Author: James Black

Dollar-cost averaging for millennial investors

It’s hardly surprisingly that a personal finance article in Forbes magazine places the classic and straightforward investment practice of dollar-cost averaging high among a list of tips to help millennials become better, more disciplined investors in 2017.

Dollar-cost averaging simply involves investing the same amount of money into shares or other securities at regular intervals – whether prices are up or down.

Investors practising dollar-cost averaging automatically buy more, say, shares when prices are lower and fewer when prices are higher. In short, purchasing costs are averaged over the total period that an investor keeps on investing, thus the name dollar-cost averaging.

Yet the core attribute of dollar-cost averaging is not so much the price paid for securities; it is the adherence to a disciplined, non-emotive approach to investing that is not swayed by prevailing market sentiment.

Dollar-cost averaging can assist investors to focus on their long-term goals with an appropriately diversified portfolio while avoiding emotionally-driven decisions to buy or sell – in other words, trying to time the market. As Smart Investing repeatedly emphasises, investors would rarely succeed consistently at market-timing.

The Forbes article, Five tips to make you a better investor in 2017, reasons that dollar cost averaging strategy may be well suited to millennial investors given their long investment horizons and their perhaps relative inexperience in investment markets. As a financial planner quoted in the piece comments: “The logic here is, if you’re in your late twenties or early thirties, the fluctuations of the market on one given day are unlikely to have serious consequences to the retirement money you’ll need to withdraw 30 years from now.” Novice investors were “too easily” influenced by market movements.

And given their long investment horizons, millennial investors are well placed to benefit from the rewards of compounding as investment returns are earned on past investment returns as well as on the original capital. (See Save early, save often, Smart Investing, January 29.)

The use of dollar-cost averaging does not necessarily mean, of course that investments will succeed; nor does it protect investors from falling share prices.

Australian super fund members who have compulsory and/or voluntary contributions regularly paid into their super balanced accounts are practising a form of dollar-cost averaging. The higher the regular contributions, the greater the potential effectiveness of dollar-cost averaging over the long term.

The vast majority of investors practising dollar-cost averaging would invest regular amounts from their monthly salaries. Yet a related issue concerning dollar-cost averaging can occur when an individual has a large amount of money to invest, perhaps from an inheritance, a bonus from work or some other windfall.

Several years ago, a Vanguard research paper found that, given certain assumptions, investing a big lump sum all at once had a better chance of producing higher long-term returns than drip-feeding the money into the market using dollar-cost averaging. This finding was based on historic long-term returns from share and bond in Australia, US and UK. As the paper emphasises, investment of a lump sum gains exposure to the markets as soon as possible.

Another consideration is that dollar-cost averaging may address concerns of a risk-averse investor about investing a big sum into the market immediately before a possible sharp fall in prices. It is a way for such an investor to ease their way into the markets.

For most investors without a huge windfall to invest, a critical role of dollar-cost averaging is to help keep us focused on the long-term in a disciplined, non-emotional way. It is one of investment’s emotional circuit breakers.

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.

by James Black

Your next holiday destination - why not swap?

You might remember the movie, “The Holiday” starring Kate Winslet and Cameron Diaz. Two women are experiencing relationship problems so they exchange their houses for a holiday away from men. Kate swaps her quaint English cottage for Cameron’s LA mansion. Both love the extreme differences but, of course, there are men everywhere they go! (It ends happily ever after.)

In the ten years since that movie debuted, house swapping has taken the world by storm. It’s no longer a way to escape from our problems, but a wonderfully affordable accommodation option – and there are now thousands of homes of all shapes and sizes across the world to swap.

As the name suggests, house swapping is an exchange of homes, for an agreed period, at no cost to either party.

Swapping has many advantages over traditional holidays, including:

• the cost savings make it possible to travel to destinations you might not ordinarily afford, or to stay for longer that you normally could;

• being able to enjoy the privacy, space and comfort of a real home (you might even have a swimming pool to yourself);

• the option to swap vehicles – save money by not hiring a car; or having to rely on public transport;

• access to local knowledge about the best places to eat, shop and visit;

• staying in locations away from the noise and cost of tourist areas.

Other advantages include:

• the security of having your house occupied while you’re away, and

• the opportunity for someone to take care of your pets at home saving you money on kennel fees and making your pets happier too.

