Being actively involved in how and where your super is invested, could make a real difference to your retirement savings over the long-term.

If you are considering going down this route, there are some factors to think about such as your retirement goals, how long you have until you retire and the amount of risk you’re comfortable taking on.

For instance, if you’re close to retiring, you may want to avoid putting your super somewhere that’s too risky. Riskier investments tend to experience more ups and downs so time may help to ride them out.

This article considers four examples of investment strategies for your super.

The importance of diversification

Before we discuss the various investment strategies, it’s important to highlight the significance of diversification. Like any type of investment, spreading your super across different types of investment options, can help to build a strong portfolio and manage risk.

Why?

Because if you were to invest all of your super into one asset class such as property, your investment may suffer a loss if the property market was to fall in value. However, if you spread your money across multiple assets, you may have a different result.

Investment strategy type 1: Growth

If you don’t think you’ll be accessing your super for at least 10 years or more, a growth strategy may work for you as a longer timeframe may help an investment portfolio withstand volatility while aiming for returns.

A growth strategy that follows a higher risk, higher return approach tends to have a larger focus on assets that are exposed to capital appreciation. That is, investing in assets which are expected to grow at a higher rate than the industry or overall market.

For instance, this may involve an investment of around 70-85 per cent in shares or property with the rest in fixed interest and cash-based investments.

Historically, over any 20-year period, a growth strategy has delivered better returns than more conservative portfolios which would mainly be invested in fixed interest and cash. However, over a short-term period, you may experience significant losses as a result of market volatility.

Another key benefit of a growth strategy is that by making greater returns on your investment, your savings are more likely to keep up with the rising cost of living. This is arguably important because over time inflation may reduce the value of your retirement savings, which could make it difficult to maintain your standard of living when you’re retired.
Investment strategies for your super

Investment strategy type 2: Balanced

Similar to a growth strategy, if you aren’t planning to access your super anytime soon, opting for a balanced investment portfolio may be another option.

This strategy is aimed at balancing risk and return so your portfolio has enough risk to provide reasonable returns, but not enough to cause significant losses.

A balanced strategy typically involves investing around 60-70 per cent in shares or property, with the rest in fixed interest and cash-based investments.

Investment strategy type 3: Conservative

You may be considering how you could protect your capital if you want to access your super within 3-5 years.

A safe or conservative strategy follows a lower risk, lower return approach so it’s really about preserving the value of your investment portfolio. While there may be less risk of losing money, a downside could be that your returns may not
keep up with inflation.

For example, this could involve investing around 20-30 per cent of your super in shares and property, with the rest in fixed interest and cash-based investments.

Investment strategy type 4: Ethical and sustainable

You may choose not to invest in certain companies based on ethical grounds. For example, taking a stance against investing in firearms. This approach is called ethical or socially responsible investing.

There is also sustainable investing which goes beyond incorporating just ethical and social factors. That is, it approaches investing from an environmental and governance lens too. Some super funds now offer this, so if these factors are important to you, speak to your super fund for more details.

If you’re a self managed super fund (SMSF) trustee, there are a range of sustainable managed funds which you can tap into.

Review your investment approach

You may want to review your current investment approach with your super fund or SMSF to consider how it aligns with your goals and risk comfort.

For example, if you are looking to take an active role by directly investing your super in shares, exchange traded funds and managed funds, there are super products and platforms which enable you to do this.

Alternatively, a SMSF is an option that enables you to have more control over how your super is invested with the added bonus of being able to access more investment options such as direct property and commodities. You also have the ability to borrow within your super fund for investment. There are a
number of administration requirements however, as well as legislative requirements to adhere to.

You may want to consider speaking to a financial expert when determining which super product may be best for you.

This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 22 May 2019.

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This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. It does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. BT cannot give tax advice. Any tax considerations outlined in this article are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications of investing in property, shares or superannuation can impact individual situations differently and you should seek specific advice from a registered tax agent or registered tax (financial adviser).

Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation. The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis. There will be tax consequences if you breach these caps. For more detail, speak with a financial adviser or visit the ATO website.

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Concentration risk is the increase in investment risk that comes about from not sufficiently diversifying your portfolio. In other words, too much money is concentrated in too few assets, sectors or geographical markets.

This can happen:

• Intentionally, because you have a strong belief that a particular share or sector, such as resources, banks or property, is likely to outperform in the future.
• Unintentionally, through asset performance. One or two shares deliver spectacular gains, making the entire portfolio more sensitive to moves in just a couple of assets. Or maybe shares as a whole enjoy a period of strong growth. Even though you hold a large number of different shares, the increased exposure to one asset class increases the risk to your portfolio.
• Accidentally, through poor asset selection. Nine out of the ten top companies that make up the MSCI World Index also appear on the top ten list of the main US index, the S&P 500. Investing in two funds, one that tracks the world market and one that tracks the US market won’t deliver the level of diversification you might expect.

Managing your risk

The solution to concentration risk is our old friend, diversification.

• Appreciate the importance of asset allocation, the art of spreading your money across the main asset classes of shares, property, fixed interest and cash. Ensure your asset allocation matches your tolerance to investment risk.
• Diversify within each asset class. Holding the big four banks is not a diversified share portfolio. If property is your thing, buying four one-bedroom apartments in the same building, or even in the same area, creates a huge concentration risk.
• Rebalance your portfolio to keep it broadly in line with your ideal asset allocation. This may create a tax liability, but often it’s better to pay some tax than to carry too high a level of concentration risk.
• Understand each investment and its role in your portfolio. Does share fund A hold similar shares as share fund B? Do they both have the same strategy?
• Get a professional opinion. Even if you are confident in making your own investment decisions it’s wise to run them by a licensed adviser.

It’s surprisingly common for investors to develop an emotional attachment to particular shares or properties they own. Concentration risk can also increase over time due to lack of attention. Your financial planner will assess your portfolio for hidden concentration risk and help you achieve a better balance of investments.

For more information about managing your investments, contact our office on (02) 4926 2300 or email success@leenanetempleton.com.au

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The foundations of risk and return – Risk is integral to investing. This can be a frightening thought, but risk shouldn’t necessarily be feared, as without it there is less opportunity for reward. Quite simply, the higher the return you want from your investments over a particular period, the more short-term volatility (or risk) you have to accept in the value of your investments. Granted, if you’re happy to receive the bank deposit rate, you can put all your money in the bank, safe in the knowledge that the account balance will rise a small amount every day. But if you want higher returns, you’ll have to take on more risk and consider other investments, such as shares, fixed income, commodities and property.

Accepting short-term volatility for higher returns

Why do some investments offer higher returns than bank deposits? Each investment has different characteristics and offers varying potential levels of return. For example, a share’s return over a particular period is uncertain as the company’s profits are unpredictable, therefore share owners require a greater return than they would accept from bank deposits. What share investors are implicitly saying is “I want a higher return, but understand that I have to accept volatility in returns over the short term”.

Looking at risk from a longer-term perspective

Risk is the possibility or probability of loss. But if you’re talking about one of those frequent falls in a share price on a particular day, is that really an important loss? Firstly, it’s only a loss if you sell the investment. Secondly, most of the time these ’losses‘ are temporary and prices soon bounce back; this is the usual volatility of the stock market. The reason this is important is that the financial industry has defined an asset’s risk as the extent to which its price fluctuates; in other words, risk is the likelihood of an asset not achieving its long-term expected return over a short period.

Perhaps the risk that you should really care about is the possibility of an asset not achieving its expected return over the long term, rather than over the short term. In the case of equity share, such a situation might arise if the company in question goes out of business. So important risk relates to permanent loss of capital, not day-to-day losses of which the vast majority are temporary.

