Bottrell Financial Planning Newsletter – February 2023
February marks the end of summer holidays for many of us and getting down to business for 2023. It can be a good time to reflect on plans and goals for the months ahead.
China’s plans to kickstart its economy after the pandemic shutdown have been dominating the news this month and will have worldwide implications, not the least for Australia. As our largest trading partner, an increase in demand is likely to bring improvements in our commodity prices, exports and share prices (particularly of companies exposed to China).
Australian shares were up nearly 8% in January while US stocks climbed by about 5% but the markets are nervously waiting for expected increases in interest rates by major central banks this month to help curb inflation.
Australia’s inflation rate jumped by 1.9% in the December quarter to 7.8% for the year. It was the biggest increase since 1990 and more than twice the rate of wage growth, despite the Reserve Bank’s moves to increase the cash rate during 2022.
The ANZ-Roy Morgan consumer confidence index increased slightly in January to finish at 86.8 points but it’s still 15 points behind the same time last year. The NAB business conditions survey recorded a third successive fall in December although business confidence improved slightly and remains well above average.
The Aussie dollar fell slightly from near eight-month highs, easing towards US70c ahead of the expected rate rises by major central banks overseas.
Building Wealth in Diversity
What a difference a year makes. In recent months, Australian shares hit a record high, the Aussie dollar dipped to levels not seen since the GFC and interest rates were cut to historic lows.
The danger is that investors with a portfolio heavily weighted towards local stocks are not only exposed to a downturn in the bank and resources
Towards the end of 2018, shares were in the doldrums and while experts agreed the Aussie dollar would go lower most tipped the next move in interest rates would be up.
All of which goes to show that when it comes to predicting financial markets, the only sure thing is uncertainty.
There’s no avoiding market risk, but it does need to be managed if you want to build enough wealth to live
comfortably in retirement and achieve other life goals along the way.
Thankfully, there is a way to reduce the impact of market volatility on your
overall investment portfolio. Hint: it’s not by putting all your money in the bank.
Mix it up
The best way to reduce the risk of one bad investment or a downturn in one market decimating your returns is to hold a mix of investments. This is what is referred to as diversification or not putting all your eggs in one basket.
To smooth your returns from year to year and avoid the risks of short-term market volatility, you need a
mix of investments from different asset classes.
The difficulty of predicting the market in the short-term was certainly in evidence in the year to June 2019.
Investors who panicked at the end of 2018 and sold their shares would have missed out on the unexpected rebound in global shares.
A year of surprises
Australian shares returned 11 per cent in the year to June 30. Global shares returned 11.9 per cent while US shares returned 16.3 per cent, partly reflecting the fall in the Aussie dollar from US74c to US70c_i
The worst performing asset class in the year to 30 June was Australian residential property, down 6.9 per cent.ii But while the housing market downturn was constantly in the news, good news in other sectors of the property market went largely unnoticed.
The best performing asset class by far in the year to June was Australian listed property, up 19.3 per cent.
The gap in performance between direct residential property and listed property highlight another important aspect of diversification. You also need to diversify within asset classes.
Look beyond your backyard
Where property is concerned, that means investing across a range of property types and geographic locations. By diversifying your property investments, you reduce the risk of short-term price fluctuations in one location which can result in a big loss if you are forced to sell at the bottom of the market.
The same holds true for shares. Many Australians have a share portfolio dominated by the big banks and miners, attracted by their fully franked dividends. The danger is that investors with a portfolio heavily weighted towards local stocks are not only exposed to a downturn in the bank and resources sectors but also the opportunity cost of not being invested in some of the world’s most dynamic companies
Time is your friend
Over the last 30 years the top performing asset class was US shares with an average annual return of 10.3 per cent. Australian shares (9.4 per cent) and listed property (9.2 per cent) were not far behind. And then there was cash. In a time of record low interest rates cash in the bank returned 2 per cent in the year to June 30, barely ahead of inflation of 1.6 per cent. The return was better over 30 years (5.6 per cent), but still well behind the pack.
While it’s important to have enough cash on hand for daily living expenses and emergencies, it won’t build long term wealth.
There’s no telling what the best performing investments will be in the next 12 months, as past performance is not an indicator of future performance.
What we can be confident about is that a portfolio containing a mix of investments across and within asset classes will stand the test of time.
Retirement is a phase of life most of us look forward to. It’s a chance to pursue other interests, travel and maybe do some part-time work or volunteering.
Thanks to more than 30 years of compulsory superannuation, we are retiring with more savings than previous generations but that also brings its challenges.
According to the government’s Retirement Income Review, the average age of retirement in Australia is around the ages of 62 to 65.i On average men and women can expect to live to 85 and 88 respectively.
To make the most of your retirement your savings need to last. The best way to achieve that is to have a plan that will help you avoid some common and preventable retirement mistakes.
Mistakes people make
While it’s impossible to predict what financial challenges lie ahead, these eight common retirement mistakes remain the same:
1. Not knowing your living costs – When you earn a regular income, you may be less focused on keeping a track of your living costs. When the regular income stops at retirement, you can be unaware of whether your investment income and/or pension payments will support your lifestyle costs. Know what your living costs are before you retire to help manage expectations.
