Bottrell Financial Planning Newsletter – January 2023
As a new year begins, we wish everyone a happy, healthy and prosperous 2023. Many families will be glad to put 2022 behind them and although challenges remain, we look forward to better times ahead.
As 2022 drew to a close, investors remained focused on inflation, interest rates and recession worries. Inflation is running at around 7% to 11% in most advanced economies, including Australia (7.3%). The Reserve Bank of Australia (RBA) lifted its target cash rate by another 25 basis points to 3.1% in December, the eighth monthly rise in a row, up from 0.1% in May. The RBA noted that “inflation is expected to take several years to return to target range (2-3%)”, and most economists expect at least one more rate increase.
High inflation and borrowing costs continued to weigh on consumers in December. The ANZ-Roy Morgan consumer price index was steady at 82.5 points in the run-up to Christmas, 26 points below the same period the year before. Slowing consumer demand and rising costs also dragged the NAB business confidence index into negative territory for the first time in 2022, down to -4.4 points in November.
But it’s not all bad news. Australian company profits rose 18.6% in the year to September, the fastest pace in five years. Unemployment remains low, despite edging up to 3.45% in November and annual wages growth was 3.1% in the September quarter, the fastest pace in a decade. The Aussie dollar lifted slightly to US68.13c in December, down 6% for the year. Iron ore prices lifted 8% over the month but were down 1% for the year, while oil prices (Brent Crude) eased slightly but were up 11.4% in 2022 as war in Ukraine disrupted supply.
Outsmart your biases: using investor psychology to your advantage
When it comes to decision making, we don’t always get it right. It is human nature to fall for several behavioural traps when making everyday decisions and also when trying to predict the future. Even the smartest people can succumb to their own biases when forming judgements and making choices.
While it’s unrealistic to expect to never again make a bad decision, we can of course recognise and anticipate possible biases so we can make informed decisions. This knowledge helps us to better understand how our mind works so we can use this information to our advantage for our next financial decisions, investments and life choices.
Here are a few of the most common behavioural biases (and therefore traps) to be aware of and tips for how to overcome them.
This bias is ruled by fear, as you are focused on what you can lose rather than what you can gain. Mark Twain posed the example of a cat who jumps on a hot stove once and never will again, even though the stove would be cold and potentially contain food later, as a way to illustrate loss aversion.
Overcoming this bias requires confidence and pragmatism, as often the fear and expectation of loss is greater than the loss itself. It can help to lower the cost of failure (for example, if you are investing) and increase the likelihood of success to feel more assured when making decisions.
On the flipside, overconfidence can cause bad decision making as it means you’ll take greater risks. Facets of this bias include an illusion of control, planning fallacy (such as underestimating how long a project will take) and positive illusions.
This type of bias is often linked to people with high self-evaluations, however anyone can fall into the trap of overconfidence. To avoid it, consider the consequences of the decision and explore all possibilities rather than just the best case scenario. Be open to feedback and advice from others to help balance overconfidence and to give you more options to consider.
Groupthink is where you are influenced by the ideas of others in order to reach a consensus in a group situation – this is also called the bandwagon effect. Something might not sit well with you but rather than voicing your feelings and being at odds with the group, you go along with it.
It is easy to get swept along with group consensus but there are ways you can minimise groupthink. Encouraging conversation and debate allows differing ideas and opinions to be considered – in a group scenario this enables everyone to have their voices heard.
Even when making a decision by yourself you can still be swayed by the opinions of others, so don’t let these overpower your instincts. Think critically and have confidence in your own analysis.
The primacy/recency effect
This bias is part of the serial-position effect: why we can often remember the first and last items in a series the most clearly (and forget what comes in the middle). The primacy and recency effect are intertwined for this reason, and they are often used by teachers, speakers, lawyers and advertising, in order to make their message most impactful.
Awareness of this effect can help you understand why you’re likely not using all information presented in your decision making, but only the first and last messages. Keep a record of all information to get a more accurate picture of the situation. It also helps to do your research so you won’t just be influenced by the message from one source either.
These are just some of the biases that impact our decision making, from the day-to-day to the bigger life decisions. Having a trusted adviser in your corner can help improve your financial decision making, by providing market research together with considered advice through an external, unemotional lens. In fact recent findings from Russell Investments found one significant benefit of an advisers is they prevent clients from making silly behavioural mistakes.i
We can offer guidance to help you overcome your biases and make better choices, so don’t hesitate to get in touch today.
Time to protect your income
Consider cover for your most important asset – your ability to earn.
One of the reasons people say they don’t have income protection is the perceived cost. But if you were to lose your ability to earn you might regret not having cover, or not having enough cover.
Sadly, one in five Australian families will be impacted by the death of a parent, a serious accident or an illness that renders a parent unable to work.
These are sobering statistics given that only 31 per cent of Australians have income protection insurance.
Who needs it?
Income protection insurance comes into its own when you have commitments like a mortgage and a family. It is particularly helpful if you are self-employed and rely solely on your ability to work to earn an income. But it is also useful for employees as the cover will kick in once your sick leave runs out.