Of course, there are downsides. In particular, you are entrusting complete strangers to use your home while you are absent. However, with the growing number of registered websites that allow users to be rated or reported, this risk may be reduced. Doing sound research and getting to know your potential swapper early is crucial. Leaving your holiday contact details with neighbours is always a good idea. And for more peace of mind, lock away or remove any precious or valuable items such as jewellery.

To find a website to best suit your needs, simply type “house swapping” into your favourite search engine.

House swapping is by no means new – it “officially” began 60 years ago in the US – and with the explosion of websites catering for this growing demand, the only problem now is deciding where to go!

by James Black

Preparing for your family's future

No-one wants to think about death in the prime of life. But it’s important to decide what will happen to your assets when you die. Find out how you can give instructions to your family about your legal and medical preferences should you fall ill or lose the capacity to make those decisions yourself.

Estate plans

An estate plan includes your will as well as any other directions on how you want your assets distributed after your death. It includes documents that govern how you will be cared for, medically and financially, if you become unable to make your own decisions in the future.

You must be over 18 and mentally competent when you draw up the legal agreements that form your estate plan. Key documents might include:

• Will

• Superannuation death nominations

• Testamentary trust

• Powers of attorney

• Power of guardianship

• Anticipatory direction

If you have made a binding nomination in your super or insurance policies, the beneficiaries named in those policies will override anyone mentioned in your will. If you have a family trust, the trust continues and its assets will also be distributed according to the trust deed, no matter what is written in your will.

You should ask a legal professional to check your estate plan. A good estate plan should minimise the tax paid by your heirs, and help avoid any family squabbles.

Wills

A will takes effect when you die. It can cover things like how your assets will be shared, who will look after your children if they are still young, what trusts you want established, how much money you’d like donated to charities and even instructions about your funeral.

Your will can be written and updated by private trustees and solicitors, who usually charge a fee. Some Public Trustees will not charge to prepare or update your will, but only if they act as the executor of your will. Other Public Trustees may only exempt you from charges if you are a pensioner or aged over 60. Check with the Public Trustee in your state or territory.

• ACT – Public Trustee and Guardian for the ACT

• NSW – NSW Trustee and Guardian

• Northern Territory – Office of the Public Trustee

• Queensland – The Public Trustee of Queensland

• South Australia – Public Trustee South Australia

• Tasmania – Public Trustee Tasmania

• Victoria – State Trustees Victoria

• Western Australia – Public Trustee Western Australia

You can buy will kits online but it’s a good idea to ask a solicitor to review your will to make sure everything is in order. If a will isn’t signed and witnessed properly, it will be invalid.

Keep your will valid and up to date as your legal rights change, specifically if you marry, divorce or separate; have children or grandchildren; if your spouse or beneficiaries die; or if you have a significant change in financial circumstances.

If you die intestate or your will is invalid, an administrator appointed by the court pays your bills and taxes from your assets, then distributes the remainder, based on a pre-determined formula, which may not be how you intended your assets to be distributed.

If you die intestate and don’t have any living relatives, your estate is paid to the state government.

Testamentary trusts

A testamentary trust is a trust set out in a will that only takes effect when the person who has created the will, dies. Testamentary trusts are usually set up to protect assets.

Here are some reasons why you would create a testamentary trust:

• The beneficiaries are minors (under 18 – 21 years old)

• The beneficiaries have diminished mental capacity

• You do not trust the beneficiary to use their inheritance wisely

• You do not want family assets split as part of a divorce settlement

• You do not want family assets to become part of bankruptcy proceedings

A trust will be administered by a trustee who is usually appointed in the will. 

A trustee must look after the assets for the benefit of the beneficiaries until the trust expires. 

The expiry date of a trust will be a specific date such as when a minor reaches a certain age or a beneficiary achieves a certain goal or milestone, like getting married or attaining a specific qualification.

Powers of attorney

Appointing someone as your power of attorney gives them the legal authority to look after your affairs on your behalf.

Powers of attorney depend on which state or territory you are in: they can refer to just financial powers, or they might include broader guardianship powers. You will need to check with your local Public Trustee.

