News - MG Financial Planning Gippsland's leading financial planners & accountants

Financial Planner Checklist

Wed, 02 May 2012 00:00:00 -1000

Choosing the right planner is a difficult and important decision. If you are not using DMG, ask your financial planner the following 7 questions and ask yourself one.

Financial Planner Checklist

Prepaying your Health Insurance Rebate

Tue, 24 Apr 2012 00:00:00 -1000

From 1 July 2012 the rebate available in your health insurance rebate is being income tested. However; even if you are currently claiming the 30% rebate in the form of a reduction in your premiums, there is an opportunity to double up before 30 June if you want to.

For families with a combined income of over $160,000 (and singles with income over $80,000), if you prepay your 2012/13 before 30 June 2012, you can also claim the 30% rebate – even if you’ve claimed the premium reduction.

For full family cover of (say) $3,500 premium cost, that’s a savings of $350 at least.

Food for thought.

New Reporting System for Building and Construction

Fri, 20 Apr 2012 00:00:00 -1000

From 1 July 2012, businesses in the Building and Construction industry will need to report to the Australian Taxation Office (ATO) each year on the total payments they make to each contractor for building and construction services.

Clients in the industry are encouraged to check how they keep their records to make sure they have the details required for the new Taxable payments annual report.

The first annual report is due 21 July 2013 for payments made in the 2012-2013 financial year. In this first year, businesses that lodge their business activity statements quarterly, may lodge by 28 July 2013.

For more information, don't hesitate to contact your usual advisor. (contact us)

April Newsletter 2012

Fri, 20 Apr 2012 00:00:00 -1000

Reading time 3 minutes & 30 seconds

China - is it really a concern?

The talk is of either a hard landing or a soft landing. The concept of landing implies a decline, when China is actually growing at around 7.5%.

Do you think if the US or Europe were showing growth anywhere near that number, there would be talk of a hard or soft landing?

The entire talk was about the reduced growth rate, whilst omitting to even mention things like electricity being connected to hundreds of thousands of households, the millions of jobs being created, housing being completed and the increase in disposable income of rural residents.

China does have its challenges as it moves from reliance on exports to a greater contribution from domestic consumption. However there are many positives and overall its contribution to the world economy remains important.

Housing affordability

The AMP/NATSEM Income and Wealth report from July 2011 has reported a drop in home affordability.

Over the previous decade;

The median house price in Australia more than doubled, or a 100% increase to $417,000.
Median after tax income only increased by 50% to $57,000.

A lot of people panic and sell in response to dramatic headlines about market ‘meltdowns’, only to see stocks rebound a few days later.

You can deal with these distractions by understanding that the media has an in-built short-term focus. Its tight production schedules create an insatiable demand for ever-changing content.

It needs drama, movement and colour to attract and keep audiences to sell to advertisers – its real clients.

This all makes the media predisposed to stock specific stories and the notion that your future wealth depends on timing the market.

Keep up with the news by all means. But unless you’re a speculator, much of this information is irrelevant to your portfolio.

Your agenda as a long-term investor is to structure a diversified portfolio around asset classes that deliver reliable returns.

Once you’ve done that, all you have to do is stay disciplined.

Super is not the problem

Perhaps the greatest myth in relation to investments is that 'super' is the problem. It does make for a great headline as most of us have a super fund. But it simply is not true.

The reality is that super does not determine the performance. Super is merely a vehicle (actually a very good one) for holding investments.

There is no greater investment risk when investing through super as;

you can invest in the same assets
Cash is an option
Term Deposits can be used

You should not let this myth have a detrimental impact on your ability to achieve your financial goals.

Index returns for the 12 months ended 31 March were:

Sector	1 Year % Returns
Cash	4.89
Australian Listed Property Trusts	1.57
International Property (Hedged)	8.40
Infrastructure (Hedged)	7.10
Australian Sharemarket (S&P/ASX 300 Accum Index)	-6.20
Australian Small Companes	-8.57
Internatational Shares - Hedged (removes effect of currency movements)	5.07
International Shares - Unhedged (includes effect of currency movements)	1.80
Emerging Markets	-4.02

The theory of simply investing in 'a few blue chip Aussie shares' continues to disappoint as our market struggles compared to other asset classes. At some point it will recover and outperform, but it is clearly not a failsafe approach. March ended a very good quarter for the markets as a whole and some of the one year returns are now heading toward a reasonable outcome.

