Deciding when to start investing again

At some time during the recent bear market did you sell most or all your investments to cash? Or maybe have you been holding out on your regular investment plan because you haven’t felt comfortable? Watch the video below for some insights into how to decide when to start investing again.

At some time during the recent bear market did you sell most or all your investments to cash?

Or maybe have you been holding out on your regular investment plan because you haven’t felt comfortable?

If you made that decision based on an emotional trigger such as “feeling tired of losing money” then you face the real predicament of getting back in too late and missing out on big gains which often come in the early days of an economic recovery.

Watch the video below for some insights into how to decide when to start investing again.

RBA rate cuts an ineffective stimulus

“Figures from the Big Four banks show that fewer than 5 per cent of mortgage borrowers have opted to reduce repayments as interest rates continue to slide.” (As reported on News.com.au here or  here)

What that means is that the massive rate cuts from the Reserve Bank of Australia over the past four months have been an ineffective stimulus on the Australian economy.

I believe this is happening because our nation’s “leaders” are fear-mongering. They are talking up the bad news too much without sufficient balancing positive leadership. Their jaw boning is counter-productive to their financial stimulus.

The big problem is that talk is free and stimulus is costing the country billions. 

The consequences could include (according to my fuzzy crystal ball):

  • Sudden reflation of the bubble as confidence returns and people start spending like the old days using their new stash of cash savings
  • Equally rapid interest rate rises 
  • A debt noose around our nation’s necks that hampers our international competitiveness and growth
  • A depression as the fear mongering becomes a self-fulfilling prophecy

To clarify I don’t mean all of the above. It could go either way in the short term.

One thing I am clear on is that fear breeds fear and what we need is true leadership, not a cash shower.

If you’re feeling scared ask yourself if the facts of your personal situation have really changed? Or is it just your perspective?

Maybe you are unnecessarily too scared. Maybe you don’t really have much to be afraid of and instead could be showing personal leadership to those around you.

How long markets have taken to recover

The Reserve Bank of Australia’s Statement on Monetary Policy (released 6th February 2009) included the following graph of the largest falls in Australian equities (aka shares). As the RBA note in their report “Historical experience indicates that, following large falls, it can take between three and six years for the share market to recoup losses”.

aust_equities-falls-rba.jpg

Read the full report on the RBA website here. The above graph is graph 65 on page 47 of the report.

First Home Buyers: Don’t Rush In

Many in the media are saying that the latest interest rate cut makes property more affordable for first home buyers. I disagree.

Let us remember this is the lowest interest rate in over 30 years. Rates are artificially low to stimulate the economy short term. This is not normal or even an average.

So it is fair to assume that over the 25 to 30 year loan term that interest rates will go up again. If you can’t afford the repayments when interest rates go back up (as they will) then buying a house now is a recipe for future financial stress.

The current interest rate only makes a home more affordable if you can fix your rate at current levels for 30 years.

If you still buy even though you can only just afford the repayments now then you are betting that your income will increase quicker than interest rates. Start praying that it does.

The only thing that makes the house more affordable is free cash in the form of the First Home Owners Grant.

House prices will perhaps stop decreasing so rapidly. Lower interest rates reduce the pressure on would be sellers so they will be less inclined to drop the price of their house. It is suddenly more affordable for them to hold on.

Of course you could be really creative and just buy a less expensive house that you could afford.

TIP: calculate your affordability based on the repayments if interest rates are 3% higher than they are at the time of purchase. Then make repayments at that level right from the start.

What Warren Buffet is Doing: in his own words

“Buy Amercian. I am.” declared Warren Buffet in an opinion piece in the New York Times on October 17th, 2008.  This article is written by Warren Buffet and I highly recommend you read it here.

In his own personal account he says that he has been buying American stocks. He also says that people who currently have their wealth in cash should not feel comfortable at the moment. Read the full article to understand his reasoning, including some historical context.

Following the historical context Buffet writes:

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Slow, steady and committed wins the race. Chopping and changing in line with your emotions will cost you dearly.

Over 10 years they’ve never lost

With the sharemarket hangover fairy still bashing around inside our heads it can be tempting to proclaim “never again will I drink from that font of wealth creation.” But where’s the fun in that?

It’s time to continuously remind ourselves to take a strategic view and keep a long term perspective that matches the period we will be alive and investing. Finally some articles to that affect are appearing among the mass media doom and gloom.

You may think you have heard it before but keeping reading the good news – you need at least two pieces of bright news to outweigh the psychological impact of each piece of gloomy news.

