Common Terms and Phrases in the Sharemarket

Posted on July 16, 2024 by Arrowroad

Understanding the most frequently used words and phrases in the sharemarket will help you navigate your share investments more effectively. Below are some common terms and their definitions:

Ordinary Shares: Ordinary shares, commonly referred to simply as “shares,” give their holder part-ownership in a company. Holders of ordinary shares are entitled to voting rights and company dividends.

Index: An index is a benchmark used to measure the performance of the sharemarket or a component of the sharemarket. For example, in the Australian sharemarket, the ASX/S&P 200 represents the overall sharemarket.

Volatility: Volatility refers to the extent of price movement of a share or the sharemarket. High volatility means shares have extreme up-and-down movements in their prices and performance, making them more difficult to predict. Volatility is a common measure of the riskiness of a share or sharemarket.

Dividend Imputation: A tax rule whereby tax paid by a company is credited to individual shareholders. Shareholders are assessed on the total amount of the dividend and imputation credit, and then allowed to claim a tax rebate equal to the imputation credit. This eliminates the double taxation of company profits. If the franking credits you receive exceed the tax you must pay, you can claim the difference as a tax refund.

Dividend Yield: The yield, or income, from shares expressed as a percentage. Dividend yield is calculated by dividing a company’s total annual dividends by its share price.

Franked Dividends: An Australian company may pay you a franked dividend, which is paid out of company income that has already been taxed. Shareholders receive a reduction in income tax in line with the amount of tax paid by the company. Dividends can be fully franked (the entire amount carries a franking credit) or partly franked (a portion carries a franking credit).

Dead Cat Bounce: A short-lived rise in a company’s stock price after a sustained drop in its share price.

PE Ratio: The price-earnings ratio measures the attractiveness of a stock relative to other stocks. It is calculated by dividing a share price by a company’s current or forecast earnings per share (EPS). A high PE ratio suggests high growth expectations or a high valuation.

Earnings Per Share (EPS): EPS is a company’s net profit after tax divided by the number of shares issued by the company. It is a way of measuring the performance of a company.

Return on Equity (ROE): ROE measures how well a company uses funds invested by shareholders. It is calculated by dividing a company’s net income by the total equity of shareholders. The higher the ROE, the better the return for shareholders.

EBIT: EBIT (Earnings Before Interest and Tax) measures a company’s total revenue minus expenses other than interest and tax.

Beta: Beta measures the relationship between the price of a company’s shares and the overall sharemarket movement. A beta of 1 means the share moves in line with the market. A beta lower than 1 means less movement than the market, and a beta higher than 1 means more movement than the market.

Alpha: Alpha measures the excess return of a security or managed fund relative to the return of the benchmark index. For example, if a managed share fund returned 12% and the overall sharemarket index returned 10%, the alpha is 2%.

Cyclical Stocks: Companies whose fortunes ebb and flow with the business cycle. These companies prosper in economic upswings but perform poorly in slowdowns.

Bear Market: A term used to describe when the sharemarket is in a downtrend or a period of falling share prices.

Bull Market: A term used to describe when the sharemarket is in an upward trend or a period when share prices are rising.

Derivatives: Investment products whose value is linked to an underlying stock, index, commodity, currency, or fixed interest product. Examples include futures, options, and warrants. The value of derivatives is determined by changes in the underlying assets.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Tips for Teaching Children Good Savings Habits

Posted on July 15, 2024 by Arrowroad

Introduction: Teaching children money values is crucial for securing their financial success. Children learn money management early, primarily by observing their parents or other influential adults. Schools also play a role by offering courses on money management, but the foundation starts at home with values such as earning, saving, responsible spending, and good debt management.

Easy Strategies for Parents:

1. Teach Kids What Money is For: Parents should begin by explaining how money fits into their children’s lives. Make sure kids know money is earned by working hard, allowing them to enjoy the things they see around them. Explain that their favorite toys and dinners come from money earned through work. This personal connection helps them understand the importance of hard work and earning money.

