News

Volatility remains

Recent weeks has seen concerns arise in the financial markets that have again created volatility.  In particular we have seen;

• Concerns about the Greek & Italian economies.
• Continuing tensions the Middle East & Northern Africa
• Commodity prices falling
• Worries that the Australian economy is over reliant on China. (This was even reported in the US media).

The consequence has seen sharemarkets around the world fall slightly and Australia suffering a little more because of our reliance on commodity prices.  The Australian dollar has also fallen.  One positive of this is that the falling Australian dollar adds value to the investments in the international shares in your portfolio. 

Whilst this means that the overall performance of the markets is not where we would like it, our portfolios are still outperforming and adding value.  Again this is due to the use of the asset class investing approach and only taking on risks that can provide value.

Investor psychology

Several aspects of investor psychology interact in helping drive bull and bear phases in investment markets, including individual lapses of logic and crowd psychology.

Numerous studies by psychologists have shown that people are not rational and tend to suffer from various lapses of logic. The most significant examples are as follows:

• Extrapolating the present into the future – people tend to downplay uncertainty and assume recent trends, whether good or bad, will continue.
• Giving more weight to recent spectacular or personal experiences in assessing the probability of events occurring. This results in an emotional involvement with an investment strategy – if an investor has experienced a winning investment lately he or she is likely to expect that it will remain so.
• Overconfidence - people tend to be overconfident in their own investment abilities. This is particularly the case for men.
• Too slow in adjusting expectations - people tend to be overly conservative in adjusting their expectations to new information and do so slowly over time. This partly explains why bubbles and crashes in share markets normally unfold over long periods.
• Selective use of information - people tend to ignore information that conflicts with current views. In other words they make their own reality. This helps to perpetuate a bubble once it gets underway.
• Wishful thinking – people tend to require less information to predict a desirable event than an undesirable one.  This may partly explain why asset price bubbles normally precede crashes.
• Myopic loss aversion – people tend to dislike losing money more than they like gaining it. Various experiments have found that a potential gain must be twice the potential loss before an investor will consider accepting the risk.

The chart below indicates the rollercoaster that can be experienced by investors when emotions have an impact.

Part of our role is to help you manage the impact that emotions can have on your decision making and plans.  Not investing aggressively when markets are cheap and holding on through difficult periods can add short and long term value.

Market returns still not where we would like them

The table below indicates that the typical portfolio of Australian & Overseas shares, Australian property and cash, would have delivered very low returns.  Our approach of asset class investing targets those areas that can add value whilst taking an acceptable risk.  In particular the table highlights the value of including (but not over relying) on small companies and international property.

Again our portfolios that we operate for you have been adding value above these averages.

Superannuation Strategies prior to June 30^th

Here are a few reminders of ideas that may be of benefit to you, your family, colleagues or friends.

1 - Set up a salary sacrifice arrangement

Ask your employer to pay extra into your super from your before-tax salary. Apart from boosting your super, salary sacrifice can reduce your assessable income, which can in turn reduce the amount of income tax you pay. However, you should consider the Government caps on contributions before doing so.  

2 - Make an after-tax voluntary contribution

Even small contributions to your super can make a difference to your retirement savings. Any extra payments you make from your after-tax income will not be taxed again when paid into your super account.  Again the Government caps on contribution need to be considered. 

3 - Get a co-contribution from the Government

If you earn less than $61,920 in a tax year and make an after-tax contribution to your super, then you may be eligible for a Government co-contribution of up to $1,000.  This can also be of significant benefit to working children.

4 - Build your spouse’s Super

If you are a permanent employee and are married or in a de facto relationship, you can open a super account on behalf of your spouse. The Government currently offers a tax offset of up to $540 if your spouse is a low income earner and you make a contribution on their behalf.  

5 - Consolidate your Super accounts

There are lots of reasons to consider consolidating your Super including saving on fees, costs and the overhead of juggling multiple Super accounts. However you should check with your fund if any exit or withdrawal fees apply, and whether any benefits such as insurance cover might cease once you have consolidated.