Instead of thinking of volatility as a risk (and therefore something to be concerned about), think of it as the cost of the longer-term return. And, if you’re able to ignore the fluctuations in the value of your investments from day-to-day and month-to-month, it’s a cost you won’t notice.

Diversification is a fundamental principle of investing

Avoiding permanent loss of capital requires careful analysis of the investment in question. But, if a company does go out of business, you can reduce the impact by having diversified your portfolio across a number of companies and even asset classes. 

For example, a simple multi-asset portfolio could include shares, government bonds, corporate bonds and cash. Given each asset class has its own expected return, they can be combined in different ways to target a particular return. If we assume that bank deposit rates are 0 per cent, the expected return from bonds is 5 per cent, and that from shares is 10 per cent; to aim for a return of 5 per cent, you can either invest the entire portfolio in bonds, or split the portfolio 50/50 between shares and bank deposits (or one of many other possible combinations).

Everyone will have a different attitude to risk and, therefore, the returns they require. By adjusting your combination of investments you can control the level of risk and affect your potential returns. This is known as asset allocation and is essential for effective portfolio management.

Source: Aberdeen-Asset

Call (02) 4926 2300 or email us here at

Leenane Templeton.

Speak to our financial planners to find out more about your investment options and the foundations of risk and return today.

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You have heard us talk about investment asset allocation or diversification, but we thought it might be a good idea to expand on that explanation to show you how it affects your investment portfolio.

You already know that asset allocation is spreading the money in your portfolio over a mix of the different investment types available, but what is the right mix and does “one size fit all?”

As with anything personal, your own financial portfolio must suit your specific needs – both now and in the future. So, with each of your objectives and timeframes in mind, the most important aspect to look at when determining your investment spread is risk.

There are three types of risk that must be considered:

1. General market risk – largely dependent upon economic conditions;
2. Market sector risk – a particular sector of the market, e.g. industrial vs resource stocks;
3. Specific risk – a particular share or property.

As you can see, each risk is affected by different factors, so the best way to manage all types of investment risk is to ensure that your portfolio is adequately diversified to cater for volatility and over-reactions. Put simply: when one goes down, another goes up.

Once the risk factors are taken into account, it’s time to look at the specific assets within the portfolio, investing across cash, fixed interest, Australian shares, international shares and property. All of which will provide something unique at the different points of the investment cycle.

Remember that the longer you plan to invest, the more important good diversification becomes. This further minimises risk and your growth potential is maximised.

We hope this explanation helps you to understand why we’re so focused on the right asset spread for you.

Call (02) 4926 2300 or email us.

If you have any questions about asset allocation or your personal portfolio, please contact our expert team of financial planners here at Leenane Templeton.

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Every parent wants the best for their child, so if you are in a position to invest money specifically for your children’s future, you should follow the same approach as if you were investing personally.

Start with clearly identifying why you are investing, set a goal and put the strategy into place. A range of products is available depending on your attitude to investing and the investment time frame. For short-term goals, a high interest earning savings fund may be appropriate and for medium to long-term goals, managed funds and direct shares could be suitable. For longer term goals, a geared instalment program may be appropriate.

One taxing question is in whose name to hold the investment. Children are taxed at penalty rates on unearned income. They can receive income of up to $416 in 2014/15. For example, an investment of $5,942 earning 7% pa this financial year would be tax-free if held in the child’s name.

Other options to avoid the high rates of tax include:

• Investment bonds where income is reinvested and the life office pays tax at 30%. The proceeds of the bond are tax-free after 10 years and the child can be named as the beneficiary.
• Investing in the name of the parent on the lowest marginal tax rate. A parent who has no other income could earn around $140,000 in fully franked dividends and pay no tax. A parent already earning $30,000 could earn around $45,000 in fully franked dividends and pay no extra tax, before medicare levy.
• Investing using an ‘implied trust’ where the investment is held in the parents’ name in trust for the child. The child enjoys the tax-free threshold of $6,000 and the parents keep control. Beware that the investment must be used for the benefit of the child or the Tax Office can attribute the income to the parents and tax them personally.

