with China. Public debt skyrocketed. However there were a number of key positives.

The massive fiscal support provided by governments shielded businesses from collapse and saved jobs and incomes. Debt forbearance schemes headed off defaults, while plunging interest rates helped borrowers service loans.

Economies began to reopen after social distancing helped contain the virus, with nations like Australia, New Zealand and Asian nations doing better on this front than the US and Europe.

The November 2020 election of US President Joe Biden offered the prospect of less global policy uncertainty and reduced international tensions in 2021 and beyond.

Disruption caused by the pandemic massively accelerated a number of broader productivity gains. These include the faster take up of technology like virtual meetings, e-commerce and use of the cloud to cut costs and boost output for business.

As a result, the pandemic has shown it is possible for people to work from home and enjoy a more balanced lifestyle – increasingly in regional areas where property prices are generally more affordable.

The benefits of science - typified by the rapid development of vaccines - has also served as a rebuke to populist politicians and offers hope for better management of issues like climate change in the future.

The lessons of 2020

  1. Timing market moves is hard – getting out at the top of the share market in February 2020 was hard, but getting onboard again for the rally in March last year was even harder.
  2. Don’t fight the central banks – while they could not prevent the magnitude of the fall in share markets, their massive money easing was a key driver of the recovery.
  3. Depressions can be avoided – 2020 showed that a large, rapid, well-targeted economic policy response can protect an economy from a significant shock and enable it to rebound quickly.
  1. Investment valuations need to be assessed relative to interest rates – low rates make shares relatively attractive.
  2. Turn down the noise – stick to a long-term investment strategy.

Reasons for optimism through the remainder of 2021

Recent bumps in the road of vaccine roll out has not stifled the overall goal of achieving herd immunity in many developed countries by the second half of this year. Fiscal stimulus and easy monetary policy continue to work through the system, with even more fiscal stimulus being injected into the US economy. Continuing high saving rates indicate significant spending potential as confidence improves. Low inflation, and hence low interest rates, mean we are still in the “sweet spot” of the investment cycle.

After having run up so hard since early November 2020, shares are still vulnerable to a short-term pull back. We are likely to see a continuing shift away from investments that benefitted from the pandemic and lockdowns (technology, health care stocks and bonds) to investments that benefit from recovery (resources, industrials, tourism stocks and financials).

We expect global shares to return around 8% this year, but we anticipate there may be a rotation away from tech-heavy US shares to more cyclical markets in Europe, Japan and emerging countries.

Australian shares are likely to be relative outperformers returning around 12%.

Australian home prices are likely to rise 10-15%, boosted by record low mortgage rates and government incentives, but the pause in immigration and weak rental markets will likely weigh on inner city areas, and units in Melbourne and Sydney.

Nine things for investors to remember

  1. Harness the power of compound interest – under the principles of the ‘Rule of 72”, it takes
  2. 144 years to double an asset’s value if it returns 0.5% per annum, but only 14 years if the asset returns 5% per annum.
  3. Don’t get thrown off by the cycle – investors can often abandon a well thought out strategy at the wrong time during falling markets – as some may have done in March last year.
  4. Invest for the long term – get a plan that suits your wealth, age and risk tolerance and stick to it.
  5. Diversify – don’t put all your eggs in one basket.
  6. Turn down the noise. As discussed earlier.
  7. Buy low, sell high – the cheaper you buy an asset, the higher its prospective return, and vice versa.
  8. Beware the crowd at extremes. Don’t get sucked into the euphoria or ‘doom and gloom’ around an asset.
  9. Focus on investments that you understand. It’s probably best to avoid companies that have complex and hard to understand valuations or business models.
  10. Accept it’s a low nominal return world. Historically, when inflation is around 1.5%, the average return of 7% for super funds begins to look pretty good.

Source: AMP Capital

Banner - Why is Insurance Important
Why Insurance is Important
Why insurance is important: real benefits for you and your family

Insurance plays a central role in providing financial security for you and your family when it’s needed most.

You insure your car and your home. But nothing is more important than your life and your ability to make a living. So it makes good sense to insure your greatest asset – you!

As we move through life, find a partner, raise a family, and maybe start a business, the importance of insurance in a long term plan increases. That’s because insurance is all about providing a financial safety net that helps you to take care of yourself and those you love when you need it the most.

5 reasons why insurance matters

Why is insurance important? Let’s look at five key reasons.

1. Protection for you and your family

Your family depend on your financial support to enjoy a decent standard of living, which is why insurance is especially important once you start a family. It means the people who matter most in your life may be protected from financial hardship if the unexpected happens.

