The fascinating world of bonds

The fascinating world of bonds

Bonds have a reputation for being one of the more boring asset classes, only slightly more exciting than cash. However they are important financial instruments, and if you have superannuation, chances are some of your money is invested in them. Bonds may also suit some personal investors – so how do they work?

What is a bond?

When you buy a bond you are making a loan to the issuer, usually a government or a corporation. While there are different types, the key characteristics of a typical bond are:

  • Face value – the amount the buyer receives on its maturity date. Usually this is $100 per bond.

  • Coupon rate and coupon dates – the interest payment expressed as a percentage of the face value. Most bonds pay interest once or twice per year on the coupon dates.

  • Maturity date – the date the investor receives the face value of the bond, along with the final coupon payment.

  • The issue price – this is usually the same as the face value.

How are bonds bought and sold?

While bonds can be bought directly from the issuer (the primary market), most are traded on a secondary market. In Australia, government bonds are traded in large volumes between institutional investors. However, Australian retail investors can receive all the benefits of investing in bonds by buying CHESS Depository Interests, which are listed on the Australian Stock Exchange (ASX). Various corporate bonds are also traded on the ASX.

Many Australian investors participate indirectly in the bond market via managed fixed interest funds.

How risky are they?

Like any loan, the security of a bond depends upon the ability of the borrower to pay the interest and face value when due. Bonds issued by financially stable governments, (Australia being one), are considered very low risk. Buy such a bond, hold it to maturity, and you know with a high level of certainty exactly how much money you will receive and when.

Corporate bonds and those issued by financially ‘weak’ governments are higher risk, and usually offer a higher interest rate to reflect this. So-called ‘junk’ bonds are extremely high risk, and more of a gamble than an investment.

What drives bond prices?

While the relative risk of quality bonds can be low if bought and held to maturity, it’s a different story if you need to sell before the maturity date.

If interest rates rise, bond prices fall so it is possible to make a loss, even with quality issuers. This somewhat extreme example explains how this works.

Imagine you buy two hundred 10-year bonds with face value of $100 (total value $20,000) and a coupon of 3%. You’ll receive $600 interest each year for ten years and then get your $20,000 back. Overnight, interest rates jump to 4% and a sudden emergency means you need to sell your new investment. A potential buyer now has a choice between earning $8,000 over ten years from the new bond versus $6,000 from yours. Clearly, something has to give, and that something is the price of your asset. In this example, and assuming annual coupon payments, your bond is now only worth $18,377.82.

On the other hand, if interest rates fall, investors can realise a gain as bond prices rise.

It isn’t just actual changes in interest rates that affect bond prices. Expectations of what interest rates may do in the future also play a big part.

Another influence on prices is time to maturity. All other things being equal, longer-term bonds usually pay a higher interest rate than short-term bonds. This reflects the higher risks of locking your money away for longer.

Investors in managed fixed interest funds need to be aware that, even if the manager takes a buy and hold approach, the daily unit price will change in line with the market value of the bonds held.

Seek advice

There are many reasons why you might want to include direct bonds in a portfolio, but it needs to be an informed and considered decision. Talk to us today on |PHONE|.

 


Don't let your portfolio end up like a gym membership

New Year resolutions and portfolio rebalancing face common challenges.

Both spring from the best of intentions. Both can drift into the background as the holiday season draws to a close and the urgency and demands of everyday life return.

For self-managed super funds (SMSFs), the more relaxed pace of life earlier in the year often presents the opportunity to review the fund’s portfolio and investment strategy.

Setting a fund’s asset allocation is arguably the most important decision SMSF trustees make.

At a time when there is heightened levels of uncertainty on the geopolitical stage, the value of rebalancing the portfolio periodically to keep the portfolio within the risk ranges you are comfortable possibly takes on even more importance.

As 2017 gets into full swing it is worth reflecting on the year just gone. For SMSF trustees, a challenge can be knowing how your fund is performing and a critical data point is knowing what to benchmark your fund against.

Broad-based market index funds provide an easy and accessible way to measure your fund’s performance while mainstream super funds are another point of reference.

In 2016, defensive assets like fixed interest did their job of providing stability to portfolios, with the Australian fixed interest index delivering 2.7 per cent and Australian government bonds 2.5 per cent.

Australian shares enjoyed another year of double digit returns with the Australian shares index fund delivering 11.5 per cent and the high-yield index fund slightly lower at 10.6 per cent.