Generally speaking, there are different types of power of attorney:

• A general power of attorney is where you appoint someone to make financial and legal decisions for you, usually for a specified period of time, for example if you’re overseas and unable to manage your legal affairs at home. This person’s appointment becomes invalid if you lose the capacity to make decisions for yourself.

• An enduring power of attorney is where you appoint a person to make financial and legal decisions for you if you lose the capacity to make your own decisions.

• A medical power of attorney can make only medical decisions on your behalf if you become unable to do so yourself.

You can prepare a few other documents to help your legal appointees and family as you grow older, including:

• An enduring power of guardianship that gives a person the right to choose where you live and make decisions about your medical care and other lifestyle choices, if you lose the capacity to make your own decisions.

• An anticipatory direction records your wishes about medical treatment in the future, in case you become unable to express those wishes yourself.

• An advance healthcare directive (or living will) documents how you would like your body to be dealt with if you lose the capacity to make those decisions yourself.

The documents you choose to draw up will depend on your situation, and the responsibilities you are happy to entrust to others. Get legal advice if you are not sure.

Choosing your powers of attorney

Nominate people that you know are trustworthy, if possible financially astute, and likely to be around when you need them.

Your legal and financial housekeeping

Once your paperwork is in order, it will help your executor and family if you list the legal documents you have and where they are kept.  

Keeping a record of your personal information and notes on how your legal documents, assets and investments are arranged can also help you.

Here is a list of key documents to keep:

• Birth certificate

• Marriage certificate

• Will

• Enduring power of attorney

• Advance healthcare directive (also called a living will)

• Personal insurance policies

• House deeds

• Home and contents insurance

• Deeds and insurance policies for any other real estate you own

• Bank account details

• Superannuation papers

• Investment documents (securities, share certificates, bonds)

• Medicare card

• Medical insurance details

• Pensioner concession card

• Any pre-payments of funeral investments

A good will and estate plan can help make sure your wishes are carried out after you die, or if you are no longer able to make your own decisions.

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

Source:

Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at www.moneysmart.gov.au

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.

by James Black

Your first SMSF portfolio: Don't overlook fundamentals amid super changes

New SMSF trustees face something of a double challenge in 2017-2018: Coming to terms with the long-standing fundamentals of having your own fund together with the biggest changes to super in a decade.

It is critical for new trustees not to neglect any of the fundamentals of self-managed super in their efforts to understand the changing super system from the beginning of July. (See A critical time for specialist advice, Smart Investing, December 2, 2016.)

The first few months of a new financial year are among the most popular times to establish an SMSF. Often, investors aim to begin their self-managed approach to super with a fresh start for a new financial year and to spread their administration costs over the entire 12 months rather than part of a year.

And in many cases, members switching from large APRA-regulated funds would time their setting-up of their SMSFs with their retirement at the end of a financial year or relatively early in a new financial year.

If you are aiming to setup an SMSF from the beginning of 2017-18, preparations obviously should begin well in advance.

Fundamentals for would-be SMSF trustees to begin thinking about now include:

Setting a compulsory investment strategy

SMSF trustees are legally required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund. These circumstances include: investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and ability to pay member benefits. (The SMSF Association offers a free course for SMSF trustees.)

Investing within the rules

Trustees must maintain a super fund for the sole purpose of providing member retirement benefits; not provide loans or financial assistance to members or their relatives; separate SMSF assets from their own personal or business assets; conduct transactions on an arm’s length basis; and adhere to the investment restrictions under the in-house asset rule*.

Choosing an SMSF’s strategic asset allocation

A portfolio’s asset allocation – the proportions of its total assets that are invested in different asset classes of mainly local and overseas shares, property, fixed interest and cash – spreads risks and opportunities. Research has long found that a diversified portfolio’s strategic asset allocation is responsible for the vast majority of its return over time.

Selecting investments within an SMSF’s strategic asset allocation

SMSFs often adopt a “core-satellite” approach to invest in accordance with their asset allocation. With this strategy, the core of their portfolio is held in low-cost traditional index funds or exchange-traded funds (ETFs) tracking selected indices with smaller “satellites” of favoured direct securities and/or actively-managed funds. As the Vanguard/Investment Trends 2016 Self Managed Super Fund Report shows, SMSFs are among the biggest and longest supporters of ETFs.

