Volatility is part and parcel of investing so it's important to put it into perspective and look at the full picture when thinking about your wealth, rather than focus on day-to-day market swings.

 

If there was to be a single investing lesson that emerged from the events of the last two years, it is that we should learn to expect the unexpected.

 

And with that in mind we should acknowledge that volatility is part and parcel of investing.

 

There are several ways to measure volatility – the VIX index or as it is colloquially known the “index of fear” being perhaps the best empirical measure. But there is a simpler measure of market volatility that is much closer to home and that is when friends and family start calling to ask “what is happening to my super”. That is when market falls have got people’s attention.

 

And for the near term at least, we will probably continue to experience more market bumps and drops for a while. For those approaching or already in retirement, accepting that market volatility is here to stay could possibly induce a few sleepless nights, especially for those who keep an ever-watchful eye on their investment portfolios.

 

But while dramatic market losses can sting, it is important to keep a long-term perspective in order to participate in the recoveries that follow. Research shows that the average length of a bear market is 236 days while bull markets on average have lasted 852 days, leaving investors well compensated for the long-term risk they took on.¹

 

So a long term perspective is extremely important, but so too, is context.

 

Take a moment to pause and look at the big picture. If you only view your shares or superannuation portfolio balance in isolation to everything else, then recent market volatility will have been of concern with widespread impact across most equity and bond investment portfolios in the past few months. At the time of writing, the ASX/S&P300 is down around 6% while in the US the S&P500 index is hovering around the more eye-catching -17%.

 

But if you were to zoom out and include other aspects of your investment portfolio – dividend payments for example, or your property value, then the overall picture is a little rosier. Dividends are particularly noteworthy during this volatile time because unlike back in 2020 when many investors had to tighten their belts or draw down on capital because payouts had been vastly reduced, most companies are still paying out some form of dividend. In this situation, the income element of share portfolios is still delivering steady returns for most investors – a particularly valuable point for investors with self-managed super funds who commonly have a strong yield tilt in their portfolios.

 

Also, while rising interest rates are front and centre of everyone’s minds right now, for those who own a home or have an investment property, now is a good time to remember that the property values have enjoyed strong gains during the worst of the pandemic in the last two years, far outstripping the interest rate increase aspect of the equation. Further, while landlords might be lamenting interest rate rises, according to a recent Domain report, every state in Australia is also experiencing its sharpest rental price growth in 13 years, with most rental increases keeping pace with interest rate rises.

 

So at times like these, remember to look at the full picture when thinking about your wealth. Your portfolio in its entirety includes your superannuation, your portfolio outside of super including shares, property and fixed income and cash. Viewed in widescreen mode, it’s likely that you’re still in positive territory despite the pull back in share market values.

 

These can be challenging times because when volatility is spiking the emotional response is to want do something - anything. Which is when being clear about your long-term investment goals and having an asset allocation in line with your risk tolerance can be the best antidote and help you be disciplined and stay the course.

 

Contact us if you need help with your investments, or would like to find out more about investing.

 

 

Source: Vanguard

1 Vanguard

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

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Many parents and grandparents worry about how to help the children in their lives achieve financial independence. But the value of long-term investment can seem like a dry and complicated idea for kids to get their heads around.

In fact, many young people would like to know more about money, according to a Young People and Money survey by the Australian Securities and Investments Commission MoneySmart website. The survey found more than half of the 15-21-year-olds surveyed were interested in learning how to invest, different types of investments and possible risks and returns. What’s more, almost all those young people with at least one investment were interested enough to regularly check performance.

One way to introduce investment to children may be to begin a share portfolio on their behalf. The child can follow the progress of the companies they are investing in, understand how the market can fluctuate over the short- and long-term, as well as learn to deal with some of the paperwork required, such as filing tax returns.

How to begin

Setting up a share portfolio doesn’t need to be onerous. It’s possible to start with a minimum investment of around $500, using one of the online share trading platforms. Then you could consider topping it up every year or so with a further investment.

Deciding on which shares to buy comes down to the amount you have available to invest and perhaps your child’s interests.

If the initial investment is relatively small, an exchange traded fund (ETF) may be a useful way of accessing the hundreds of companies, bonds, commodity or theme the fund invests in, providing a more diversified portfolio.

ETFs are available in Australian and international shares; different sectors of the share market, such as mining; precious metals and commodities, such as gold; foreign and crypto currencies; and fixed interest investments, such as bonds. You can also invest in themes such as sustainability or market sectors such as video games that may appeal to young people.

Alternatively, buying shares in one company that your child strongly identifies with – like a popular pizza delivery firm, a surf brand or a toy manufacturer – may help keep them interested and excited about market movements.