International shares delivered 8.03 per cent on an unhedged basis while if the currency impact was hedged out the return was higher at 10.4 per cent.

Emerging markets and international small companies delivered 11.03 per cent and 13.02 per cent respectively on an unhedged basis. Global infrastructure index – a specialist asset class that can be hard for SMSFs to access directly – ended 2016 up 12.66 per cent.

On the property front, Australian listed property returned 13 per cent while international listed property was 6.69 per cent with currency hedging.

When reviewing individual asset classes, the danger and/or temptation is to focus on the top-performing sector. At this point, it is good to remember that past performance is never guaranteed to be repeated next year.

Potentially a more meaningful benchmark for an SMSF to look at is the performance of diversified funds that invest in a spread of asset classes based on target risk levels.

In 2016, the conservative Vanguard index fund returned 6.06 per cent, the balanced fund 7.35 per cent, the growth fund 8.5 per cent and high growth 9.67 per cent.

The key comparison point here with an SMSF is understanding the portfolio split between defensive and growth assets. For example, the balanced fund is 50/50 while the growth fund is 70/30 growth assets to defensive assets.

The rebalancing question comes into play after one asset class has had a significant growth (or loss).

A typical SMSF has strong allocation to Australian shares – according to Investment Trends research around 40 per cent of an average SMSF portfolio is in local shares. Given 2016 returns of 11.5 per cent for the Australian sharemarket, portfolios are likely to have moved out of target asset allocation ranges.

This is why the discipline of regular reviews of the SMSF portfolio’s asset allocation is so valuable.

If you find your SMSF portfolio has moved outside the tolerance levels you or your adviser has set then the next question is how do you go about rebalancing to get it back to the point you are comfortable with the allocation.

The simplest way is to use new cashflows/contributions to buy more of the asset class that is now underweight.

Where it is more complex is if you do not have cashflows to work with and so you will need to consider selling some assets to provide the cash for the rebalance. This can involve both transaction costs and have potential tax implications, so it can be good to seek expert advice either from a financial adviser or an accountant specialising in SMSF work.

The concept of rebalancing is one of those things that is simple to say but harder to carry through on. One of the emotional hurdles many investors struggle with when it comes time to rebalance is the reality that you are buying into the weakest performing asset class, and potentially selling your strongest performing asset.

That can cause investors to procrastinate and which is when rebalancing ends up in the company of other well-intentioned New Year resolutions.

If you would like to discuss, please call us on |PHONE| or email |STAFFEMAIL|.

 

Source:

Written by Robin Bowerman, Head of Market Strategy and Communications at 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.

© 2017 Vanguard Investments Australia Ltd. All rights reserved. 

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.


“Tap and go” and then what?

Talk about hammering the plastic. In November 2016 Australia’s 16.7 million credit card accounts were used to make 226 million transactions with a total value of $27.8 billion. We are currently paying interest on $32.2 billion worth of credit card debt, running up an annual interest bill of over $5.6 billion (that’s $5,600,000,000!).

It’s not just the easy money that cards provide; it’s the easy form of delivery via “tap and go” that’s pushing our debt to extraordinary levels. The quicker the transaction, the less thought or planning required. Pay now and think about it (and deal with it) later.

Don’t become a statistic – here are some things to look out for plus a few tips.

Traps

  • Over 40% of credit card spending goes on groceries and utilities. While this isn’t a problem if you pay off your card balance in full each month, if you’re paying interest just so you can buy the necessities of life, it’s a real danger sign that you may be living beyond your means.

  • Most credit limits are well beyond cardholder needs. On average, Australians only use about a third of their available credit limits each month. However, by giving you a higher credit limit card issuers hope temptation will get the better of you. If that means you can’t pay off your entire balance each month you’ll end up paying them lots of interest.

    Also bear in mind that if you apply for a personal loan or mortgage in the future, lenders will look at your combined card limits, not just the balances. High credit limits will affect the size of loan approved. Reduce the temptation and reduce your limits to appropriate amounts.

  • Beware the bonus card. Yet another credit card may come with a new mortgage. Look out for annual fees or other costs and make sure you understand what’s involved. If you don’t need it, cancel it.

Tips

  • Financial institutions can only offer to increase your credit limit if you specifically ‘opt in’. This can be done in writing or over the phone. However, it’s prudent to withhold this permission to keep your limit under control. You can always apply for a once-off increase if you really need to.