2. Help Them Comprehend the Value of Money: Let children know how much things cost. Start small by explaining the cost of everyday items, like a chocolate bar. Make it fun by comparing prices in terms of items they understand, like how many chocolate bars equal the cost of a car. Ensuring they understand the different values of things helps them recognize good deals versus bad deals later in life. Handling both notes and coins can also help them grasp the value of money.

3. Introduce Pocket Money and How it Works: Once children understand what money is for and how much things cost, introduce pocket money as a way for them to earn their own money. Emphasize that pocket money is not a free handout but a reward for hard work. This approach helps prevent overspending and debt issues later in life.

4. Ways to Earn Pocket Money: Encourage children to earn pocket money by helping with small tasks. Younger children can start with simple chores like feeding pets or watering plants. As they grow older, they can take on more substantial tasks that help around the house, teaching them the value of hard work and earning money for their goals and savings.

5. Share the Cost: Parents can set rules where children must save part of the cost for items they want. For example, if a child wants a pair of joggers costing $100, they need to save half the amount if they want a more expensive pair. This teaches them the value of saving and contributing to their purchases.

6. Start an Investment Plan: Encourage children with part-time jobs to save a portion of their pay into a bank account and consider investing in shares or managed funds as their savings grow. Parents could also buy a small share portfolio for their child, encouraging them to monitor performance and make decisions on buying and selling. Additionally, parents could take a portion of the child’s pay to simulate paying taxes, investing this amount into a savings plan.

7. Teach the Limits of Spending: Parents should educate children about the limits on what they can buy, how borrowing money works, and the cost of debt. This knowledge helps them make informed financial decisions and understand the implications of borrowing and debt.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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SMSF Investors and Home Bias: Diversifying into International Shares

Posted on July 14, 2024 by Arrowroad

Introduction:
The ATO Self Managed Super Fund (SMSF) statistical report for March 2023 indicates that Australian listed shares made up approximately 29.35% of total SMSF assets, while overseas shares only made up approximately 2.68%1. This exposure does not consider exposure via managed funds and listed trusts.

SMSF Investors Have a Home Bias:

SMSF investors have a bias for Australian shares relative to international shares. This may be driven by several reasons:

  1. Ease of Access:
    Investor preference for investing directly tends to mean SMSF investors favour Australian shares because investing directly into international shares is complex and harder to access. Currency movements affecting returns from international shares and the currency hedging decision increases the complexity of investing in international shares.
  2. Quasi Global Exposure:
    Some SMSF investors believe that investing in Australian companies that have a global presence or that are influenced by global developments, such as resource companies, provides adequate exposure to international economies and investment themes.
  3. Preference for Tax-Effective and Income-Yielding Shares:
    Australian shares tend to provide relatively higher levels of income with franking credits. This can be an important source of tax-effective income for retirees and pre-retirees. The franking credits can be used to offset other tax within the SMSF in the accumulation phase and refunded credits in the pension phase can add to returns.
  4. Greater Understanding of Australian Companies:
    An SMSF investor will typically have a deeper knowledge and understanding of the Australian share market and companies that make up the market than overseas companies. Therefore, SMSF investors may feel more comfortable investing domestically.

The Downside of Excessive Home Bias:

SMSF investors need to determine whether they have a bias towards Australian shares and consider the following implications:

  1. Concentrated Exposure of Australian Shares:
    The Australian share market represents a small portion of the global universe (around 1.9% as measured by the S&P Global Broad Market Index as of June 30, 2023). The market is highly concentrated in a few sectors and a handful of companies. The materials and financial sectors comprise around 52.1% of the ASX 300, with the top five stocks being the three major banks, BHP, and CSL^.
    ^ Source: S&P ASX 300 factsheet, June 30, 2023, viewed July 19, 2023.This high level of concentration means that investors are prone to shocks or underperformance affecting these key sectors and companies.
  2. Currency Movements Affect Returns from Global Shares:
    SMSF investors should consider the significant impact that the movement in the Australian dollar can have on the total returns from overseas assets (unhedged). A rise in the Australian dollar translates to currency losses, detracting from overall returns. Conversely, a fall in the Australian dollar can provide positive returns from currency movements.
  3. Other Australian Assets:
    SMSF investors that operate a small business and/or own investment property (either within or outside of their SMSF) already have heavy exposure to the Australian economy. An excessive home bias to Australian shares exacerbates their reliance on the performance of the Australian economy, limiting diversification. Limited exposure to global assets reduces access to countries with stronger economic growth prospects, such as emerging markets.