Insurance can mean the difference between maintaining your current lifestyle or defaulting on your mortgage and having to take your children out of private school. It can also give you peace of mind at a stressful time.
Most income protection policies pay up to 75 per cent of your salary for a negotiated period of time. This is often for two years although you can opt for payments up to the age of 70. What you choose will determine the cost.
You also need to decide whether to have a waiting period and, if so, for how long. For instance, if you are an employee it might make sense to wait 90 days or until you exhaust your sick leave entitlements. This will lower your premiums.
Lots of decisions
Timing is just one of the issues you need to address. There are other decisions to consider including whether to hold the policy inside your super fund or outside.
The key benefit of holding income protection inside super is that paying the premiums will have no impact on your cash flow; premiums can be funded from your employer contributions or your account balance. However, deducting premiums from your super will reduce your retirement savings.
If you hold income protection outside your superannuation fund you can pay premiums 12 months in advance and offset the expense against this year’s tax.iii
Stepped, level or mixed premiums?
Stepped premiums start low, but increase over time; level premiums are constant throughout the life of the policy although there may be minor annual adjustments for inflation. Mixed premiums allow you to blend the two within or across cover types. For example, you could have life cover that is 50 per cent stepped and 50 per cent level, or trauma cover stepped and life cover level.
If you are only looking for short-term cover for five to 10 years, then stepped might be cheaper; if you are expecting to maintain your cover for about 20 years, then you could choose level or mixed premiums.
This is because after 10 years the stepped premiums in dollar terms become more expensive than level or mixed premiums and you will end up paying more overall.
Agreed value or indemnity?
With agreed value, any payout is determined at the time you take out the policy. With an indemnity policy, the insurer generally looks at your level of income in the 12-24 months prior to the claim. Agreed value is usually preferable if you are self-employed and your income fluctuates from year to year
If you have financial responsibilities and depend on your ability to earn an income, you can’t afford not to insure.
Call us if you would like to discuss your income protection needs.
Keeping yourself accountable
At the end of the day, we are accountable to ourselves – our success is a result of what we do – Catherine Pulsifer
It can be both empowering and a little uncomfortable to think that we are responsible for our successes – and failures. Being willing to accept the consequences of our actions, choices or behaviours is not always easy.
We’ve all at some time or another played the “blame game”. It’s so easy to look outward and blame others for our problems, hardships or the obstacles that are getting in the way of us achieving our goals and dreams. For example, it’s the company’s fault that I keep getting passed over for that promotion, my team at work is holding me back, my partner is not being supportive enough of me.
The reality is there are always external forces at play that impact our lives and focussing on these external forces takes away our personal accountability.
What does it mean to be accountable?
Being personally accountable means taking responsibility for one’s own actions (or in some cases – lack of action!). It’s maintaining an ongoing commitment to yourself and what is important to you.
Here are a few ways you can become more accountable.
Remove the roadblocks
It all starts with your mindset. Choose to consciously embrace an accountable approach and recognise that you are the architect of your destiny.
That means letting go of the excuses and recognising them for what they are – roadblocks that are holding you back from taking responsibility for your own actions.
It helps to know what you are trying to achieve – whether that be in your career, relationships or personal life. Take the time to set concrete goals, jot them down, and have a plan of how you will achieve them and in what timeframe.
Start by setting yourself smaller goals as they will be easier to achieve in the beginning. Setting goals (even if they are small ones) and achieving them allows you to prove to yourself and others that you can and will hold yourself accountable.
Create your own opportunities
Accountability empowers you to be in control of your actions in your personal life and career. You can create your own opportunities rather than passively allowing life to happen to you.
Being accountable is about fulfilling your obligations to yourself as well as to others, so when you achieve what you’ve been aiming for, take time to recognize these milestones and celebrate them.
Take responsibility for your decisions
Embrace the ‘good, the bad – and the ugly’ and accept the consequences of your actions, choices and behaviours, be they positive or negative.
Revel in the positives, but don’t be afraid to admit and own up to your mistakes. One of the most powerful ways we learn is through making mistakes and taking responsibility for them. That means acknowledging that there is a problem, identifying your role in it and proposing a solution to minimise or eliminate the chances of it happening again.
Learn from your mistakes
To reach your potential it’s necessary keep extending what you are capable of and taking risks and that means making mistakes. Don’t beat yourself up but think of what you would have done differently and what you’ve learned from the experience.
Ask for help
The road to success does not have to be a lonely one. While you are responsible for your own successes, that doesn’t mean you can’t ask for a hand or even better, work with another, or others to get the support and encouragement you need.
An accountability partner can be someone who shares your goals and supports you to keep your commitments or maintain progress on a desired goal.
Having an accountability partner has been proven to increase your chances of success to an astonishing 95% if you have a specific accountability appointment with a person you’ve committed to.ͥ
So, if you are wanting to be more accountable to your own success this year don’t go it alone – make a time for a chat with us and we can work with you to help you achieve your goals and dreams.