Volatility remains high and we are working hard to limit the impact of this on your portfolios.

Website Calculators

We have financial calculators on our website (free to register & use!) and they have just released some new functions.

Click here to use Our Financial Calculators

Budget Review – Items entered into the Budgeting tool are brought forward into the 'Budget review' tool for review. Users then elect to 'Retain, Reduce or Remove' each expense item. The budget review tool illustrates the annual saving opportunity per item, whilst building a 'Budget Review Action List' in the background.

Users are then tasked with implementing their ‘Budget Review Action List’. Substantial savings can be achieved by running through this very simple process.

Debt Consolidator – Enter details on your debts and it shows how much you can save per month in repayments if consolidated.

March Newsletter 2012

Tue, 20 Mar 2012 00:00:00 -1000

Reading time 4 minutes

Bad news is declining, Good news is growing.

The financial markets and media have been in a feeding frenzy in recent months. Worst case scenarios have been predicted and a dire outlook has been the consensus. Selling growth assets and moving to cash and Term Deposits was a common theme.

How did the sharemarkets respond? They rose strongly. Total Returns for January and February were as good as you could hope for. Australian large companies gained 7.09%, small companies 14.76%, International large shares 9.89% and Emerging markets 12.28%.

All these gains were much needed after a poor year in 2011. It happened because of the following positive news:

US recovery in employment
Greece has avoided a disorderly exit from the Euro, for the time being at least.
Europe is now focussing on how to grow their economies (I am not sure how they will do this in some cases but at least it is a better matter to focus on)
Improvement in US retail sales

What should investors consider in the current environment?

Continuing our approach of learning from leading Economists, whose opinion we regard highly, the following points from Don Stammer and Shane Oliver are very timely.

The cycle lives on - history tells us that times of gloom will eventually give way to boom and vice versa.
The power of compound interest – regular investing of small amounts can compound to a big amount after 20 years plus.
Buy low and sell high – starting point valuations matter, and the lower valuations thrown up by market weakness over recent years provide opportunities for far-sighted investors.
Focus on investments providing decent and sustainable cash flows – dividends, distributions, rents – as they are a good guide to future returns, a good buffer in volatile times and provide good income.
Avoid the crowd – just as the crowd got it wrong piling into the ‘Japanese miracle’ in 1989 (with Japanese shares falling for the next two decades), the ‘Asian miracle’ of the mid 1990s (which turned into the Asian crisis of 1997-98), the ‘tech boom’ of the late 1990s (which turned into the tech wreck of 2000-03), the credit and US housing booms of mid-last decade (which turned into the global financial crisis), it might also find that the dash for cash and Term Deposits of the last few years will ultimately prove to be wrong over the next five years or so.

Index returns for the 12 months ended 29 February were:

Sector	1 Year % Returns
Cash	4.92
Australian Listed Property Trusts	0.42
International Property (Hedged)	2.90
Infrastructure (Hedged)	3.06
Australian Sharemarket (S&P/ASX 300 Accum Index)	-6.67
Australian Small Companies	-8.98
International Shares - Hedged (removes effect of currency movements)	1.83
International Shares - Unhedged (includes effect of currency movements)	-1.33
Emerging Markets	1.53

The first two months of the year have provided a welcome relief and a much needed recovery. The one year figures are still well below their average and acceptable levels.

As the table above indicates, Australian shares have still been trailing other asset classes. In particular, US shares have outperformed our share markets for 3 years. This is because the growth in profits of our companies has been less than that of the US. Contributing factors are that productivity gains have been very strong in the US and our dollar has risen, whilst theirs has fallen.

Our approach of a well diversified portfolio has helped provide some protection against over reliance on investments that have performed poorly.

Another strong message is that asset allocation matters. Betting on one or two asset classes, which is usually Australian shares and property, may provide the occasional short term benefits, but it is not sustainable and not that simple.

Insurance - how will you fund a traumatic event?

According to the Cancer Council the medical cost and other costs associated with cancer average at $47,000. In addition there will be the cost of the disruption to family income and lifestyle.