2. Not looking at your super until just before retiring – Investing too conservatively when you’re working
could mean you don’t have enough super to fund your retirement. Review your super account regularly to ensure it is appropriate for each stage of your life.
3. Underestimating the impact of inflation – Australia’s rate of inflation hovered below 3 per cent per year between June 2012 and early 2020.
Since the onset of the global pandemic in March 2020, inflation has jumped to more than 7 per cent.” The cost of living may require you to reassess your retirement planning.
4. Not understanding your government entitlements –
If you’re age 66 or older, you may be eligible for a full- or part-Age Pension. However, if you are not eligible for the Age Pension, you may still be eligible for other entitlements including the Seniors Card, Pensioner Concession Card, income tax offsets or pensioner stamp duty exemption/concession.
5. Letting the noise affect your investment decisions – Negative news headlines can create uncertainty during market volatility. History has shown, over the long run the market trends upwards. All this noise can make it difficult to stick your long term strategy.
6. Trying to time the financial markets – “We haven’t the faintest idea what the stock market is gonna do when it opens on Monday – we never have,” said legendary share investor Warren Buffett. Say you invested
$10,000 in the ASX 200 index by trying to time the market and missed the 40 best days between October 2003 to October 2022, your investment would be worth $9,064, whereas if you remained fully invested it would be worth $46,099.i” Trying to time the markets is never a good idea.
7. Being asset rich and cash poor – You may have built up a strong balance sheet of assets, but in retirement you need income. For many Australians, their family home could be their biggest asset. You may have other assets but are they generating enough income? This could include rent from an investment property, share dividends or managed fund distributions. If the income is insufficient, downsizing into a smaller home could free up enough money to live on.
8. Not consulting professionals – Financial advisers, accountants and other financial professionals can help set you on the right path by navigating the complexities of superannuation, investments, constant rule changes and other factors that affect your retirement. A good retirement plan, implemented correctly, can set you up for life.
Whether it’s due to lack of time or awareness, too many people tend to make these same mistakes when entering retirement which can lead to unwanted financial surprises.
A phase of life you have looked forward to for so long deserves careful planning. So please get in touch if you would like to review your retirement income needs.
We often like to think of artificial intelligence as some fantasy of the distant future, the stuff of sci-fi movies. But the reality is, it’s already here. From flight comparison websites to predictive text, Al is everywhere, but what is it exactly?
Al is the development of computer systems that have the ability to perform tasks normally requiring human intelligence. These processes include learning, reasoning, and self-correction. The first Al algorithms were in fact written way back in the fifties, but it’s only been in the last twenty years, with huge advances in computer processing power, that we’ve really been able to see the tangible effects of Al in our lives and on our finances.
Big data, changing legislation and technological advances are feeding an Al revolution in the finance sector that is having wide-ranging repercussions for stock market trading and our personal finances.
Impact on trading
Since the late 90s when electronic trading became widespread, the proliferation of Al has totally changed the functioning of the global economy. Most of this is done through algorithmic trading, which, though nothing new, has been enhanced by huge advances in computational power.
Advocates of this sort of trading talk about how it eradicates human error, and removes emotion from investment decisions. While others argue that if algorithms aren’t thoroughly back-tested over a long enough period-or if the input data is somehow compromised-
people’s assets are at risk. Many point to the inability of Al to predict the GFC as an example of this. The 2010 Flash Crash is another, wiping nearly $1 trillion USD from the market in seconds because of spoofing algorithms (which have since
been banned), before rapidly rebounding The truth is, as Al has developed so has its regulation, meaning hiccoughs experienced even ten years ago are less likely to occur today. And you need only look at changing rules around data sharing and instant transactions occurring globally, or the massive returns last year on quantitative hedge funds -which employ algorithms and machine learning to inform their investment decisions-to know that this sort of trading is here to stay.ii
Al has already had a big effect on how we manage our personal finances. The credit card industry for example has benefited from increased data security and reductions in fraud as a result.
Similarly, banks are now able to analyse the data of billions of transactions to predict the spending of consumers and market their products accordingly. This same technology allows individuals to automate their expenditure, with many banking apps now sorting purchases by type and alerting users when they’re reaching their limits.
Al is also changing processes around lending and borrowing. This is especially true in the developing world, where credit scores might not be available. Startups such as LenddoEFI in Singapore are tracking people’s behaviours on their
smartphones to glean the likelihood of them meeting their repayments. The algorithm they’ve developed recognises behaviours indicative of financial responsibility and therefore can advise lenders, with a high degree of accuracy, on whether the loan should be approved. This technology will be interesting to watch as banks tighten lending standards and start to look not just at salary but also spending habits to determine if a loan is approved.
The robots aren’t coming… yet
In the world of Al, scholars often make the distinction between Artificial Intelligence, which is now common place in many industries, and Artificial General Intelligence (AGI), the sort that
might mimic a human brain and create links between disparate ideas and deal in abstract notions. We are still a long way from achieving the latter. And it has been argued that there are some aspects of the human experience that can’t be replaced by code, however clever it is. When it comes to your financial life, technology can certainly provide us with useful tools. There is no substitute however for knowledgeable advice that takes into consideration your unique circumstances, goals and dreams. We can help you navigate this brave new world, while also assisting you in a way that no algorithm is yet capable of.