Should you buy in your name or theirs

Since children cannot own shares in their own right, you may consider buying in your name with a plan to transfer the portfolio to the child when they turn 18. But be aware that you will pay capital gains tax (CGT) on any profits made and the investments will be assessable in your annual income tax return.

On the other hand, you could buy the shares in trust for the child. While you are considered the legal owner the child is the beneficial owner. That way, when the child turns 18, you can transfer the shares to their name without paying CGT. Your online trading platform will have easy steps to follow to set up an account in trust for a minor.

There is also some annual tax paperwork to consider.

You can apply for a tax file number (TFN) for the child and quote that when buying the shares. If you don't quote a TFN, pay as you go tax will be withheld at 47 per cent from the unfranked amount of the dividend income. Be aware that if the shares earn more than $416 in a year, you will need to lodge a tax return for the child.

Taking it slowly

If you are not quite ready to invest cash but are keen to help your children to understand share investment, you could consider playing it safe by playing a sharemarket game, run by the ASX.

Participants invest $50,000 in virtual cash in the S&P/ASX200, a range of ETFs and a selection of companies. You can take part as an individual or a group and there is a chance to win prizes.

Another option, for children able to work independently, is the federal government money managed website. This is pitched at teens and provides a thorough grounding in savings and investment principles.

Call us if you would like to discuss how best to establish a share portfolio for your child, grandchild or a special young person in your life.

Teaching good financial habits, such as saving and budgeting, is one of the best ways to prepare children to have a secure financial future. Helping kids establish sound money management skills and strong financial acumen is important, regardless of wealth level.

Younger children (under age 11)

A great way to begin to teach younger children about money is to explain its value and its function in the world. Kids often focus on rewards-based systems, where they earn a reward for good behaviour or academic achievement. Use this time to teach them how to earn money as a reward and divide it into 3 categories: spend, save, and give. For example, spending may be related to buying a fun treat or toy, saving could be taught as a way to buy something they really want in the future, and giving is how you help those in need.

Activity: "Money jars"

• Set up 3 separate containers for "bank accounts" and label them Spending, Saving, and Giving.
• Each week, offer opportunities to earn money by using real-life experiences, such as listening well, completing homework early, or doing simple chores.
• At the end of the week, count how much money they've earned in each category.

Tip: Sometimes when sharing the concept of saving with your child, it can be helpful to explain you're "paying yourself for something fun in the future" and relating it back to an age-appropriate concept they can understand. You can make tweaks to this activity along the way. For example, if your child puts extra money into their Saving jar, you could provide a few additional dollars to help them understand compounding interest—how saving money can help them earn more over time. If they receive money as a gift for a holiday or celebration, bring out the money jars for a refresher. Repetition and reinforcement become important in learning any discipline, especially money management skills.

 

Preteens and young adults

Parents often associate the tweens and teens as the years their kids desire more independence and more options. In this case, tying money management and financial literacy to something relevant in their lives can help keep them engaged. For example, many young people are interested in gaming, so try to relate investing to playing a game. Before they start the investing game, provide them with an overview of the concepts of shares, bonds, and cash, and how they operate differently, like different players in a game. The different players in the game all act together to form an investment strategy. Depending on a child's age, engagement, and appetite for these discussions, consider introducing the concept of building model portfolios. Review model portfolios that show different asset allocations, and then have each family member choose a portfolio. Once a family member chooses a portfolio, discuss what stood out to them about the portfolio. This will help reinforce the importance of asset allocation and diversification.

 

Activity: Investment simulators

• Google the phrase investment simulators; many are available online.
• These simulators allow you to invest in different securities and monitor their performance over time.
• Have frequent conversations with your child about their portfolio's performance. How would they feel if those were real funds in the market they "lost" or "gained"? This can help reinforce the concept of risk and reward in investing.

 

University graduates and beyond

At this stage, they may be ready to digest more advanced topics. Discuss the importance of goals-based investing by asking them to think about the next big purchase they want to make—are they saving for a car, a down payment for a home, or even setting aside money for future retirement? Ask: What is their time frame for that investment? When do they want to reach that goal? This helps teach the importance of time horizon as it relates to investing; the longer a person has to save and invest, the greater the likelihood for success in reaching their goals. Depending on their current situation, they may also have student loans to pay back. Budgeting may become a critical topic at this time, and sitting down with them to create that budget can be helpful. This is another important component of financial literacy and money management, and attaching it to an important life stage can make it all the more relevant.

 

Summary:

It's never too early or late to start talking about money with your children — start as soon as you are comfortable to and make learning as relevant to their age and life stage as possible.

If you'd like more investment tips and guides, call us today.

