Bottrell Financial Planning Newsletter – December 2022
by Bottrell Wealth- Jan 27, 2023
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- Category: Investment, Money Tips
December 2022
It’s December, summer is here and holidays are just around the corner. We take this opportunity to wish you and your family a happy festive season!
The big story on the global economic front continues to be inflation, and how high interest rates will go to tame it. November began with the US Federal Reserve hiking its federal funds target range by another 75 basis points to 3.75-4.00%. There are signs the tough approach is working, with the annual rate of inflation falling from 9.1% in June to 7.7% in October.
In Australia, the Reserve Bank lifted the cash rate another 25 basis points to a decade high of 2.85%. Inflation fell to 6.9% in the year to October, down from 7.3% in September, but remains high and economic signals are mixed. Reserve Bank governor Philip Lowe is keeping a close eye on consumer spending, where higher interest rates are having an impact. Retail trade fell 0.1% in October for the first time this year. And while the ANZ-Roy Morgan consumer sentiment index was up 5.6% to 83.1 points in the last three weeks of November, it remains 22.9 points below the same week last year. But rate hikes are not yet affecting the labour market, with unemployment falling to a 48-year low of 3.4% in October, while annual wages growth rose 1% to 3.13% in the September quarter, the fastest growth in a decade.
The Aussie dollar lifted 3c to around US67c over the month, crude oil prices fell 10% while iron ore lifted 0.5%. Shares remain skittish but positive overall. The ASX200 index rose more than 5% in November while the US S&P500 index was up more than 2%.
Buying shares for kids: a gift that keeps on giving
Many parents and grandparents worry about how to help the children in their lives achieve financial independence. But the value of long-term investment can seem like a dry and complicated idea for kids to get their heads around.
In fact, many young people would like to know more about money, according to a Young People and Money survey by the Australian Securities and Investments Commission MoneySmart website. The survey found more than half of the 15-21-year-olds surveyed were interested in learning how to invest, different types of investments and possible risks and returns. What’s more, almost all those young people with at least one investment were interested enough to regularly check performance.
One way to introduce investment to children may be to begin a share portfolio on their behalf. The child can follow the progress of the companies they are investing in, understand how the market can fluctuate over the short- and long-term, as well as learn to deal with some of the paperwork required, such as filing tax returns.
How to begin
Setting up a share portfolio doesn’t need to be onerous. It’s possible to start with a minimum investment of around $500, using one of the online share trading platforms. Then you could consider topping it up every year or so with a further investment.
Deciding on which shares to buy comes down to the amount you have available to invest and perhaps your child’s interests.
If the initial investment is relatively small, an exchange traded fund (ETF) may be a useful way of accessing the hundreds of companies, bonds, commodity or theme the fund invests in, providing a more diversified portfolio.
ETFs are available in Australian and international shares; different sectors of the share market, such as mining; precious metals and commodities, such as gold; foreign and crypto currencies; and fixed interest investments, such as bonds. You can also invest in themes such as sustainability or market sectors such as video games that may appeal to young people.
Alternatively, buying shares in one company that your child strongly identifies with – like a popular pizza delivery firm, a surf brand or a toy manufacturer – may help keep them interested and excited about market movements.
Should you buy in your name or theirs
Since children cannot own shares in their own right, you may consider buying in your name with a plan to transfer the portfolio to the child when they turn 18. But be aware that you will pay capital gains tax (CGT) on any profits made and the investments will be assessable in your annual income tax return.
On the other hand, you could buy the shares in trust for the child. While you are considered the legal owner the child is the beneficial owner. That way, when the child turns 18, you can transfer the shares to their name without paying CGT. Your online trading platform will have easy steps to follow to set up an account in trust for a minor.
There is also some annual tax paperwork to consider.
You can apply for a tax file number (TFN) for the child and quote that when buying the shares. If you don’t quote a TFN, pay as you go tax will be withheld at 47 per cent from the unfranked amount of the dividend income. Be aware that if the shares earn more than $416 in a year, you will need to lodge a tax return for the child.
Taking it slowly
If you are not quite ready to invest cash but are keen to help your children to understand share investment, you could consider playing it safe by playing a sharemarket game, run by the ASX.
Participants invest $50,000 in virtual cash in the S&P/ASX200, a range of ETFs and a selection of companies. You can take part as an individual or a group and there is a chance to win prizes.
Another option, for children able to work independently, is the federal government money managed website. This is pitched at teens and provides a thorough grounding in savings and investment principles.
Call us if you would like to discuss how best to establish a share portfolio for your child, grandchild or a special young person in your life.
Sustainable investing on the rise
Sustainable investing isn’t new and is becoming more mainstream. From climate change to gender diversity, more people are aligning their money with their values.
In 2021, Australia’s sustainable investment market increased 20 per cent to a record $1.5 trillion. The Responsible Investment Association Australasia (RIAA) 2022 benchmark report found sustainable investments represents 43 per cent of total professionally-managed funds.
In addition to traditional shares and fixed interest sustainable investments offer a wide range of assets, including property, alternatives such as forestry, infrastructure, private equity and cash.
Most big super funds offer a sustainable investment option and some offer this as their default option. You can also buy sustainable managed funds, including a growing list of exchange-traded funds (ETFs).
What are sustainable investments?
Focus on people and planet
Sustainable investing is also known as ethical, responsible and ESG (environmental, social, governance) investing, with the focus on people, society and/or the environment.