How to Diversify into International Shares:

There are several ways of accessing international shares, including via managed funds, exchange-traded funds (ETFs), and direct shares listed on offshore share markets. Different types of international share funds include global diversified funds, sector-specific funds, country funds, and specialist funds. The best way to access international shares depends on the investment strategy of the SMSF and the amount of money to be placed in international shares. Some guidelines include:

  1. Direct Investments:
    SMSF investors with a preference for direct investments may consider buying international ETFs that track an international index. Actively managed ETFs that attempt to outperform the index are also an option.
  2. Global Diversified Funds:
    Investors with a small amount to invest in international shares may prefer a global diversified fund that provides broad diversification across countries, sectors, and companies.
  3. Specialist and Regional/Country Funds:
    Investors with a higher risk tolerance and larger amounts of funds may consider a combination of global, diversified funds supplemented with specialist and regional/country funds.

Dealing with Currency Exposure When Investing Offshore:

Currency can pose a significant risk for international investors but also provide benefits. When the Australian dollar depreciates, currency gains can be made from the international asset when converted back to Australian dollars, boosting returns. Hedging the currency exposure means that investors miss out on this gain if the Australian dollar falls. However, if the Australian dollar appreciates, investors will incur currency losses. Predicting currency movements is difficult and fraught with risk. Nonetheless, if SMSF investors are concerned about the risk of a continued rise in the Australian dollar, they can hedge some or part of their currency risk by the following methods:

  1. Managed Funds:
    Investing in a managed fund that actively manages the currency exposure, leaving the hedging decision to the specialist fund manager.
  2. Hedged International Share Funds:
    Investing in a managed fund that always has a set amount of hedging in place, such as 50% and 100% hedged international share funds.
  3. Currency ETFs:
    Investing in currency ETFs that effectively increase in value if the Australian dollar appreciates, thereby offsetting some or all of the losses made in the international share portfolio.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

  1. https://data.gov.au/data/dataset/self-managed-superannuation-funds/resource/50ec132c-06ba-40fd-b9d2-d4dc9435c83b SMSF quarterly statistical report March 2023, Self Managed Superannuation Funds – Dataset ↩︎
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The Importance of Portfolio Rebalancing

Posted on July 13, 2024 by Arrowroad

Introduction:
You may find that your portfolio asset allocation has significantly deviated from your strategic or target allocation and, consequently, may not match your stated risk profile. Rebalancing your portfolio involves bringing your asset allocation back in line with your target or strategic asset allocation.

Understanding Strategic Asset Allocation:

Your strategic asset allocation is determined based on several factors, particularly your tolerance for the level of risk, which is measured by your risk profile. Generally, the higher your exposure to growth assets such as shares and property, the greater the level of risk in your portfolio. Your strategic asset allocation is structured to match your risk profile.

Why Rebalancing is Necessary:

As the investments and asset classes in your portfolio achieve different levels of returns over time, your actual asset allocation will drift away from the original strategic asset allocation. This may affect the allocation to growth assets in your portfolio relative to defensive assets. If the proportion of growth assets in your portfolio increases significantly relative to your target allocation, the expected long-term returns may increase, which is a positive outcome. However, it will also increase the risk in your portfolio, which may not align with your risk tolerance.

How to Rebalance Your Portfolio:

Rebalancing your portfolio involves adjusting your allocation to different assets to realign with your strategic asset allocation. This can be achieved in several ways:

  1. Selling and Buying Assets:
    • Sell the assets that have increased their weighting and buy the assets that have reduced their weighting relative to your strategic asset allocation.
  2. Channelling New Funds:
    • Direct any new funds or contributions to the assets that have a lower weighting relative to your strategic asset allocation to increase their weighting in your portfolio.
  3. Withdrawing Funds:
    • Withdraw funds from the assets that have a higher weighting relative to your strategic asset allocation to reduce their weighting in your portfolio.