Higher interest rates are a worry for people with home loans and borrowers generally. But they are good news for older Australians who depend on income from bank deposits and young people trying to save for a deposit on their first home.

Rising interest rates are also a sign of a growing economy, which creates jobs and provides the income people need to pay the mortgage and other bills. By lifting interest rates, the Reserve Bank hopes to keep a lid on inflation and rising prices. Yes, it’s complicated.

 

How high will rates go?

In early May, the Reserve Bank lifted the official cash rate from its historic low of 0.1 per cent to a still low 0.35 per cent. The reason the cash rate is watched so closely is that it flows through to mortgages and other lending rates in the economy.

To tackle the rising cost of living, the Reserve Bank expects to lift the cash rate further, to around 2.5 per cent.ⁱ Inflation is currently running at 5.1 per cent and while unemployment is below 4 per cent, annual wages growth of 2.4 per cent is not keeping pace with rising prices.ⁱⁱ

So what does this mean for household budgets?

 

Mortgage rates on the rise

The people most affected by rising rates are likely those who recently bought their first home. In a double whammy, after several years of booming house prices the size of the average mortgage has also increased.

According to CoreLogic, even though price growth is slowing, the median home value rose 16.7 per cent nationally in the year to April to $748,635. Prices are higher in Sydney, Canberra and Melbourne.

The table below shows the impact a rate rise of 1-2 per cent rise would have on monthly mortgage repayments in Australia’s capital cities. For example, a 1 per cent rise would add $486 a month to repayments on the median new home loan in Sydney, and an additional $1,006 a month for a 2 per cent rise.

How much could mortgage repayments rise for a new owner occupier?

						Monthly mortgage repayments
	Median value		Loan amount (80% LVR)	Current (*)	Increase with 1% rise		Increase with 2% rise
Sydney	$1,127,723		$902,178	$3,560	$486		$1,006
Melbourne	$806,144		$644,915	$2,545	$348		$719
Brisbane	$770,808		$616,646	$2,433	$332		$687
Adelaide	$619,819		$495,855	$1,957	$267		$553
Perth	$552,128		$441,702	$1,743	$238		$492
Hobart	$735,425		$588,340	$2,322	$317		$656
Darwin	$501,182		$400,945	$1,582	$216		$447
Canberra	$947,309		$757,847	$2,990	$408		$845

Source: CoreLogic. ^*Assumes current average variable rate of 2.49%, monthly P&I repayments over 30 years.

The big four banks have already passed on the Reserve Bank’s 0.25 per cent increase in the cash rate in full to their standard variable mortgage rates which range from 4.6 to 4.8 per cent. The lowest standard variable rates from smaller lenders are below 2 per cent.ⁱⁱⁱ

Still, it’s believed most homeowners should be able to absorb a 2 per cent rise in their repayments.

The financial regulator, APRA now insists all lenders apply three percentage points on top of their headline borrowing rate, as a stress test on the amount you can borrow (up from 2.5 per cent prior to October 2021).

But with prices increasing for food, fuel, childcare and other basics, budgets are tight, and households may need to cut back non-essential spending or increase their hours of work.

Before you take drastic measures, it’s worth looking at some painless ways to improve your household budget.

 

Rate rise action plan

Whatever your circumstances, the shift from a low interest rate, low inflation economic environment to rising rates and inflation is a signal that it’s time to revisit some of your financial assumptions.

The first thing you need to do is update your budget to factor in higher loan repayments and the rising cost of essential items such as food, fuel, power, childcare, health and insurances. You could then look for easy cuts from your non-essential spending on things like regular takeaways, eating out and streaming services.

If you have a home loan, then potentially the biggest saving involves absolutely no sacrifice to your lifestyle. Simply pick up the phone and ask your lender to give you a better deal. Banks all offer lower rates to new customers than they do to existing customers, but you can often negotiate a lower rate simply by asking.

The big four banks’ discount rates are more than 2 per cent below their current headline rates, a potential saving of tens of thousands over dollars over the life of your loan. If your bank won’t budge, then consider switching lenders. Just the mention of switching can often land you a better rate with your existing lender.

 

 

The challenge for savers

Older Australians and young savers face a tougher task. Bank savings rates are generally non-negotiable, but it does pay to shop around.

Banks have been slower to pass on the full increase in the cash rate to savings accounts. By mid-May only three of the big four had increased rates for savings accounts. Several lenders also announced increased rates for term deposits of up to 0.6 per cent.^iv

High interest rates traditionally put a dampener on returns from shares and property, so commentators are warning investors to prepare for lower returns from these investments and superannuation.

That makes it more important than ever to ensure you are getting the best return on your savings and not paying more than necessary on your loans. If you would like to discuss a budgeting and savings plan, give us a call.