Oil

Developing or Emerging countries are now driving the increase in the rate of oil consumption. The Chinese currently consume 2.5 barrels of oil per person annually; India is 1 barrel per person, whilst in Australia we are at 15 barrels. The US consumes 24 barrels per person.

The population of these developing countries mean that as their usage levels rise, global consumption will continue to rise faster than supply. This is shown in the chart below.

Global Oil Consumption is Rising Faster than New Supply

Source: www.aspo-ireland.org, IMF, AMP Capital

It means that as consumers we can expect our petrol bill to remain high and possibly move higher. Investments in energy shares will do well, but all others will have to contend with higher costs.

The current tensions in the Middle East could also add significantly to the price of oil.

Does the Government surplus equal a deficit for us?

It seems hardly a few days can pass without our current leaders assuring us that they will return to a budget surplus.

How exactly are they doing this? The fact is that we are paying personally to contribute to this economic or perhaps political target. Some extra costs we are bearing;

a reduction in super contribution limits means extra tax is payable by many average Australians.
A further reduction in the superannuation co-contribution payment impacts those below the average earnings.
the reduction in the Private Health Insurance rebate

Some of these, such as the super limit reductions, are very short sighted and just move the financial obligation to future Governments and generations.

February Newsletter 2012

Wed, 22 Feb 2012 00:00:00 -1000

Some positive news from Europe

The recent Greek Parliament decision to support the austerity package and subsequent assurances by Parliamentary Leaders means that they can access the funding from Europe. This is certainly not a permanent solution and can be more likened to Greece having improved just enough to be taken off life support.

They now need to do what they agreed to do, unlike last time when they agreed, took the funding and did very little in terms of implementing budget changes.

Additionally China & Japan have both said they will provide funds to help support the Europeans in their efforts to resolve their problems.

This does remove some uncertainty and that is why sharemarkets reacted positively.

Property never goes down: Myth or fact?

When the sharemarkets are falling, the statement that property never goes down is often used to entice or justify a decision to sell shares and invest in a property.

Maybe we are a little insulated here from some events overseas or maybe sometimes we just take in the information we want to hear to support our position. The reality is that there are many cases overseas and now here, where property has fallen in value. Japan is an obvious one as is the US in recent years. We know that Europe is struggling and recent analysis from the All-Island Research Observatory in Ireland produced startling results. Overall house prices in Dublin have fallen 53.7% between January 2005 and December 2011.

It was not so long ago that the Irish economy was booming and held up as a role model for others.

Yes we are in much better shape than all those countries were, however it is unrealistic to believe that Australia is immune from falls.

Investing is not easy and simplistic statements rarely provide a solution.

Some key indicators

The spread between German interest rates and those for Italy, Spain and France – has been narrowing. This is a good sign and means the latter trio is seen as being a little less risky than recently thought. See the chart below;

Source: Bloomberg, AMP Capital Investors

The A$ is a good indicator of global growth - if it stays up things are okay.

China – so far so good

Chinese economic growth has slowed to 8.9%, but there is no sign of a hard landing. Export growth has slowed sharply but so too has import growth and in any case net exports have not been a contributor to growth in recent years. Retail sales growth has held up well and fixed asset investment has slowed only slightly.

Furthermore, falling inflation (from 6.5% in July to 4.1% in December) and a cooling property market, evident by falling prices in 52 of 70 major cities in December, and falls in sales and dwelling starts provide authorities with the ability to ease the economic policy brakes. And there is plenty of scope to ease. Large banks are currently required to keep 20.5%(after a reduction last week) of their assets in reserve, the key one-year lending rate is at 6.6%, the budget deficit was just 1.1% of GDP last year and net public debt is around zero once foreign exchange reserves of US$3 trillion and other assets are allowed for.

After doubling between October 2008 and August 2009 on global financial crisis related stimulus and a growth recovery, Chinese shares fell 38% to the low early this month as investors feared tightening policy would result in a hard landing. With Chinese price to earnings (PE) multiples having fallen back to bear market lows and policy starting to ease again, decent gains are in prospect over the next few years.