  • Switch to a reloadable (pre-paid) credit card. Like a debit card it means you are using your own money with the added advantages that you can pre-set a limit on your spending and reduce the risks associated with buying online. Reloadable cards are available from banks, other financial institutions and major retailers.

  • If you sign up for a new card for a 12-month interest-free purchase, pay it off in the first year then cancel the card before the renewal fee is automatically charged. There is no point paying an annual fee if you’re not going to use the card.

And a myth

Many people think that it is only lower income earners who are susceptible to the siren call of easy credit. But like the Sirens of Greek folklore themselves, it’s a myth. In fact, higher income earners also rack up huge balances on gold, platinum and diamond cards, and can experience real difficulty in paying them off.

If your credit cards are more an enemy than a friend, contact us on |PHONE| to discuss a range of solutions to get you back on track.

 

Sources:

ASIC’s MoneySmart website www.moneysmart.gov.au credit card debt clock


Advocacy to support the rights of older people

Most of the time aged care services work well and the people who use them are happy with the service they receive. However, sometimes there is a problem, and you may need help to speak up and have the problem resolved.

Advocacy to support the rights of older people

Supporting the rights of older people

Many people feel uncomfortable raising a complaint or concern but it is important to address your concerns early and not leaving it to escalate.

This can be particularly difficult if your complaint is about care or service that you are dependent upon for meeting your most basic needs.

Nevertheless, we live in a society where each and every one of us, regardless of our age, has rights as citizens and individuals.

What are my rights?

The Charters of Residents’ Rights and Responsibilities outlines your rights and responsibilities as a resident and those of the provider. Some of the rights and responsibilities include:

  • Full and effective use of residents’ personal, civil, legal and consumer rights
  • Quality care, privacy, dignity and respect
  • Making complaints about anything unfair or unreasonable
  • Access to advocates and to be free from fear of reprisal.

The Charter should be displayed at the aged care home, included in the Resident Agreement or you can request a copy from your provider.

Who can help?

If you feel unsure or unable to address your concerns yourself with the service provider, you can ask an advocacy service to help you.

An advocate can give information, advise and support you to express your concerns or even speak on your behalf. They will aim to achieve the best possible outcome for you.

An advocate can help you:

  • Understand your rights and responsibilities
  • Listen to your concerns
  • Discuss your options for addressing a concern
  • Raise a concern with the service provider or speak on your behalf

Advice is generally provided on consumer rights, human rights, financial exploitation, substitute decision-making and elder abuse.

How to find help

There are free and independent advocacy services in every state and territory which provide free telephone advice, community education and other assistance for older persons throughout Australia.

All advocacy services ensure the needs of people from a culturally diverse background are met through culturally appropriate services and interpreters where necessary.

If you receive Government funded home care or aged care services you can access independent and free advocacy services through the National Aged Care Advocacy Program.

Contact the National Aged Care Advocacy Line on 1800 700 600 or an Aged Care Advocate in your state for more information.

If you would like to discuss, please c.ontact Emmett Wilkinson.

Source:

This article was originally published on AgedCareGuide.com.au. Reproduced with permission of DPS Publishing.

Important:

This provides general information and hasn’t taken your circumstances into account.  It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.


Why more women need MONEY as a value and it's benefits

By Guest Author Kelly Magowan

Having been a career coach for well over a decade and worked with a diverse range of clients from various industries and professions  (men and women), more often than not it is the men who include money in their list of core values. Occasionally women will, however, only very occasionally.  Why is this?  Below I have offered some thoughts.

Values Defined

Values can be seen as blurry things. If you need a refresher then below is a great descriptor of what values are from MindTools.

“Your values are the things that you believe are important in the way you live and work. They (should) determine your priorities, and, deep down, they’re probably the measures you use to tell if your life is turning out the way you want it to.”

Values & Greed!

For women it seems that having money as one of your core values could possibly translate into the view that your greedy. Is this perception or reality?  I suspect a combination of the two.

When I coach  men in their 20s – 50’s about their values in detail and what this means to them, and how it is played out in their work and lives, more often than not money translates into them being able to provide for their current or future families. And no, it is not a luxury yacht, expensive cars or endless overseas travel. It mostly is around having food on the table, paying the bills, a comfortable lifestyle and being able to educate their children.  No doubt part of this also relates to status and a sense of self-worth.