Regular Review:

Your portfolio asset allocation should be reviewed regularly (at least annually) to ensure that it has not unintentionally drifted away from the target allocation.

The Costs of Rebalancing:

Rebalancing your portfolio involves buying and selling investments, which can result in additional fees and costs, such as brokerage fees if buying and selling direct shares, and entry and exit fees in the case of managed funds. To minimize these transaction costs, it is recommended that you only rebalance your portfolio if it has drifted away from your strategic asset allocation by more than 5%.

Selling investments can also trigger a capital gains tax event, and you may be required to pay tax on the sale of your investments.

Conclusion:

Rebalancing is a crucial part of portfolio management that ensures your investments remain aligned with your risk tolerance and financial goals. By regularly reviewing and adjusting your asset allocation, you can maintain the desired risk-return profile of your portfolio and potentially enhance your long-term investment outcomes.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Managing Risk in Times of High Market Volatility

Posted on July 12, 2024 by Arrowroad

Current Context:
Higher volatility in financial markets is being touted as the ‘new norm’. During choppy times in financial markets, investors are prone to making investment decisions based on emotions. Below are some tips on different ways to manage risk during periods of high volatility.

Move to a More Conservative Portfolio:

When markets are volatile, investors typically want to protect their investment portfolio from any further falls in the share markets. This is usually done by selling down some or all of their growth assets like shares and property and investing the proceeds in secure investments such as cash and/or term deposits. Unfortunately, investors tend to sell down risky assets after prices have already fallen. Nonetheless, this strategy is a good means of protecting your portfolio against further market downturns while providing some positive returns.

You may not necessarily need to take big steps by selling all or a significant amount of your growth assets. Instead, you can reduce your exposure to risky assets by making smaller tweaks. This way, you will have some protection on the downside while still maintaining some exposure to markets should the decision turn out to be wrong or inappropriate.

The timing of the sale of shares may also not be optimal from a tax perspective. There may be capital gains tax payable, particularly on shares that have been held for a long time. If the shares are held within your super fund, the maximum capital gains tax payable is 10%, so the tax implications may be less of an issue.

The biggest risk of this strategy is the risk of attempting to time the market and getting it wrong, thereby missing out on any recoveries in markets, which can often be very rapid and short-lived. Investing in a term deposit for, say, three years limits your flexibility to move back into the market if the opportunity arises before the maturity of the term deposit.

A lower exposure to growth assets can mean that your likelihood of achieving higher returns is reduced, which adversely affects the future value of your portfolio. You may be planning for retirement and base your plans on achieving a certain level of returns over time that, if not achieved, puts your planned future outcomes at risk.

Another risk to consider is longevity risk, as people are living longer. Adopting a conservative portfolio may exacerbate this risk because it limits the potential growth of your portfolio over time.

Switch to Defensive Investments:

You can switch to securities and managed funds that have a more defensive characteristic. This may be due to the share or managed fund providing exposure to companies that are more defensive either because their business tends to hold up better during economic downturns and/or it pays a higher level of income that cushions the total returns from a fall in its price. Certain assets like gold can perform well when there is greater uncertainty around the markets and are sometimes considered defensive investments.

You need to take account of the specific nature of the investments. If you are switching to a different type of investment, then it is important that you understand the risks and product-specific attributes of this investment approach. Another expected outcome of this strategy is that defensive assets may not perform as well as the overall market in the case of a market recovery. Any switching of investments may result in realized capital gains and transaction costs.

Maintain Your Portfolio’s Diversification:

Diversifying your portfolio by spreading the investments across a range of assets and investments is one of the fundamental rules for managing risks in a portfolio. Investing across a range of assets, including alternative assets and debt securities, can be an effective means of protecting your portfolio against market downturns. Avoid having a concentrated portfolio with limited exposure to a few assets or investments.

Consider Dollar Cost Averaging:

Making regular investments over time can allow you to avoid market peaks and troughs. This is done by buying more assets when prices are low and fewer assets when prices are high. The advantage of this approach is to lower the total average cost of the investment purchased over time. This strategy reduces the risk of making a large investment at the peak of the market.