Sustainable investments are selected using a variety of screening methods, including:
- Positive screening selects the best investments in their class
- Negative screening excludes harmful sectors, companies or activities such as arms, gambling, animal testing, tobacco and fossil fuels
- Norms-based investing screens for minimum standards of relevant business practices
- Impact investing has the explicit intention of generating positive social or environment impacts.
The term ESG investing is used when a fund or company commits to sustainable investing in these three areas:
- Environmental– air and water pollution, biodiversity and climate change
- Social– child labour and labour standards, ethical product sourcing, gambling and human rights
- Governance – board diversity, corruption, business ethics, corporate culture and whistle-blower schemes.
The report found gender diversity and women’s empowerment are also gaining popularity.
Sustainable investing is not all warm and fuzzy. Performance still matters.
Performance gains
Initially, sustainable investing often came at the expense of returns but that is no longer necessarily the case.
The report compared the performance of what it terms responsible investment funds and mainstream investments funds (on average and net of fees) over the past 10 years to December 2021.
Responsible multi-sector growth funds consistently outperformed mainstream funds and their benchmark over 1, 3, 5 and 10 years. Responsible Australian share funds generally outperformed or were on par with mainstream funds. Only responsible international share funds disappointed, underperforming mainstream funds across all timeframes.
Watch out for greenwashing
Increased demand for sustainable investments has led to a rapid increase in the number of products available. The rush to cash in on the trend has sometimes led to what is known as ‘’greenwashing”. The Australian Securities and Investments Commission (ASIC) describes greenwashing as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.
ASIC warns investors to review the product terms. For example, a fund might describe itself as ‘’no gambling” but may invest in companies that earn less than 30 per cent of revenue from gambling. Look for a clear explanation of how the product will achieve its aims and don’t rely on vague language like “considers”, “integrates” or “takes into account”.
Australian companies lifting their game
It’s not just super funds and managed funds taking sustainable investing more seriously, Australian listed companies are also adapting to changing investor preferences and regulatory environment. A recent analysis of ESG reporting by Australia’s top 200 listed companies, PwC found a 13 per cent increase in companies declaring a commitment to net zero emissions. However, only 55 per cent of those disclosed a transition plan or activities that will enable them to reach net zero.
There was also a 10 per cent increase in companies disclosing climate risks and opportunities, and a 30 per cent increase in companies disclosing a gender diversity policy.
For investors seeking sustainability along with financial returns from their investments, momentum and choice is growing. So please get in touch if you would like to discuss your investment options.
Leave your cares at home when you travel
Holidays should be blissful periods where you can do exactly what you want – usually involving relaxing and enjoying time with loved ones. However, it’s not uncommon to come back even more tense than ever and feeling like you need another vacation after what should have been a lovely break.
Here are some ways to make sure your well-deserved break is all that you want it to be.
Dealing with disruption
It is more common now to face some level of disruption to holiday plans if you are flying – whether that be long queues at airports, flight cancellations or lost luggage. It’s important to recognise that there may be factors outside your control that impact your plans and deal with them as and when they happen. Keeping your cool, knowing your rights and trying to be constructive when faced with a problem can mean you are more likely to get assistance but there are also measures you can take to reduce the likelihood of problems.
Planning
There is a lot you can do in the way you plan your trip to avoid problems. When travelling consider leaving more than enough time at the airport before boarding and it’s also worthwhile taking earlier flights are they as less subject to being cancelled. Book direct flights where possible and ensure you allow adequate time for layovers in the event of delays.
There is a lot of demand for accommodation and hospitality services at present, so the days of spontaneity are over for now. Arrange accommodation in advance and research restaurants and attractions you’d like to go to and make bookings, so you don’t miss out.
Even the best laid plans do sometimes go astray so try to make the best of less-than-ideal circumstances. Your kid’s best memories of your holiday just might be when you got stuck overnight and had to stay in a funny little hotel in a strange city you had planned to visit only in transit.
Staying safe and well
You don’t want to get sick on holiday so take the basic precautions we all learnt during the pandemic to avoid catching lurgies and stay well.
It’s also quite common for people to let their guard down and take risks they may not take at home when they are on holiday, so think before hopping on that motorbike or crossing that flooded monsoonal river.
Travel insurance can be an important part of holiday planning so decide what may be appropriate for your circumstances and shop around to get the right coverage.
Switch off
Achieving the right headspace to enjoy your holiday can be as challenging as the planning and organisation. As tempting as it may be to check in and respond to work-related queries while you’re away, doing so may make it harder for you to relax and enjoy the moment.
If you are in a role where it’s not possible to completely switch off from work while you’re away, planning to check in for a limited time at the same time every day means you are not constantly ‘on call’ or thinking about work.
Ensure your holiday suits your style
Everyone’s idea of the ideal vacation is quite different. Some people like nothing better than a vacation filled with adventure and frenetic activity and for others the ideal holiday consists of lying around by the pool with a glass of something cold in their hand.
Know yourself and plan for a holiday that ticks the boxes for you, but also consider your travelling companion or companions, and make sure if you aren’t on the same page about how you want to spend your time, you are OK to spend some time apart doing your own thing.
Whatever your holiday style and preferences, a vacation is very much about what you make of it – so don’t sweat the small stuff (or even the big stuff that’s out of your control!) and make yours a happy, relaxing, and safe one.