Following is an excerpt of a long article by James Dunn in The Australian today. Rational analysis that enables you to learn from history.

Andex Charts has calculated the returns made by investments in the main accumulation index (share price growth plus dividends) of the Australian share market, made at every month-end since January 1, 1950, and held for 10 years. In the period to August 31, 2008, there have been 585 10-year investment periods — and not one had made a loss.

The lowest 10-year return was 2.9 per cent a year (for the 10 years ended September 30, 1974), while the best return was 28.7 per cent a year (for the 10 years ended September 30, 1987. The median 10-year return comes in at 13.3 per cent a year.

The most recent completed 10-year return — for the decade to August 31, 2008 — is 12 per cent a year. This is despite a 13.1 per cent fall in the last 12 months of that period. Reid says the index would need to have fallen by 66 per cent in September to produce a negative 10-year return.

The lesson in these numbers is that if you are certain that you can give a share market investment (that is, in the accumulation index) time, you can be confident that it will make money for you.

A financial planner would get into trouble for describing the share market as capital guaranteed but, statistically, the accumulation index is, if you hold it for 10 years.

Wealth creation is a long term project. Investing in growth assets like shares must always be considered with at least a 10 year horizon before you need to spend the money. Any time frame less than that is gambling with odds that are turning against you.

Industry super funds are under-performing

Industry Super Funds LogoIndustry Super Funds would have you believe that one of their logos on your superannuation statement could mean thousands of dollars more in your superannuation. What they fail to mention is that it also could mean thousands of dollars less.

In a submission to the Australian Industrial Relations Commission on award modernisation and default superannuation funds, Minister for Superannuation and Corporate Law, Senator Nick Sherry said:

“Aggregated, unpublished Australian Prudential Regulation Authority (APRA) data shows that there are 24 industry funds (out of a total of about 84 such funds), potential default funds in awards, that have under-performed over the long-term.”

Sherry said this underperformance was as high as 1.6 per cent a year and the funds had a membership of around 3 million accounts in a system wide total of around 21 million accounts. (Read the article here.)

Oh my goodness! That is 28.5 percent of funds are under-performing and 14 percent of fund account members that could be affected.

The Industry Super Funds network are extremely vocal about the fees charged by retail super funds and apparent under performance of retail funds. This brings to mind the phrase “Me thinks you protest too much!” Their incessant headline grabbing behaviour appears to be a smoke screen for the real story.

And anyway, who is paying for the millions of dollars of advertising spent by the Industry Super Funds network? The members! “Run only to profit members” – yeah right! If you are going to make a claim, make sure it is true!

The lesson here is to not be complacent and accept the BS fed to you by your providers. Take a few moments a year to compare their performance to relevant benchmarks and Crack The Whip Over Your Wealth!

Has some of your superannuation been stolen?

On Friday night the current affairs show, Today Tonight reported that $300 million of superannuation has been stolen by employers. It’s a shocking situation for sure. Could some of your superannuation have been stolen?

The way employers “steal” your superannuation is by not paying compulsory superannuation guarantee contributions (9%) into your account on time, if ever. Some people in the story went 2 or 3 years without superannuation having been paid.

The truth is, if your superannuation is unpaid for over one year you must take some responsibility for that.

If superannuation goes unpaid for over a year it means that you ignored your annual superannuation statement when it was sent to you. Superannuation is your money; your wealth; your future lifestyle – ignore it at your peril!

How To Avoid Your Superannuation Being Stolen

If you want to avoid working for an employer who does not have the integrity to pay their full obligations then check your superannuation at least every three months. Employers are obligated to pay their superannuation guarantee by the 28th day after the end of each quarter. If you salary sacrifice into superannuation then your employer is obligated to contribute more regularly. And I dare say you have a greater interest in ensuring they do.

So I recommend that you check your superannuation account at least 4 times per year; on the 1st day of February, May, August and November. It should take less than five minutes each time, since most funds offer online access these days. Set a recurring reminder in your diary right now. Go on,  set one now.

And once you’ve done that quickly check your account to ensure that last quarter’s contributions have been paid. You don’t want to working one day longer for an employer who won’t or can’t pay their obligations.

It’s time in the market that counts

“Fortune favours the brave.” Investing more aggressively is one of the key behaviours of money masters in creating long term wealth. But when the share market falls suddenly and significantly many people cannot contemplate such a behaviour.

To help you be comfortable to invest more aggressively you need to invest time educating yourself about the short term risk, the long term rewards and your available options. Education and awareness is one key.