There are plenty of options, so talk to your financial adviser about an appropriate solution for your situation and that of your children.
Call (02) 4926 2300 or email us.

Source: www.ato.gov.au 

Disclaimer

To discuss Tax and your children's investments please do not hesitate to contact the team at Leenane Templeton.

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Investors may be interested in borrowing in a self managed super fund (SMSF) to invest within a residential property. However, investors need to be wary as this is not always the most financially effective way to buy property.

Self managed super has grown from a specialised strategy into a massive market comprising about one-third of the nation’s superannuation savings.

This can be attributed to a number of factors, including to marketing hype and expectations of continuing low interest rates fuelling demand for property. As the popularity of buying property through SMSFs grows, so too does the need for awareness and understanding.

It is essential that investors fully understand the benefits and consequences of borrowing to own a property in a SMSF compared to owning it in their own right.

Generally speaking, investors who pay the top marginal tax rate could be better off with a personal loan after set-up costs, management fees, and capital gains tax are deducted from the gross gains.

Buying a residential property through a SMSF carries additional responsibilities such as the fund’s trustees only being allowed to rent to tenants under “arms length” arrangements. Also, any rise in interest rates, falls in property value or overpriced properties would eat away at the profits.

Even negative gearing, which allows property investors to deduct interest costs against other income sources, may not be enough to offset the SMSFs higher legal and borrowing costs.

Call our team to discuss SMSF and property investment today!

Source: Leenane Templeton Chartered Accountants & Business Advisors – End Of Year Update

Disclaimer

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The stall-holder hopes you won’t make a sufficient correction so that you pay too much. It’s an everyday example of a common decision-making frailty: our tendency to anchor to numbers in the face of uncertainty.

With investing, numbers to anchor to are ubiquitous: this is why it is one of the most common cognitive traps for investors. Forecasting, in particular, allows the anchoring bias to run free.

Imagine two reports that forecasts gold prices a year from now. Report A suggests a doubling of the price while report B suggests a tripling. Investors who read report B might be reluctant to sell after a doubling of their investment – they are anchored to the idea of a tripling. What if the gold price falls? Investors risk hanging onto a losing investment by clinging to anchors.

Much of the harm of anchoring is exacerbated by other behavioural biases such as hindsight, overconfidence and an attachment to “narrative fallacy” – a story that justifies a forecast. The problem is the story may not play out – and the story itself is typically a device for understanding a chaotic world.

Anchoring in forecasting is a best-guess exercise and investment professionals are aware of the pitfalls.

More dangerous is the subconscious anchoring to irrelevant numbers that derails many investors. Why does the price an investment is bought at act as an anchor on future decisions? Most worrying is the fact that anchoring happens when people know they are using irrelevant information.

Many investors are guilty of latching onto market prices as anchors. This is dangerous as prices may prove to be overvalued or undervalued. They are simply the latest estimation of value and may not reflect the real value of a company.

So how should investors deal with anchoring when the tendency to anchor is overwhelming?
James Montier, one of the leading authors on behavioural investing, has a suggestion. It is that investors should anchor to something with predictive power, namely income streams such as dividends.

While earnings can be manipulated by accounting treatments, dividends cannot. In this way, they provide a barometer of a company’s financial health. Studies suggest that bubbles are more likely to appear in stocks when investors lack dividends as an anchor.

Dividends and dividend yields provide a way for investors to understand price relative to value. Equityincome investing has always been seen as appealing to the patient investor. Now it has behavioural appeal to those who want to overcome common investing vulnerabilities.

In order to ensure you are making a measured and tactical investment choice, always speak with your financial planner when making investment decisions.

Source: Fidelity Worldwide Investments
 

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The importance of “dividend imputation” – for that’s what the system is called – is that it changed the post tax considerations of investing in favour of Australian shares, especially over cash.