Deciding whether to take specialist SMSF advice

Most SMSF trustees receive some professional guidance ranging from administration services up to full financial planning. And specialist SMSF advice can be particularly valuable when a fund is being established.

For the past 16 years or so, Vanguard analysts have studied “adviser’s alpha“. This is the value that advisers can add through their wealth management and financial planning skills – guiding their clients in such areas as asset allocation, cost and tax efficiency, and portfolio rebalancing – and as behavioural coaches.

Skilled advisers can add considerable value by using skilful wealth-management practices together with personally encouraging their clients to adopt disciplined, long-term approaches to investing.

New SMSF trustees in 2017-18 will be joining a force of around 600,000 SMSFs with more than $600 billion in assets.

* Under the in-house asset rule in superannuation law, an SMSF is generally prohibited from making loans, providing leases or having investments with related parties and entities that exceed 5 per cent of its total asset value. Certain exceptions apply including business property.

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.

by James Black

To rent or own: retirement living options

by James Black

The perfect property at an affordable price - it’s not a myth

 So you’ve found your dream home, but it’s in need of a little TLC. While others may see this as a deterrent, this is actually a great opportunity to nab the house of your dreams at a price tag that’s within your means. Here’s how to tactfully negotiate the price without ruining your chances of securing the property.

by James Black

Having an estate plan is more than just having a will

There seems to be a common misconception that having an estate plan is for wealthy people. Wrong. Having an estate plan is for everyone. It is about being prepared, minimising risk and making sure your loved ones receive the benefit of your estate.

Today, there are many factors which influence an estate plan. Simply having a will may not be enough for your estate to pass to your loved ones. Often, the starting point is to determine what estate assets and non-estate assets you own. It is common for mum and dad to think they own a particular asset, only to learn that their family trust in fact owns the asset.

What is an estate asset?

An estate asset is an asset held in your own personal name. Examples of estate assets include real property held in your personal name or an interest as tenants in common, bank accounts, vehicles and shares.

Estate assets are dealt with in accordance with your Will.

What is a non-estate asset?

A non-estate asset cannot be dealt with in accordance with your Will. Non-estate assets may be assets owned:

1. as joint tenants;

2. by your self-managed superannuation fund;

3. by your family discretionary trust;

When dealing with a non-estate asset, your estate plan can often be tailored so that the control of any non-estate assets is passing to your loved ones.

What happens to property owned as joint tenants?

The right of survivorship applies to property held among individuals as joint tenants. This means that upon the death of one of the owners, full ownership of the property will automatically revert to the surviving owner. The property will not form part of the deceased owner’s estate.

In your estate plan, if you do not wish for the right of survivorship to apply, steps can be taken to sever a joint tenancy, so that the property is held as tenants in common. This will ensure that your interest in the property flows to your estate.

What happens to your superannuation?

Superannuation is separate to your estate, therefore, it is not automatically distributed in accordance with your will. Without an estate plan, the trustee of your superannuation fund will decide which dependents to pay your superannuation to. However, with a plan, you can control which dependents your superannuation is paid to, via a binding death benefit nomination. There are strict compliance issues which impact whether a binding death benefit nomination is valid.

What happens to assets held by a discretionary family trust?

Trust property will not form part of your estate as the assets are owned by the trust itself. Without an estate plan, assets held by these separate legal entities may not pass to your loved ones. With a plan, you can transfer the control of these assets to a specific person. If you are concerned about assets held in a separate legal entity, it is imperative that you have your trust and company documentation reviewed and seek advice on how the transfer can be incorporated into your estate plan

What happens to life insurance?

If you have taken out a life insurance policy to ensure that your loved ones continue to enjoy their lifestyle in the event of your passing, it is important to consider how this policy has been established. If a beneficiary has been nominated on the policy, the life insurer must pay the beneficiary directly, which means that the proceeds will not form part of the insured’s estate.

An effective estate plan means considering and appreciating all aspects of a person’s life. 

Source:

Written by Chloé Kopilovic, Lawyer at Ferguson Cannon Lawyers. Reproduced with permission of Chloé Kopilovic. This article was originally published at www.australianestatelawtoday.com.au

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

by James Black

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|.

by James Black

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.

by James Black

“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

by James Black