 

i https://www.rba.gov.au/speeches/2022/sp-gov-2022-05-03-q-and-a-transcript.html

ii https://www.abs.gov.au/

iii https://www.canstar.com.au/home-loans/banks-respond-cash-rate-increase/

iv https://www.ratecity.com.au/term-deposits/news/banks-increased-term-deposit-interest-rates

At first glance, investing can seem daunting. So much complex information and so little time to absorb and act on it when you’re busy getting on with life. It’s little wonder that so many of us put it in the too hard basket for longer than is good for our wealth.

The good news is that investing doesn’t need to be hard. The basic rules of investing are surprisingly simple and timeless.

 

Set your objectives

“Before beginning a hunt, it is wise to ask someone what you are looking for before you begin looking for it.” Winnie the Pooh was on the money with this wise observation. If you want to reach your personal and financial objectives, first you must define what they are.

Ask yourself where you want to be in 5, 10, 20 years’ time. Perhaps in a new home, kids settled into good schools, with your money working hard for retirement at 60. You may want to start a business or spend a year in Provence with the family. Be specific, put some dollar figures beside each goal and then start planning how you will get there. We can assist you in your goal setting and in mapping out a strategy to achieve your goals.

 

The genius of compounding

Albert Einstein said compound interest was man’s most powerful discovery, but it doesn’t take a genius to put it into practice. Compound interest means you not only receive interest on the money you invest but interest on your interest. Over time, this simple concept becomes a powerful wealth creation tool.

Say you invest $10,000 today at 5 per cent; with all interest reinvested, it will grow to $27,126 in 20 years. Now look what happens if you spend your interest payments, earning what is called simple interest. Your $10,000 will earn $500 a year and will be worth just $20,000 in 20 years.

That’s the genius of Australia’s superannuation system which locks away your savings and all investment earnings until you retire. Even if you’re on a modest salary, time allows compound interest to weave its magic.

 

Take your time

We all know we should take an active interest in our super and other investments, but is there such a thing as too much interest? Yes, according to a study by US fund manager, Fidelity Investments. A review of clients over a decade found the best performing accounts were for investors who were dead! Next best were investors who had forgotten they had accounts. The thing both groups had in common was that they were not actively trying to time the market.ⁱ

A landmark study of 66,000 investors by the University of California reached a similar conclusion. The most active investors underperformed the overall sharemarket return by 6.5 per cent a year, leading the researchers to conclude trading is hazardous to your wealth.ⁱⁱ

The lesson is not to do nothing. Instead, be patient and stick to your plan.

 

Reduce risk with diversification

As sayings go, ‘don’t put all your eggs in one basket’ is an oldie but a goodie. Shares, property, bonds and cash all have good years and bad. Even though shares and property provide the best growth in the long-term, prices can fall or move sideways for years at a time and you don’t want to be forced to sell in a downturn because you need the cash.

The way to reduce the risk of crystallising losses or losing everything on one dud investment is to diversify across and within asset classes. The right mix will depend on the timing of your goals and your risk tolerance. Think about investments that provide capital growth in the long run and income when you need it – from bank deposits, bonds, share dividends or rental income from investment property. And don’t forget to build a cash buffer for emergencies.

 

Follow the cycle, not the herd

Markets tend to rise above true value when investors join the stampede to get in quick for fear of missing out. Prices also tend to fall too far when a wave of panic selling grips the market and everyone tries to sell at once.

Long term asset class returns

Source: AMP

Following the herd is a risky strategy, but you can profit from keeping an eye on the herd’s behaviour; buying when investors are fearful and selling when they’re greedy. When you take a long-term perspective, and have clear investment goals, it’s easier to sit back and watch market cycles unfold. Then when you see an opportunity to buy quality assets at a low price, or sell an investment that no longer meets your objectives at a high one, you can pounce.

As the chart above shows, investors who panicked during the 2007-08 financial crisis and switched out of shares into cash and bonds would have done better to sit tight and ride out the volatility. And investors who took the opportunity to top up their holdings when the market was gripped by pessimism would have done even better.

Successful investing doesn’t need to be over-complicated. Give us a call to help map out a plan and let time, diversification, compound interest and our knowledge of the investment landscape do the rest.

i ‘Fidelity’s best investors are dead’, The Conservative Income Investor, 26 May 2015, http://theconservativeincomeinvestor.com/2015/05/26/fidelitys-best-investors-are-dead/

ii ‘Trading is hazardous to your wealth’ by Brad Barber and Terrance Odean, Journal of Finance, University of California Berkeley, 2 April 2000, http://faculty.haas.berkeley.edu/odean/papers%20current%20versions/individual_investor_performance_final.pdf