So while certainly greed exists, I would suggest for the average person, they are looking to have a personally rewarding career and lifestyle. Is this greedy?  I don’t think so. However men are much more comfortable with acknowledging this personal value, and articulating it publicly. For many women this is not the case. In addition, men generally are better at putting a fair or inflated monetary value on their contribution in the workplace.

Is it that it is not socially acceptable for women to acknowledge (which I believe is a part of it), the other is that women are just as likely to want the same output in terms of what money as a value offers.  However, are less likely to acknowledge it – be it on a conscious or sub-conscious level. As a result this could potentially be contributing to pay inequality, with men four times as likely to initiate the negotiations as women.

My suspicion is that if you don’t talk about or acknowledge the importance of money in your life from a growth and opportunity perspective, you are less likely to find yourself in a positive money situation.

Choices

Money is one of my core values and the reasoning is not one of greed.  For me it is twofold, when I work I expect to be paid fairly for the work I do, as this is a part of me defining my self-worth. Secondly, I know that as a child of a migrant, that money provides you with choices.  My husband and I lead a far from lavish lifestyle.  There is no designer car or high end fashion. We travel rarely and when we do it is in our own state. However for me the value of money is there because like most parents we hope to be able to offer our children the best education we can. I would also like to know that when retirement comes we will lead a comfortable lifestyle where I can continue to do voluntary work within the community. Is this greedy? No, it is a case of money offering choices.

Women’s roles & money

In an age where we have more women working and more separations in families, women’s roles have extended greatly, be it the sole, equal or shared income contributor. Yet this is not translating into equal salaries.

There is an element of denial in how important money is to our lives particularly by many women. Not so much when it comes to shopping, saving or the household budget, more around how the money is earned! The spending part is easy for us all to speak about. The how and valuing how hard it is to earn is the challenge. Also, valuing our contributions and asking to be paid more when warranted!

Last week I met with a friend who is a contender for a senior role and has pitched herself in the middle range of what they are offering – even though she is brilliant and should be pitching herself at the top of the pay scale! Sadly it is a common scenario – a women undervaluing her expertise and the value she brings.

Like me, you have no doubt heard the saying ‘If you do what you enjoy and do it well the money will follow’. I am not so sure about that. Perhaps for some, however, for many others this does not translate into their reality.  I can tell you this from countless stories of women who spent their careers being loyal and working hard to deliver value to their employer/s and not being paid fairly for doing so.  So we can carry on with this mantra or we can acknowledge that the world of work and pay is not about what is fair and rewarding those who do a good job.  The onus is on us to value ourselves and to speak up.

I would love to see a mindset shift around how women define money as a value for their work and lives.  Once this occurs we may start to see some even greater traction around pay equality.

If you would like to discuss, please call us on |PHONE| or email |STAFFEMAIL|.

 

Source:

This article was originally published by Kelly Magowan from www.kellymagowan.com and is reproduced with the permission of Kelly Magowan.

Kelly Magowan is the author of e-book, A Busy Woman’s Guide to Salary Negotiations.

Important:

This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.


The Good, the Bad and the Ugly

I don’t think anyone would have predicted that 2016 would be quite as eventful as it turned out to be but while a lot happened not a lot actually changed.  To my mind, investing, particularly in emerging markets (EM), always requires a patient, judicious approach and 2016 was no different. The list of issues to worry about is a long one: Exchange rates, interest rates,  growth rates, political uncertainty – my developed market peers have a lot on their plate! If nothing else 2016 reminded markets that the issues above are not just the preserve of emerging markets. Globalisation has driven ever greater linkages across geographies and asset classes, any perceived interference therefore creates volatility which is immediately transmitted across the investment universe. With that in mind, there are a couple of things I did want to comment on.

1. The Fund remains underweight Energy

Robust corporate governance and prudent capital allocation are two of my most important considerations when it comes to stock selection. Historically the majority of the state owned EM energy sector (which includes Russia but also China and elsewhere) have made incredibly bad capital allocation decisions. Overtime this tends to result in a significant impairment of shareholder value which is in my experience not a price worth paying for the odd period of cyclical improvement. For this reason, I continue to be discerning when it comes to stock selection focusing on minimising the risk of a permanent loss of capital before cyclical valuation expansion.   

2. Indian demonetisation a long-term positive

The Indian Government’s controversial decision late last year to  demonetise its 500 and 100 rupee notes to curb ‘black money’ may be an incredibly positive development long-term , given the limitations which informality imposes on the ability of an economy to continue to develop.