2. Reduce stress during difficult times

None of us know what lies around the corner. Unforeseen tragedies such as illness, injury or permanent disability, even death – can leave you and your family facing tremendous emotional stress, and even grief. With insurance in place, you or your family’s financial stress will be reduced, and you can focus on recovery and rebuilding your lives.

3. To enjoy financial security

No matter what your financial position is today, an unexpected event can see it all unravel very quickly. Insurance offers a payout so that if there is an unforeseen event you and your family can hopefully continue to move forward.

4. Peace of mind

No amount of money can replace your health and wellbeing – or the role you play in your family. But you can at least have peace of mind knowing that if anything happened to you, your family’s financial security is assisted by insurance.

5. A legacy to leave behind

A lump sum death benefit can secure the financial future for your children and protect their standard of living.

Case Study: Tony and Karen – Young Family

The following scenario is illustrative only to demonstrate the importance of insurance and is not based on an actual event.

Tony (34) and Karen (33) recently upgraded to a new home to allow their twin boys Nicholas and Rocky (aged 4) more room to play. This also meant taking on a bigger mortgage on one income, as Karen is a homemaker. To protect the family, Tony decided to take out Income Protection Insurance.

During a simple Saturday afternoon game of backyard cricket with the twins, Tony tripped and broke his leg. What appeared to be a simple break was more complicated than initially realised and Tony required several reconstructive operations followed by physiotherapy.

It meant Tony was out of the workforce for over six months, and while his employer was sympathetic, Tony only had two weeks of sick leave owing to him.

Thankfully, Tony’s Income Protection insurance meant he received a stream of payments equal to 80% of his regular wage (including super). The couple needed to tighten their belts a little until Tony was back on his feet but they were able to keep up with their home loan repayments, which would not otherwise have been possible without their Income Protection cover.

Source: BT

Banner - Supporting your kids without sacrificing your own retirement
Supporting your kids without sacrificing your own retirement
Supporting your kids without sacrificing your own retirement

In the past, wealth was often passed on through an inheritance. But with our longer lifespans, and the higher cost of living (especially housing), the desire to help our kids while we’re alive and well is increasing.

If your children are young, you may have twenty or thirty years to save and invest on their behalf, while also saving for your own retirement. If this is the case, it pays to put a strategy in place early on.

For those nearing retirement age, or already retired, you may have a large lump sum you’d like to gift to one or more of your kids. Giving money is a wonderful thing to do, but it’s not always simple. It can have tax implications, and may affect your income support payments from Centrelink. On the other hand, gifting may enable you to increase your government pension payments or benefits, if done right.

So how can you help your children without compromising your own financial security and comfort in retirement?

Ensure you’re on track for a comfortable retirement

Before you give away your wealth, it’s important to remember that you need to fund your own retirement for many years.

Australians are living longer than ever, with more years spent in retirement. If you were to retire at age 60, and live to 90, that’s one whole third of your lifetime spent in retirement.

As well as wanting to enjoy your retirement through travel or leisure activities, older age often comes with more medical and health expenses.

So it’s really important to make sure you have enough funds saved and invested to get you through. This might sound selfish, but in reality, it means you won’t become a financial burden on your children later in life.

How much will you need to retire, and, how much can you afford to give away now? It’s always best to seek professional financial advice to ensure you have enough put away to see you through. A financial planner will be able to give you tailored advice about the impact of your giving on your retirement plans.

What am I giving money for?

Next, consider what it is you’d like to help your son or daughter with. Are the funds for a property deposit? To pay for a wedding? Education expenses? This might offer some clue as to the right amount of support.

Following on from this, consider how many children you need to help. If you gift funds to one child, do you need to match that for others when the time comes? If you have several children, but some are doing better than others, do you need to help them all equally?

Balancing the family dynamics around money is important, as it can be a sensitive issue. The last thing you want to do is cause a rift in the family over some perceived inequality. If you do have several children you need to help, keep this in mind, as it will limit how much help you can offer each child.

Giving an incentive

Often the best way to support children financially is to match their own contribution. Rather than purchasing something outright, offer to base your assistance on their own savings. This also means they have a vested interest in the item, which means they’re likely to treat it more carefully.

How should I give money?

If you receive the Age Pension or other benefits from Centrelink, there is a limit to how much you can give away. The gifting rules allow you to give $10,000 over one financial year, or $30,000 over five years. You’ll need to let Centrelink know when you’re planning to give a gift of this type.