Up until 1987, company earnings paid out as dividends were largely taxed twice. The first time was when companies paid tax on their gross profits (for dividends come from net profits). The second time was when the investors who received the dividends paid tax on this income.

Dividend imputation abolished the double tax whammy on dividends by allowing shareholders to claim a tax credit for some, or all, of the tax an Australian company has paid on its earnings. These tax credits are known as franking credits. Companies that pay all their tax in Australia often offer “fully franked” dividends.

So that low income earners could gain the full benefit of the new tax system for dividends, the Howard government made franking credits refundable in 2000. This means that low income earners can receive franking credits back in cash as part of their tax refund.

The tax law surrounding franking credits carries restrictions and exemptions that may change the tax benefits received for different people. But its mainstream application is significant because other asset classes generally don’t offer such tax effective income streams as Australian shares.

An Australian company, for instance, that offers a fully franked dividend of 5% (its expected dividend payment divided by its share price) is offering a more tax effective income stream than a bank term deposit offering a 5% return. In reality on a pre tax basis, this Australian company is offering a 7% yield for investors on the highest marginal tax rate, versus 5% still for the term deposit.

Dividend Yield

As Australian shares have fallen in recent times, the dividend yield on Australian shares has risen to about 5% overall, and many large stocks offer dividend yield far in excess of the average (see endnotes 1). This dividend yield would carry franking credits in excess of 90%, if the franking credits offered by the typical managed Australian share fund on their distributions is any guide. This means that the effective yield of Australian shares overall is closer to 7%. At the same time, term deposit rates are falling.

The drive behind the introduction of dividend imputation was to encourage investing in shares. It’s still working just as policy makers thought it would a quarter of a century or so ago.

To discuss your share portfolio speak with our Newcastle financial advisors

Endnotes
1 Bloomberg. As at 7 September 2011. Based on the S&P/ASX 200 Index.
Source: FIL Investment Management (Australia)
Limited, September 2011

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With the historic highs of gold price, typical when the metal is seen as a safe haven in times of political turmoil and economic instability, we thought readers may like to know a little more about this valuable metal.

Historically, the story of gold is as rich and varied as the metal itself.  Wars have been fought for it, declarations of love made with it and items of both great beauty and usefulness made with it.  It has been panned for, mined, collected, coveted, worn, inserted and reused  throughout the ages in its various forms.

It is believed that the ancient Egyptians were the first goldsmiths, when in circa 3600 BC they carried out the first melting and fusing using blowpipes made from fire-resistant clay to heat the burning furnace.  Then from 2600 BC we see early gold jewellery made from ancient Mesopotamia (these are on display in the British Museum).  Advances in jewellery casting continued and we are all familiar with the wonderful creation of Tutankhamun's gold bejewelled funeral mask from 1223 BC.  

Many of the ancient civilisations used gold as coinage, but it was not until 564 BC when King Croesus so improved refining techniques that he was able to mint the world's first standardised gold currency, allowing "Croesids" to become universally recognised and traded with confidence.  

Then in 1300, the first hallmarking system, guaranteeing the quality of the precious metal, was established by the Goldsmiths of London, and in 1717 the UK gold standard commenced.  This linked the government currency of the day at a fixed mint gold price of £3.17s.10 1/2d.  per troy ounce of gold. Then between 1870 and 1900 all major countries (except China) switched to the gold standard.

Gold Price Stability

The price of gold remained remarkably stable for long periods of time.  For example, when Sir Isaac Newton, as Master of the UK Mint, set the gold price in 1717, it remained effectively the same for almost two hundred years until 1914 (except during the Napoleonic Wars of 1797-1821).  The official US Government gold price changed only four times from 1792, starting at USD19.75 per troy ounce, raised in 1834, 1934, 1972 and in 1973 to USD42.22.