Lower Gearing Levels:

Other strategies to consider include reducing the gearing levels if you have borrowed to invest. This may involve selling down investments to reduce the level of gearing and/or contributing additional personal funds to reduce the loan-to-valuation ratios. Lower levels of gearing reduce the probability of experiencing a margin call and the potential losses from a market downturn. On the flip side, it also reduces the gains from any market recovery.

Putting It All Together:

There are a range of levers that you can use to manage the impact of market volatility on your investment portfolio. Each has its advantages and disadvantages, and in some cases, a combination of strategies may prove to be a better outcome than simply relying on a single approach. Ensure you understand the implications and risks of the different approaches to make an informed decision.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Guaranteed Products – Determining Whether They Are Right for You

Posted on July 10, 2024 by Arrowroad

Introduction:
Whenever financial markets experience a sustained downturn or a higher level of unpredictability, guaranteed products become more appealing. These products generally promise investors a level of capital growth and/or a set income return without all the associated risks of investing in financial markets.

Understanding Guaranteed Products:

Before deciding whether to invest in these products, take a step back, contemplate your investment objectives, and ensure you understand the benefits and features of the specific guaranteed product. Recognize the trade-off between an investment that provides peace of mind but which may also reduce your gains from market upturns and any higher costs often associated with guaranteed products. Only then can you prioritize the product features that are most suitable for you.

The features, risks, and benefits of a guaranteed product need to fit with your specific objectives and needs. Therefore, it is important that you understand the specific features of a guaranteed product before deciding whether and/or which product best suits you.

Different Objectives for Different Needs:

Some investors may place a high value on the security of their initial investment or on a reliable income return. In this circumstance, the investor may be willing to pay higher costs and fees for some ‘peace of mind’. An investor who has a fear of outliving their funds may be willing to accept potentially lower returns relative to a non-guaranteed investment if they can transfer their longevity risk to a reputable product provider.

Each objective may result in a different guaranteed product with specific features being suitable to the investor. The case study below illustrates these differences.

Example: Three Brothers Nearing Retirement

  • Archie: Archie is concerned that the recent strong performance in share markets will reverse rapidly and affect his savings just as he is about to retire. He is not sleeping well at night and worries about day-to-day market movements. Ideally, he would like part of his portfolio to achieve a certain positive return. A product that provides a guarantee of the capital for a period of 5-7 years may be attractive to him for peace of mind. Archie may be more resistant to paying higher fees, which may reduce the net return for his portfolio.
  • Lachlan: Lachlan expects to live well beyond his life expectancy and is concerned that his portfolio will not last long enough to provide a reasonable income level in the later stage of life. He may favor a guaranteed product that transfers the risk of outliving his funds to a reputable institution that can provide a minimum level of income in the later years of his life.
  • Finn: Finn is conservative and recognizes that investing in growth assets makes sense for the long term but is uncomfortable with the high level of risk associated with growth assets. He may prefer a product that provides a guarantee of the capital over a long-term period but also enables him to participate in any positive market movements. Finn is willing to pay a premium for effective insurance to invest in growth assets.

In each case, these three brothers are likely to choose different guaranteed products to meet their specific needs.

Checklist for Evaluating Guaranteed Products:

FeatureConsiderations
Term of the InvestmentThe term of the investment needs to match your investment time horizon.
Return of CapitalThe investment may provide a guaranteed return of capital. Often, a guarantee on the initial investment is only offered if there is no/limited access to your capital over the term of the investment.
Guaranteed IncomeConsider how competitive this income return is relative to other alternative defensive assets such as cash, and consider any higher fees that may reduce the net level of income you receive. Evaluate the potential for indexed income levels to keep up with inflation.
Strength of the GuaranteeRecognize how and by whom any guarantee is supported. The financial and business strength of the organization needs to be analyzed to ensure the guarantee will be met when it falls due.
Access to Capital/Partial WithdrawalEnsure you have other assets or a source of income to meet your expenditure and income needs if the guaranteed product does not allow you to access your funds before the end of the term.
Underlying InvestmentsUnderstand the underlying investments that back the guarantee and affect the outcome of your investment.
Choice of InvestmentsConsider any restrictions on the choice of investment options, as they may reduce your ability to tailor the portfolio to suit your specific objectives and risk profile.
Potential for Capital GrowthUnderstand whether your investment outcome can benefit from gains in financial or real assets that provide the potential for capital growth over the long term and the extent to which you can participate in such gains.
FeesAssess and understand the fees charged within the structure, particularly any fees relating to the provision of the guarantee, to determine whether the costs are reasonable.
Opportunity CostsConsider the opportunity cost of a conservative guaranteed investment compared to potential returns from growth-oriented or non-guaranteed investments, especially during periods of strong market performance.