Bringing black money back into the formal banking system will, in theory, lead to a reduction in long-term funding costs and lower the cost of capital for infrastructure and investment project.  Factors badly needed in order for India to maintain the current rate of economic growth, generate jobs for its large population and avoid the inflationary pressures which fast consumer growth without a commensurate increase in fixed asset investment will create.

In the short-term however such draconian measures have created sizable problems and there will likely be a significant contraction in near-term demand as the demonetisation process works its way through. The inability to transact and problems accessing cash is obvious in terms of how consumer demand and purchasing has declined since the demonetisation measures were announced.

Yours truly can testify to the very real impact of such measures on a recent trip to Northern India when I was forced to purchase a $3 lunch with a $30 note, only to receive my change in 10 rupee notes – all 180 of them!

The demand air pocket needs to be carefully considered when looking at the valuation multiples of a number of stocks, particularly those in the consumer sector which rely on the cash economy for end demand.

3. Trumponomics: A little overdone

This is the most difficult topic for me as whilst one can rationalise to an extent the improvement in commodity prices, it does look overdone in light of the actual impact that the USA has on global commodity demand. Additionally, the disconnect between EM exchange rates and commodity prices is a phenomenon which typically hasn’t persisted for long in the past i.e. either EM foreign exchange will strengthen or commodity prices will pull back. In all likelihood we will see a combination of both and from this starting point it may be a little late to blanket buy resource stocks. As ever, I do think that there are some selective opportunities in this area: Grupo Mexico, African Rainbow Minerals to name a few.

If you would like to discuss, please call us on |PHONE| or email |STAFFEMAIL|.

 

References to specific securities should not be taken as recommendation.

Source:

by Alex Duffy, Portfolio Manager Fidelity Global Emerging Markets Fund 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. 

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser.

This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity Australia products before making a decision whether to acquire or hold the product.  The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au . The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. 

© 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.


What is your aged care funding strategy?

We’re an ageing population; the media keeps reminding us, as does the government, but are we prepared for what this means? As a society? As individuals? One thing’s for sure – it’s something we cannot ignore.

According to the Australian Institute of Health and Welfare (AIHW), in 2014, 3.4 million Australians were aged 65 and over.

Consider for a moment: this figure shows those people contemplating aged care for elderly family members are fast approaching the age when they’ll need it themselves.

Sobering thought.

What this means is that as aged care becomes increasingly important, the need for aged care facilities is growing proportionately. As demand out-grows supply, costs associated with residential care can only go one way.

Fees are regulated

In 2014, the federal government introduced stricter regulations around aged care fees and charges. Aimed at consumer protection, a degree of flexibility within the guidelines enables aged care facilities to adapt the fee structures to meet their own financial pressures.

So as we age, and as we begin to consider the future care of not only ourselves but our older loved ones, what can we expect to pay?

To help you estimate the costs

The government provides an online Residential Care Fee Estimator to help you estimate aged care costs here http://www.myagedcare.gov.au/estimate-fees-for-aged-care-services. As for the type of fees, depending on the facility, one or more of the following may apply:

Type of fee Included
Daily basic Living costs such as meals, power, laundry.
Means-tested An additional contribution towards cost of care determined by Department of Human Services (DHS) and based on your means-tested income and assets.
Accommodation The government may cover part or all of this as determined by DHS income and assets means-test.
Extras/additional options Applies where higher accommodation standards or additional services are required. Variable depending on the home and available facilities.

Watch out for “extras”

Although the government capped annual and lifetime means-tested fees, additional charges to cover extras like hairdressing, internet access, excursions, etc, can apply. It’s important to check with the facility first to find out how these extra services are offered and their associated costs. They can sometimes be disproportionate to the services supplied and add up to a substantial amount. Aged care providers must give itemised accounts to the resident breaking down each of these services and the associated charge. Legislation also states that these fees cannot be charged more than one month in advance.

Plan to make it easier

The desire to provide loved ones with the best possible living conditions sometimes forces older people to sell their homes to afford care for an aging partner. Not only can this affect the age pension they receive, but can see the partner not in care seeking accommodation with relatives or alternative housing – a heartbreaking situation for someone wishing to leave an inheritance behind.

The focus on self-funded retirement, doesn’t always consider increasing life-expectancy and what happens beyond pension-funding projections.