Index returns for the 12 months ended 31 January were:

Sector	1 Year % Returns
Cash	4.96
Australian Listed Property Trusts	1.41
International Property (Hedged)	5.79
Infrastructure (Hedged)	2.08
Australian Sharemarket (S&P/ASX 300 Accum Index)	-6.86
Australian Small Companies	-13.46
International Shares - Hedged (removes effect of currency movements)	0.02
International Shares - Unhedged (includes effect of currency movements)	-3.14
Emerging Markets	-4.23

The Australian sharemarket has continued to disappoint compared to the overseas average. The concept of just buying a few Aussie blue chip shares and holding them has proven to be flawed (another simplistic myth?). This is despite the cause of the problems being overseas; however it confirms the value of diversification.

We remain happy with the quality of the funds we use. Our portfolios have been outperforming the averages and providing some protection against the recent falls. We are confident that if the markets can do what they are meant to do, which is deliver some returns, then we will see excellent results in the portfolios that we manage for you.

John Maynard Keynes tip for investing

Keynes was a leading British Economist and Investor. He believed that investment success is largely determined by how investors behave at market peaks and troughs as it is where big investment mistakes can be made.

These periods require rational thinking and not reactions to negative headlines and herd mentality.

Retirement Planning... Lovgevity

Wed, 11 Jan 2012 00:00:00 -1000

You need to allow for the possibility that you will live beyond the average age and that the averages are increasing.

Life Expectancy at birth in 1946: Male = 66.1 yrs, Female = 70.6
Life Expectancy at birth in 2006: Male = 78.7 yrs, Female = 83.5
Life Expectancy at age 65 in 1946: Male = 77.3 yrs, Female = 79.4
Life Expectancy at age 65 in 2006: Male = 83.3 yrs, Female = 86.5

Keep in mind that to arrive at an average, you must have numbers below and above.

It is easy to justify a case to plan for your capital to last longer.

Our preference is for you to plan for you to have money until age 100.

Market Commentary

Wed, 11 Jan 2012 00:00:00 -1000

When reviewing your portfolio it is important to assess the performance in terms of the financial markets. Following is a summary of the performance of the markets:

Global Market Performance to 31 December 2011

Keys points from the above table are;

The calendar year has been very poor. 5 year numbers are also still mainly negative and 10 years are well below average.
These index returns indicate how difficult an environment it has been for investing.
We have been adding value with our portfolio construction, however it is starting from a low base with the markets, making the overall return not where we would like it.
The Australian share market has been particularly disappointing, as it has been outperformed by the overseas market index.
The importance of diversification is crucial and adds value or at least, can reduce losses.

Outlook:

The US are working through their problems and making some progress although not exciting.
The excessive debt levels in Europe continue to cause concern. Progress is painfully slow and the markets are not responding until they are satisfied of the resolution.
Volatility will remain high and returns will be impacted, whilst the problems in Europe persist.

January Newsletter 2012

Thu, 05 Jan 2012 00:00:00 -1000

It's prediction season again

We are at that time of year when we are provided with predictions of what is going to happen financially for the ensuing year.

As you know, our usual view that it is extremely difficult to accurately predict what is going to happen. In the current environment of extreme volatility it is nearly impossible.

Who could have predicted 2011?

Last year saw the following:

Floods in Australia.
The NZ earthquake.
Japanese Earthquake, Tsunami and Nuclear disaster.
Civil War in parts of Northern Africa and the Middle East.
A number of Political leadership changes.
The US debt ceiling debacle and the subsequent rating downgrade.
The ongoing European debt crisis.

There are so many unforseen events, it is futile to rely on predictions.

The current position and what we do know

Rather than look into the crystal ball, we can consider what is currently actually happening and the impact it will have.

Based on current results, the US economy is improving and growing. The growth is very slow, but it is still positive. This doesn't mean it is sustainable, but it is a good start.

The Chinese, Asian and Emerging markets are showing slower economic growth as the European problems have an impact. However they are still growing at a reasonable rate.

The consensus is that China will grow at 7% in 2012. At the risk of being cynical, this almost makes it a certainty that 7% won't be the end figure. Whether it is higher or lower depends on how well the Chinese manage the financial impact from events outside its borders. They have done this well so far.

The combination of deleveraging (reducing debt) and budget cuts in Europe will continue and this means it is extremely difficult for those economies to grow. If we do not see growth and instead have deterioration, then a recession is the likely outcome. This will dominate the headlines and have a negative impact on markets.