To assist you, Vanguard have published a chart of the volatility of the Australian share market index over the past 30 years. It shows that there have been 7 times since 1978 that the index has fallen more than 10%, for an average fall of 21.2%. The chart also shows the time length of the downturn and the subsequent recovery.

View the chart on the Vanguard website.

Remember: wealth creation is a long term game. What happens in the short term is mostly irrelevant – it’s just a blip on the radar.

Superant – financial literacy for littlies

A new educational website has been launched, called SuperAnt. Anything to do with money and finance can make many people’s eyes glaze over. This is perhaps even more so with younger people who have not yet had the life experience to realise the value of money in facilitating life experiences.

If you prefer to learn in fun, interactive ways (as many of us do) then check out the SuperAnt website, developed for TasPlan. It has lots of budgeting tips that will be useful for your teenage children too.

You are never too young, or old to learn how to make your money work harder for you. 

Property index changes name

Standard & Poor’s and the Australian Securities Exchange (ASX) recently changed the name of the S&P/ASX 200 Property Trusts Index to the S&P/ASX 200 A-REIT Index. The name change follows the ASX and Property Council of Australia’s renaming of Australian listed property trusts as Australian Real Estate Investment Trusts (A-REITs) to align with global practice.

REIT is the most commonly used and understood term used for listed property trusts in international markets. Australian REITs currently comprise around 12 per cent of the world’s listed real estate assets and are one of the largest sectors on the ASX.

Source: Vanguard Investments Australia, Smart Investing newsletter.

I recommend that all investors benchmark their portfolio returns once per year. The above name change is important to know because I recommend you use the market indices as one of your benchmarks.

Chronology of superannuation and retirement income in Australia

Do you have a massive orientation towards details and would love to learn more about superannuation in Australia? If so, you are in luck as the Parliamentary Library of Australia has just published a Chronology of superannuation and retirement income in Australia.

It is a wonderful resource for financial advisory geeks like me, but you may find the later years interesting too.

Many people grizzle that superannuation is constantly changing and that it is always bad. It is usual for any new idea to be continually tweaked as experience demonstrates the weaknesses and the strengths.  And I suggest that most of the changes to superannuation in the last decade have been beneficial to improving the long term wealth creation of Australians.

You can decide for yourself – make a cuppa and peruse the chronology… 🙂

Staff get more legal rights to claim superannuation in company collapses

Reported across several media outlets are the changes to laws giving staff greater ability to claim unpaid superannuation when companies collapse. Here is an excerpt from The Australian (read in full here):

Under new laws, which came into effect this week, superannuation will be given the same priority as other debts and will rank equally with employee entitlements such as unpaid wages and annual leave.

The Australian Taxation Office says any outstanding superannuation contributions and superannuation guarantee charge will be paid to employees before payments to ordinary unsecured creditors and once priority creditors and liquidators’ fees are paid.

The change is good news, but not one that would have me rejoicing. You see, it could takes years before the company is liquidated and the superannuation debt paid to former employees. (Ansett Airlines is still being liquidated many years after it collapsed.)

A better path is to keep an eye on your superannuation guarantee payments. If they are not paid on time one month then you approach your employer as it could be an early warning sign of a sinking ship. (It could also be an honest mistake in the timing of the payments, so be open to a quick satisfactory resolution.)

Under current regulations compulsory superannuation guarantee payments must be made quarterly. Salary sacrifice contributions must be paid in the month following the month they were sacrificed. (Actual deadline dates are listed on the ATO website.)

So at least take a quick glance at your superannuation account once every quarter to check on superannuation contributions. It may give you an early signal that you should start looking for a job with a different employer.

Almost $12 billion in lost superannuation

As at 30th June 2007 there is $11.9 billion in lost superannuation, according to the Australian Commissioner of Taxation’s Annual Report for the financial year 2006-07.  This staggeringly large amount of money is spread across 6.1 million accounts. That’s an average of $1,950 of lost superannuation per account.

Could some of this lost superannuation be yours? It may well be, even if you think you have rolled all of your funds together.

The amount in lost superannuation is so large that it is worth taking the few minutes to conduct an online search. (A few months ago I found some lost superannuation for a client who had thought they had identified all of their superannuation.) You can do this now for free using the ATO’s online Super Seeker tool. All you need is your tax file number, date of birth and name.

You wouldn’t just take $1,950 out of your bank account, throw it on the ground and ignore it, would you? So take the few minutes now to find your lost superannuation and get it working hard for you.