This is where your financial adviser can help. Indicative of our times, strategies for wealth creation with extended pension horizons are increasingly relevant. They help to support appropriate income levels so you are less likely to need a lump sum withdrawal from your investment portfolio.

You’ve heard it before: you’re never too young to plan your future. But you’re never too old either!

Sources:

Residential Care Fee Estimator www.myagedcare.gov.au

Ageing and Aged Care website www.agedcare.health.gov.au “Charging fees for additional care and services in residential aged care, including ‘capital refurbishment’ type fees”


Your latest gig, your latest super savings

It wouldn’t be surprising if saving and investing are far from the minds of many younger people working in the burgeoning “gig economy”.

Participants in the gig economy work at a series of jobs or tasks – sometimes called a portfolio of work – rather than as part-time or full-time employees. It could be bigger and faster-growing than you may believe; largely because of the changing nature of work and the accelerating impact of e-commerce.

The Economist magazine published late last year an article, Apps and downsides, that looked at the ups and downs of the gig economy. And the magazine quoted a report by McKinsey Global Institute stating that 162 million people in America and Europe – more than 20 per cent of the working-age population – “work outside normal employment”. Almost half relied on this work for their main income.

It’s reached the point where hardly a day would go by when most of us come in touch with a member of the gig economy or “digital workforce” – that’s if they don’t work in it themselves.

A central point of The Economist article is that non-employed participants in this emerging economy or workforce do not receive all of the employment rights or benefits of those classified as full or part-time employees. From an Australian perspective, non-employees do not receive, for instance, superannuation guarantee (SG) contributions.

Employers are, of course, legally required to pay compulsory super contributions to those classified as their employees, again whether working full or part-time (with certain exceptions for very low-income earners). In turn, the self-employed in Australia are not compelled to put money aside for their own retirement.

Of course, some members of the gig economy are legally classified as employees (depending upon the arrangements and the nature of the relationships) and would receive compulsory super contributions.

Significantly, the new chief executive of the Association of Superannuation Funds of Australia (ASFA), Martin Fahy, emphasised the growth of the gig economy in his first address to his association’s annual conference late last year.

Research by ASFA, among others, has long highlighted that the self-employed overall have extremely low super savings, particularly when measured against their employed counterparts.

In an updated research paper, Super and the self-employed, published in May last year, ASFA reported that 22 per cent of the self-employed had no super in 2013-14 while most of those with some super had extremely inadequate amounts.

The fact that 78 per cent of the self-employed had some super in 2013-14 may an overly-positive impression. Their super is often attributable to small compulsory contributions picked up sometimes in the past when working for an employer – perhaps doing casual or part-time work.

Certainly, the gig economy is opening up exciting opportunities for many more individuals to gain more control over their lives and be their own bosses; whether at the beginning of their working lives, nearing retirement or somewhere in between.

A tremendous challenge for younger, self-employed members of the gig economy is to recognise the long-term rewards of voluntarily putting savings aside for a retirement that might be 40 years or so away. (These rewards include, of course, investment compounding as returns are earned on past returns, concessional tax treatment and a higher standard of living in retirement.)

Perhaps a little nudge from informed parents – to explain why regular saving makes sense even if it isn’t compulsory – may help get things rolling.

 

Source: 

Written by Robin Bowerman, Head of Market Strategy and Communications at 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.

© 2017 Vanguard Investments Australia Ltd. All rights reserved. 

 

Important: 

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.


Planning a holiday, building a house and creating a portfolio

Two quick questions. How long did you take to plan your last Christmas holidays? And how long did you take to plan your investment portfolio?

“It’s often said that many people spend more time planning a two-week vacation than they do on their investment plan,” say US-based Vanguard investment analysts Donald Bennyhoff and Colleen Jaconetti in an updated research paper.

“Experience suggests that this witticism is not far off the mark,” Bennyhoff and Jaconetti add.

“On their own, investors often ignore the important planning phase,” the analysts emphasise, “focusing instead on filling their portfolios with investments featuring attractive returns. This is akin to buying building materials for a house before the architect has drawn up the blueprints.”

Their research paper – Required or desired returns? That is the question – suggests the critical first step in creating an investment portfolio is for investors, perhaps with the help of a good adviser, is to understand their objectives and their constraints. And this should involve gaining an understanding of the often-overlooked and critical difference between required and real returns.

Their paper is written from the perspective of how advisers can help their clients develop investment portfolios based on realistic expectations for returns.