The European Central Bank (ECB) and others have not done enough yet to resolve the crisis. The latest significant announcement from the ECB of changing the Long Term Refinancing Operations to allow Banks to borrow at 1% for 3 years (previously 1 year) and also accept lower rated collateral as security. The ECB is hoping that the European Banks will use this to borrow to buy Government Bonds from countries such as Italy.

This sounds good in theory but why would a Bank buy more sovereign debt when having too much sovereign debt caused much of their problems.

There is a potential return to be made, but the risks are high making it unlikely for Banks to be excited about this option. This means that a real solution is still not with us.

The biggest obstacle to reaching our long-term investment goals often is not the market itself, but our own behaviour.

Common mistakes include failing to diversify, overlooking the influence of the costs of trading, ducking in and out of the market and getting distracted by daily headlines.

The fact is that as fallible human beings we tend to over-rate our own abilities and imagine that we can see things that others can’t. In an extremely competitive arena such as the financial markets, this can be ruinous.

It is in the nature of markets to go up and down. You can’t control that. But employing a structured and disciplined approach frees you up to focus on things you can control.

This includes staying diversified, keeping costs low, being mindful of the tax impacts of investing and most of all keeping your nerve amid all the short-term noise from the markets and the media.

Index returns for the 12 months ended 30 November 2011 were:

Sector	1 Year % Returns
Cash	5.02
Australian Listed Property Trusts	2.23
International Property (Hedged)	4.95
Infrastructure (Hedged)	6.40
Australian Sharemarket (S&P/ASX 300 Accum Index)	-6.27
Australian Small Companies	-12.09
International Shares - Hedged (removes the effect of currency movements)	2.84
International Shares - Unhedged (includes the effect of currency movements)	-5.23
Emerging Markets	-8.82

Returns from shares and property remain disappointing for the above period. Our portfolios have been adding value which in some cases has meant that overall losses have been avoided. Whilst this is still not ideal it is a better outcome than the market average.

Are you prepared for a traumatic health event?

It’s a fact of life that we all get sick, and sometimes seriously. The cost of recovery from an illness like cancer or heart attack can have a huge impact both emotionally and financially. That’s when you need Critical Illness insurance.

Critical Illness insurance is about helping you with survival.

Australians are suffering an increasing incidence of cancer and we still experience high levels of heart disease and stroke. With ongoing advances in medical science, we have greater chances of surviving a serious medical condition. In many cases, this survival period can be measured in years. Critical Illness insurance is designed to pay a lump sum to you if you suffer a critical illness, to ensure that you can cope with the effects on your lifestyle, family and work.

Critical Illness insurance helps you to survive financially while you take the time you need to recover.

What are the chances of surviving a Critical Illness?

One in five men and one in seven women between the ages of 30 and 64 will suffer a critical illness*.

115,000 new cases of cancer were estimated in Australia in 2010†.
More than 60% of cancer patients will still be alive more than five years later†.
Every 10 minutes an Australian will suffer a Stroke (about 60,000 new or recurring Strokes were estimated in 2010)‡.
Two out of every three people that suffer a first time stroke will be alive one year later‡.
About 88% of stroke survivors live at home and most have a disability‡.
For working people who suffer acute coronary syndrome (heart attack and chest pain), the average time before returning to work is three months - and one in five will remain off work§.

A lump-sum payment allows you to choose how you spend the claim amount – it might be paying off your mortgage, making alterations to your house to improve access and mobility, or taking a family holiday.

Many people survive an illness only to be crippled financially. Critical Illness insurance can help you recover financially by:

Reducing or eliminating debt.
Offsetting lower levels of income for an income earner returning to work following a critical illness.
Creating an emergency fund or cash reserve.
Boosting retirement savings.

Or a lump sum can give you the funds you need to explore alternative treatment options, without putting a severe strain on your finances.

* GenRe LifeHealth Australian Critical Illness Survey 2008

† Cancer Council, Fact Sheet. www.cancer.org.au 2010

‡ The Stroke Foundation, 10 things you should know about stroke www.strokefoundation.com.au 2010

§ North Shore Heart Research Foundation. National Preventative Health Strategy 2008.

What are we doing?

After much analysis and research we have appointed an additional manager to our portfolios that we use for you.

It is in the Infrastructure asset class and provides a number of benefits. It diversifies that asset class and also enables us to reduce overall volatility by reducing exposure to shares.