Conclusion:

Guaranteed products can offer peace of mind by providing secure capital growth and/or income returns, but they come with higher costs and potential trade-offs. Carefully evaluate the features, benefits, and risks to determine if a guaranteed product aligns with your investment goals.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Long and Short Positions in the Sharemarket

Posted on July 9, 2024 by Arrowroad

[vc_row][vc_column][vc_column_text]Introduction:

Share markets go up as well as down. You can profit from rising share prices by investing in shares. You can also profit from falling share prices by ‘short selling’. This smart investing article considers the mechanics of both long and short positions in the sharemarket.

Going ‘Long’:

When most people think of investing in the sharemarket, they probably imagine buying a parcel of shares, holding them, collecting dividends, and at some later time, perhaps selling them. In investing jargon, that means to go ‘long’.

Example:

If you buy 1,000 NED Ltd shares at $1, you are ‘long’ NED at $1.

  • If the price rises to $2, you can sell and make a $1,000 profit (i.e., $2,000 – $1,000 = $1,000).
  • If the price falls to $0.50, you can sell and make a $500 loss (i.e., $1,000 – $500 = $500).

 

Going ‘Short’:

The opposite of going ‘long’ is to go ‘short’, which means to sell shares that you do not own. Short-selling involves selling a share that you don’t own, with the expectation that its price will decline and you can buy it back at a lower level. Your profit will be the difference between the price at which you sold the share and the lower price you bought it back at. This investing practice is carried out regularly.

Example:

You sell 1,000 NED Ltd shares at $1.00 – you are short NED at $1.00.

  • If the share price of NED falls to $0.80, you need to buy 1,000 NED Ltd shares at $0.80 to close out the short position. The profit (sale less cost) is $1,000 – $800 = $200.
  • If the share price of NED increases to $1.40, you need to buy 1,000 NED Ltd shares at $1.40 to close out the short position. The loss (sale less cost) is $1,000 – $1,400 = ($400).

 

Risks – Short versus Long:

Long Positions:

  • Potential profit is unlimited.
  • Potential loss is limited to the amount invested.

 

Short Positions:

  • Potential profit is limited.
  • Potential loss is unlimited because there is no limit on how high the share price can go.

 

Short Selling on the Australian Sharemarket:

Short selling on the Australian market is only allowed in accordance with the Australian Stock Exchange (ASX) rules and guidelines. There is a limited list of approved companies that can be sold short. Stockbrokers are required to report their net short positions to the ASX each day. Individual investors are not required to do this, but they must inform their stockbroker before placing an order.

ASIC (The Australian Securities and Investment Commission) has placed strict controls on short selling to bring order to the sharemarket during periods of market turmoil. Short selling is a higher-risk strategy, and it is essential to understand and consider the risks based on your personal circumstances.

Conclusion:

Short selling has elements that make it riskier than simply going ‘long’. Understanding both long and short positions and their associated risks is crucial for making informed investment decisions.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.[/vc_column_text][/vc_column][/vc_row]

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Different Investment Styles Explained

Posted on July 8, 2024 by Arrowroad

Introduction:
There are different approaches or styles used to manage investments. Understanding the different investment styles can help you navigate the various managed investments and make you better equipped to choose the investment style(s) that suit you. Investment style refers to the investment approach that a professional investment manager uses to determine the selection of securities and the proportion invested in each security for the portfolio. Some of the common investment styles are defined below.

Active Manager:

Active fund managers aim to deliver investment returns above those generated, on average, by financial markets. For example, an active manager of Australian equities would attempt to beat the returns generated by the Australian sharemarket index. Active managers provide professional researchers and investment managers that seek opportunities to gain better returns than the relevant market index. They tend to charge higher expenses than passive managers partly due to the higher costs of accessing professional experts.