“The financial planning process should result in an estimate of the return needed to accomplish an investor’s objectives, taking into account that client’s unique goals, time horizon, current asset base, liquidity needs, saving behaviour, tax sensitivity, and risk tolerance among other factors”, they write. In other words, this is the required return.

Investors may set unrealistic desired returns based on a variety of influences including their own investment experiences (good and bad), historic returns over various periods, lists of the latest highest-performing managed funds, media reports and investment advertising.

Unsurprisingly, say Bennyhoff and Jaconetti, an investor’s desired return is often much higher than their required return. In turn, this can lead to investor taking excessive risks in the pursuit of achieving those higher, unrealistic returns.

Regular Smart Investing readers may be familiar with our discussions of the importance of distinguishing between required and desired returns. And it is well-worth revisiting this research paper in the light of Vanguard’s latest medium-to-long term economic and market outlook.

Our outlook emphasises that investors should ensure that their expectations for returns are reasonable or realistic in this low-interest, more subdued-return environment. It’s a straightforward message that goes to the fundamentals of sound investment practice of carefully setting your objectives and then working out the best way to get there with a disciplined and realistic approach.

As Bennyhoff and Jaconetti conclude: “Headlines and hyperbole can change daily. An investor’s long-term objectives, however, are far less variable.”

 

Source:

Written by Robin Bowerman, Head of Market Strategy and Communications at 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.

© 2017 Vanguard Investments Australia Ltd. All rights reserved. 

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.


The relationship between interest rates and housing affordability

 

A fall in interest rates is usually greeted with delight by homebuyers. The lower the interest rate the less the mortgage repayments on a particular house, right?

Well, maybe.

However, lower interest rates also mean borrowers can service a bigger loan. In a competitive housing market that can push up prices.

So what’s really going on? Have recent falls in interest rates been good or bad for homebuyers?

The numbers crunched

In mid-2011 the average interest rate on a standard variable home loan was 7.79% p.a. and the average price of homes across Australia’s eight capital cities was around $478,000. After paying a 10% deposit a buyer would have been facing a mortgage of about $430,000 with repayments of $3,259 per month over 25 years.

By mid-2016 average mortgage rates were down to 5.1% p.a. That’s great for anyone who took out a mortgage at higher rates, but what about new entrants into the housing market? In the intervening five years the average price of houses increased by 30.4%, so after paying a 10% deposit the mortgage needed to buy the average ‘residential dwelling’ had jumped to $560,644. Ouch!

But here’s the soother. At an interest rate of 5.1% the repayments on this much bigger loan work out at $3,310 per month – almost the same amount as for a 2011 buyer. And there’s something else to take into account. From 2011 to 2016 average weekly ordinary time earnings increased by 16.1%. With an extra $912 per month in income, the average wage earner has that fractionally higher mortgage repayment easily covered.

The upshot? On the base numbers, the average house was about as affordable in low-interest-rate 2016 as it was in high-interest-rate 2011, and more affordable when wage increases are taken into account. However, one thing this analysis doesn’t capture is the deposit. If house prices increase at a greater rate than average earnings, new homebuyers have a harder time saving the deposit they need just to get to the starting line.

The problem of averages

Average numbers hide a wealth of detail. House prices in Melbourne and Sydney have followed very different pathways to those in Hobart and Darwin. Over the past few years some cities have become more affordable as a result of lower interest rates and stable house prices. In other cities house prices have continued to boom, making it much more difficult to get a foot on the ladder of home ownership.

Really ‘affordable’?

The generally accepted rule of thumb is that a household should not spend more than 30% of pre-tax income on mortgage repayments. Any more is defined as ‘mortgage stress’.

In the example above, in 2016 someone on the average wage would have been spending 50% of his or her gross income on mortgage repayments. In other words, a single average wage earner couldn’t afford an average house.

Fortunately, for couples with both earning the average wage, the figure is a more comfortable 25%. But how much more comfortable? In the worst case, if their mortgage interest rate jumped to 6.94% p.a. immediately after taking out their mortgage they would reach the threshold of mortgage stress. Such a large and immediate jump is unlikely, but higher interest rates in the future are definitely on the cards.

Priceless advice

Dealing with the big numbers associated with buying a home can be a bit daunting. If you need help in working out a plan towards home ownership, or in managing a current mortgage and other household debt, talk to us today on |PHONE|.