The reduction to shares has been spread across Australian, international, large companies, small companies and emerging markets. This way, we have made subtle changes to a number of asset classes rather than selling out of a single class or fund whilst markets are down.

The overall summary is that the new fund will provide slightly lower returns in strong markets, but more importantly, better results in falling markets and provide greater stability to your portfolio.

You will see more details of this fund and the other changes as we conduct our reviews for you as part of our ongoing service.

November Newsletter 2011

Mon, 28 Nov 2011 00:00:00 -1000

The European rollercoaster continues

As November draws to a close, we have again endured another poor month. However news over the weekend of a bailout for Italy has received a positive response from markets today.

The recent problem has been that as soon as one Country makes a positive move, the markets and speculators move on to the next.

Spain is already in the spotlight, Belgium was downgraded last week and interest rates are rising almost daily across many European countries. This later point is a measure of the risk of investing in these countries.

As always risk and return are related. You can currently get a 25% return on Greek Government Bonds. The risk is that you will not get all your money back!

The Italian bailout and more meetings over the next few weeks may deliver some sustainable progress.

When Buyers Meet Sellers

"Sellers were out in force on the market today after negative news on the economy." So say the talking heads on television each night. Have you ever wondered if there are so many sellers out there, who is buying?

The notion that in bear markets sellers outnumber buyers, this just doesn't make sense. What the news reporters should say is that there were not enough people willing to buy shares at the prices the sellers were seeking.

What happens in such a case is either the would-be sellers sit on their shares or prices adjust lower until supply and demand come into balance. This is when transactions occur and is described by economists as "equilibrium".

But equilibrium isn't a permanent state. That's because new information is continually coming into the marketplace, forcing would-be sellers and would-be buyers to adjust their expectations.

That new information might be company-specific news like an earnings warning. It might be news that has implications for an entire industry—like a spike in oil prices forcing airline stocks lower. Or it might be an economic development that affects the entire market, like we are seeing in Europe.

Given this constant flux in news and information flows and the forever changing expectations of participants, individual shares and the market itself are said to be always moving toward equilibrium.

When markets are going down, it can be reassuring to remember that at some point supply and demand must come into balance. Buyers eventually will see value in the market and will invest if the prices are low enough.

Trying to time these inflexion points is a fool's game. That's because prices tend move in a random way. So it is impossible to consistently predict what the market will do next.

This in turn reflects the difficulty of successfully forecasting the future. That doesn't stop many people from trying, mind you. And sometimes they get it right. But that's usually down to good guesswork, not scientific method.

But during times like these, investors can comfort themselves in the knowledge that in a market economy, over the long term, there is a return on capital.

So rest assured there are still plenty of buyers out there. The market is doing its job and the rewards will be there if you remain disciplined and diversified.

Index returns for the 12 months ended 31 October were:

Sector	1 Year % Returns
Cash	5.02
Australian Listed Property Trusts	-2.25
Infrastructure (Hedged)	3.90
Australian Sharemarket (S&P/ASX 300 Accum Index)	-3.95
Australian Small Companies	-8.22
International Shares - Hedged (removes effect of currency movements)	3.87
International Shares - Unhedged (includes effect of currency movements)	0.43
Emerging Markets	-6.18

October was a very positive month, but despite this the results for the last twelve months have been disappointing.

Until there is a satisfactory resolution in Europe, markets are unlikely to recover.

Even in the long term there is a cycle

The following chart shows a real accumulation index for US stocks since 1900. The trend line represents a real rate of return (return above inflation) of 6.2% pa. Whenever the index is rising faster than the trend line, stocks are providing above trend returns (Bull market). Vice versa when it falls relative to the trend line (Bear market). Again this reinforces the long term trend, despite negative periods.

Long-term bull & bear phases in US shares

Source: Global Financial Data, AMP Capital Investors

What are we doing?

We have been reducing risk in portfolios by removing a manager that carries a little more risk than we currently want in the defensive assets classes. This manager has been profitable, so we are not crystallising losses.

We continue to work hard behind the scenes, reviewing the portfolios we construct for you. This includes, meeting monthly to assess our approved list and portfolios and meeting with managers to gain further information on their funds.

Overall we are satisfied with the funds we are using and our portfolios continue to add value above the market averages and losses have been limited.

However we are always looking to improve and we intend making changes over coming months to add further value.