Passive Manager:

Passive fund managers, otherwise known as index managers, aim to equal the performance, on average, of a financial market. For example, a passive manager of Australian equities might aim to equal the returns of the S&P/ASX200.

Value & Growth:

Different fund managers use different investment philosophies to identify stocks that will deliver solid returns to investors.

  • Value Managers: Look for shares that are undervalued by the rest of the market and have the potential to outperform when the market recognises their value.
  • Growth Managers: Look for companies with faster expected future growth in earnings.

Analysts use different sets of financial metrics to categorise the value or growth potential as well as their judgment to determine the investment worthiness of a security or company.

GARP:

A GARP (Growth-at-a-Reasonable-Price) investment philosophy is an alternative to value or growth investing. A GARP manager looks for stocks that are cheap but also have potential for growth.

Style Neutral:

Style-neutral managers don’t employ a value, growth, or GARP investment philosophy. Their aim is to deliver consistent performance by avoiding a style bias.

Bottom-Up Investing:

Bottom-up investors are otherwise known as ”stock pickers” because their investment selection starts with an analysis of individual companies before considering industry and economic forecasts.

Top-Down Investing:

Top-down investors begin their stock selection process by considering economic forecasts and industry prospects. Stock selection is carried out later.

MER (Management Expense Ratio):

Every managed fund charges a management expense ratio (MER) to investors. MERs are charged to recoup the cost of running a fund and to provide payment to the institution managing your money. MERs are expressed as an annual percentage.

Manage-the-Manager:

A managed investment which invests the portfolio in several investment managers with different investment styles. The combination of the blended investment styles and approaches can provide a diversified investment and more reliable returns over time.

Risk Management:

A series of checks to ensure a fund manager’s portfolio does not contain any unintended risks or biases.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Education Funding for Children

Posted on July 7, 2024 by Arrowroad

Introduction:
The costs of raising children from birth until adulthood are frequently reported by the media and vary widely depending on whether you want your children to go to public or private schools and whether they plan to go to university or college.

Education Costs:

For example, if you send two children to a private high school that costs an average of $20,000 a year for each child, you will have spent $240,000 on school fees by the time they both graduate. And that’s not counting extras such as school uniforms, trips, and sporting clinics. Public schools are much cheaper, but there are still extra tuition fees, textbooks, uniforms, and school camps to pay for.

The cost of going to university or college can also vary. If your child is eligible for HECS-HELP (a government loan available to tertiary students), they can choose to defer payment of university fees. Even if they don’t pay fees upfront, your child will have to pay for books and materials, union and sports fees, and transport costs.

Start Saving Early:

The earlier you start saving for your children’s education, the better. Education costs are usually a long-term goal that can take more than five years to achieve.

Key Steps to Set Up a Savings Plan:

  1. Set a Savings Goal: Decide what is being saved for (e.g., education – the type of education and at what level, private schooling and/or tertiary education?).
  2. Set a Budget: Determine how much needs to be saved to reach the required goal.
  3. Choose an Investment Option: Decide which product or where the money should be invested.
  4. Determine Ownership: Decide in whose name the investment should be made.

Investment Options:

To help you reach your goal, you could put your savings into:

  • Direct investments such as shares
  • Managed funds or insurance bonds
  • Term deposits or savings accounts
  • Education funds

Starting your savings plan sooner makes it easier to keep your savings growing, reducing the risk that you may have to fund any shortfall when the school fees are due. This is due to the benefits of compounding interest.

Understanding Compound Interest:

Compound interest is like a layer cake for your savings. You earn interest on the money you deposit and on the interest you have already earned – so you earn interest on interest.

Example:

An example of an account that earns compound interest is an online savings account that pays monthly interest. If you invested $10,000 at 5%, you would earn $2,834 in compound interest after five years, giving you a total of $12,834. This is because every month, the interest is added to your account, and you’ll earn interest on the interest.