Gold Price monthly averages 1883-1999

Gold Price 1995 to present (Dec 2011)

Graphs courtesy of kitco.com

In 1971 the United States suspended the US dollar's convertibility to gold and the world entered the present day system of floating exchange rates.  In 1999 fifteen European central banks declared that gold would remain an important element of their reserves and collectively capped gold sales at 400 tonnes per year over the next five years.  Then in 2004 SPDR (acronym  for Standard & Poor's Depositary Receipts – SPDR is a trademark of Standard and Poor's Financial Services LLC, a subsidiary of McGraw-Hill Companies, Inc.) gold shares were  launched, transforming the market – offering a secure and easy way to access the gold market.  In 2010 SPDRs exceeded $55 billion in assets under management with gold price sustaining record high prices.
 

Some innovative uses for gold include dentistry from an early age (c.600 BC), in microchips, in space flight to protect sensitive instruments from radiation, for the treatment of arthritis, for heart surgery (in stents), and most recently, in 2011, in cars for catalytic converters in emissions control.

Speak with one of our Newcastle financial planners and investment experts today to help with your investments and self managed super funds

 Some Other Facts About Gold

• 166,600 is the total number of tonnes of gold mined since the beginning of civilisation, all of which could fit into a crate of 20 metres cubed.
• Over 90% of the world's gold has been mined since the 1849 California Gold Rush; of the 40,000 miners who joined the gold rush (called 49ers) only a few ever got rich.
• The largest ever true gold nugget weighted 2316 troy ounces when found at Moliagul in Australia in 1869.  It was called the “Welcome Stranger”.
• The world's oceans are estimated to hold up to 15,000 tonnes of gold.
• Gold melts at 1064 degrees Centigrade and boils at 2808 degrees Centigrade.
• 100 million people worldwide depend on gold mining for their livelihood.
• Julius Caesar gave 200 gold coins to each of his soldiers from the spoils of war in defeating Gaul.
• The US Federal Reserve holds 6,200 tonnes of gold.  Fort Knox holds almost as much.
• In 95 BC, Chinese Emperor Hsiao Wu I minted a gold commemorative piece to celebrate the sighting of a unicorn.
• 60% of the gold mined today becomes jewellery.
• Because of gold's unique conductivity, gold jewellery rapidly matches your body temperature, becoming part of you.

(Source: World Gold Council)

Gold Price Advice

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The prevailing investment environment underlines the value of ensuring that an investment portfolio is appropriately diversified in accordance with your personal circumstances – including your risk tolerance, your present and future needs and the investment timeframe.

Other investment basics for an investor to consider at all times, irrespective of what the markets are doing include:

• Regularly review your long-term asset allocation investment strategy and rebalance your portfolio to ensure it fits with your asset allocation
• Review your investment costs and research alternatives to ensure your costs are kept to a minimum.  There is no need to pay for services that you don't use.
• Know the companies in which you invest.  Don't have so many stocks that you can't keep up with what is happening in the companies.
• Remember that a dividend is the company paying you for the use of your money.
• Remember that a little and often does work.  In investment terms this is called dollar-cost-averaging when you invest amounts at regular intervals so as to even out the costs of the stock.  By buying regularly you can buy more stocks when the price is lower and less stocks when the price is high, so you average out the price and reduce the risk of investing large amounts before a price fall, and also reduce the risk of making an investment which is emotionally driven.  Align this with a review in investment costs to ensure you have an optimal scenario.

What do successful long-term investors say?

• Patience is your friend
• When buying shares, think like a prospective owner of a business
• When making a stock market investment, if you don't plan on holding it for 10 years then don't waste more than 10 minutes considering it
• You don't need a lot if good investments, you need a few outstanding ones
• Keep investment costs to a minimum. This is one of the factors over which investors have much control.
• Practise dollar-cost-averaging. This involves investing regular amounts in the sharemarket at regular intervals.  In this way, you buy more stocks when prices are lower and fewer stocks when prices are higher. You average your buying costs and reduce the risk of investing a large amount shortly before a fall in share prices.

Are you an investor?

Speak with one of our Newcastle financial planners and investment experts today to help with your investments and self managed super funds

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