If you’re considering giving your children a substantial amount of money, it’s worth taking the advice of Dr Brett Davies at Legal Consolidated. He recommends always giving funds as a loan ‘payable on demand’, not as a gift. Creating a written loan agreement helps keep the money in your family, even if things don’t go to plan.

Consider this. You gift your daughter $400,000 to buy a house. Five years later, she divorces from her husband and the house is the only asset of the marriage. The Family Court awards half of the value of the house to the husband, including $200,000 of your donated funds.

If you instead had a valid loan agreement in place, the loan must be paid out before the assets are distributed. Hence, the $400,000 comes back to you, to do with as you please.

Always seek professional legal advice when drawing up a loan agreement to ensure that it’s compliant with the law, properly worded and correctly executed.

Get professional advice

If you’re nearing retirement and looking to give up work, downsize your home and/or gift funds to your children, it’s important to seek financial advice.

A financial planning professional will be able to give you tailored advice about the impact of your planned giving. They can also help you work out a strategy for meeting multiple goals, such as giving to several children while funding your own comfortable retirement.

Source: Money and Life

Changing the mindset on your super
Changing the mindset on your super
Changing the mindset on your super: Are you managing your retirement income well?

With the superannuation guarantee rising to 10 per cent from July 2021, there’s never been a better time to take an interest in your retirement income.

Many people consider superannuation to be a ‘set and forget’ investment. They sign up for account when they get their first job and don’t look at it again for years. Now if super is a long-term investment, what’s wrong with that you might ask?

The trouble is, most Australians don’t have nearly enough super saved to put them on track for a comfortable retirement. In fact, we’re falling hundreds of thousands of dollars short by retirement age.

Canstar research shows that women in their 60s face the biggest super gap of more than $249,000, on average, while men end up $216,000 short. Canstar found the super gap starts early on in life.

30-year old men and women would need to have around $54,000 in their super account today, but on average, they are currently between $26,000 and $31,000 short of that balance.

Changing your retirement income

The good news is that by actively engaging with your superannuation, you can make a real difference to your retirement income. With super making up 10 per cent of your salary from July 2021, it’s worth paying some attention.

For those just starting out in the workforce, understandably superannuation is not your biggest priority, but a little attention now will pay off in years to come.

Five simple ways to engage with your super

So what can you do now, to make a difference come retirement? No matter your age, here are five simple things you can do once a year to stay on top of your super.

  1. Look over your account statement. It’s usually issued around July or December. Take a close look at the change in value of your super, as well as the annual, five and 10-year returns, to see how your fund is tracking. Read any commentary that comes with your statement, so you understand what contributed to your result for the year. Also check the fees you’ve paid to see if you’re happy with them.
  2. Even better, get access to your super account online. Make sure to login at least once a year and review your investments. If your super is going into the default investment option, consider whether it’s the right choice for your age and stage of life.
  1. Review your insurance cover to see if it’s appropriate for you. If you’re relying on the insurance as your primary cover, make sure you’re aware of the terms and limitations of your policy.
  2. Check that your employer contributions are actually being paid. Don’t assume that the figure on your payslip means the money is in your fund.
  3. Consider whether you need to make any extra contributions to your super to reach your retirement goals. Use a super calculator like this one from MoneySmart to work out whether you’re on track.

Investing for your life stage

As your risk profile changes over your lifetime, it makes sense to review your investment strategy at certain intervals.

Younger people, who are just starting to build up their superannuation, can afford to choose a higher-growth investment fund, as they have more time to weather the market ups and downs. There will be many investment cycles in your lifetime, so don’t be disheartened with periods of negative returns.

For those nearing retirement, it is important to consider not only your tolerance to risk, but how long you need your super too last.

Beware of going too conservative at retirement as your super still needs to last your remaining lifetime, which for someone aged 65 could be another 20 years. Consider different pools of superannuation money, such as one that pays your income and another that is invested for the long term.

Whatever you do, avoid “chasing returns” by switching to the best performing option every year.

Though everyone should keep an eye on their investment strategy, beware of making changes too often. Pick an investment option you’re comfortable with and stick to it.

When to get financial advice

Ultimately, if you want to be sure you’re on track to meet your retirement goals, you should seek professional financial advice. A financial planning professional can help you tailor an investment strategy to your individual needs, and advise you on how to transition to retirement.

If you’re nearing retirement and are uncertain about how you should structure your superannuation savings, it’s really important seek advice, as mistakes can be costly.

Source: FPA