Compound Interest on a $10,000 Investment at 5% per Year (Compounding Monthly):

YearInitial DepositInterestTotal
1$10,000$512$10,512
2$0$538$11,049
3$0$565$11,615
4$0$594$12,209
5$0$625$12,834

Consider Other Financial Obligations:

Before you decide to put your money into any saving options, you should consider your other financial obligations. For example, you may be better off repaying your non-deductible debt, such as the mortgage or car loan first, before you start saving.

Seek Professional Advice:

Your financial planner can assist you with all of these decisions, ensuring that the future of your child’s education is off to a great start.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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Dollar cost averaging

Posted on July 6, 2024 by Arrowroad

Introduction:
You may be concerned about the ups and downs in financial markets and are unsure about whether it is a good time to invest in risky assets. Trying to time entry into financial markets can be fraught with danger. Consider dollar cost averaging as an alternative strategy to picking the right time to invest.

What is Dollar Cost Averaging?

Dollar cost averaging involves investing a set amount regularly over a period rather than investing the full amount at a single point in time. This strategy helps avoid trying to time your entry into financial markets. By making regular investments over time, you may be able to minimize the risk of investing all your money during a market peak. This can help to minimize investment risk and average the purchase price of your investments by buying more assets when prices are low and fewer assets when prices are high.

The aim of this approach is to reduce the total average cost of the investments you purchase over time. It allows you to take advantage of choppy or falling financial markets by investing gradually over a period. If investment prices fall over this time, you can buy investments at a lower price and receive more units or shares for the fixed sum of money.

By placing the money intended to be invested in a cash account until you are ready to make the regular contributions, you will start to earn some income to help boost your savings.

Example:

Isa has received a windfall of $100,000 and decides to invest it sensibly in shares rather than spend it. She decides to invest a regular sum of $8,333 each month over a 12-month period. Her investment balance will depend on how the share market performs over the next year.

To illustrate, we have assumed three scenarios for the performance of the share market:

  1. The share market rises steadily by 20% over the year (unit/share price increases from 1.00 to 1.20 by the end of the year).
  2. The share market is choppy and steadily falls by 20% in the first six months before steadily rising in the second half of the year to the same level as it was at the beginning of the year (unit/share price starts at 1.00, falls to 0.8 by the middle of the year, and then ends at 1.00 by the end of the year).
  3. The share market falls steadily over the year by 20% (unit/share price falls from 1.00 to 0.80 by the end of the year).

Isa invests the $100,000 into a cash account that pays an interest rate of 2% pa and draws down $8,333 from this cash account every month to invest in the managed share fund. At the end of the year, the value of her investment is as follows:

  • If the market had risen over the 12-month period, Isa’s portfolio is estimated to be worth $109,359 using the dollar cost averaging strategy. She has gained from the rise in the share market but would have performed better if she had invested the full $100,000 at the beginning of the year, in which case her portfolio would be worth $120,000.
  • If the markets had fallen over the period, Isa invests at progressively lower prices, and her portfolio is expected to be worth $89,439. She has lost money on the investment but has not lost as much as if she had invested the full amount at the beginning of the year (in which case, her portfolio is estimated to be worth $80,000).
  • If the markets are choppy, Isa takes advantage of the prices when they fall and then recover, such that her portfolio is expected to be worth $109,932 (compared to $100,000 if she invested the full $100,000 at the beginning of the year).

This example shows that dollar cost averaging can add value when markets are choppy or falling compared to investing the full amount at the beginning of the period. However, if markets rise consistently, then dollar cost averaging is less effective than investing the full amount at the beginning of the period.

Risks of Dollar Cost Averaging:

  • If markets rise over the period, dollar cost averaging is not as effective as investing the full amount at the beginning. This is because you could have invested a larger sum at the lower price and benefited from the full extent of the rise in the price of your investment.
  • If the price of your investment falls, your total investment will suffer losses, and you will have a lower balance compared to the total amount you invested. However, this loss is likely to be lower than if you invested the full amount at the beginning of the period.
  • The ‘dollar cost averaging’ approach relies on your commitment to make the same regular contribution into the riskier investment for the set period. If the investment price falls and you decide to stop making these regular contributions and/or sell your investment, you will realize a capital loss. If the investment that you sold subsequently recovers and gains in value, then you will not benefit from the subsequent growth in returns.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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