An important conversation with your parents (and your kids)

Posted on June 19, 2024 by Arrowroad

None of us likes to consider our own mortality. For our older loved ones, it’s an even more confronting topic and difficult to discuss.

When Lindsay became ill, his family’s priority was to support him through his treatment and keep him positive and as comfortable as possible.

Typical of his generation, Lindsay had always been very private, never sharing personal information – not even with his nearest and dearest. After he passed away, it dawned on the family that nobody knew whether Lindsay would have preferred cremation or burial. At such an emotionally charged time, the question caused quite a dispute.

As parents, we aim to have open dialogue with our children over issues like drugs, sex, etc. But as our parents age, difficult discussions around medical arrangements, Wills, money, etc, are usually put off until something occurs to trigger the talk. Often, by then it’s too late, which is why it’s so important to communicate while you still can.

Once Lindsay’s funeral was over, the family faced more complex questions: did Lindsay have a Will? Was there any insurance? What investments and assets did he have? Trying to locate Lindsay’s paperwork and make sense of his finances became a nightmare.

If only someone had asked him.

What should you talk to your parents about?

If you think about all those things you’d rather not discuss you’re off to a good start.

Before the conversation, consider:

  • Finances, assets, investments, accounts, insurance policies, etc
  • Will:
    • Is it current?
    • Where is it kept?
    • Who is the executor?
  • Medical:
    • Medications
    • Power of attorney
  • Funeral preferences
  • Aged care arrangements, family home, care facilities
  • Location of important documents
  • Usernames and passwords for online accounts
  • Contact details for doctor, financial adviser, trustees, power of attorney, solicitor, executor, etc.

Carefully consider your approach. These are sensitive topics; introduce them gently and tactfully. It may be helpful to involve their executor, financial adviser, or accountant.

During the conversation:

  • Extend an invitation
    Invite your loved one to express their feelings and articulate their wants. Present the discussion as a means to make their life more manageable. Stress that you’re not taking over, but that you care and that they are in control.
  • Present an example

Use examples of challenges faced by others, explaining that you hope to avoid the same situation. Tell them you’d like to help them organise their paperwork to provide peace of mind and a plan for their future.

  • Support independence 

Point out that you’re not reducing their independence but ensuring they maintain their independence and are able to live their life according to their wishes, for as long as possible.

  • Don’t judge 

As your loved one opens up, listen respectfully and without judgement. Encourage discussion around their choices so you can understand and help implement them.

Afterwards, follow up and fulfil any promises you made.

Finally, just when you think your job is done, have the same discussion with your children, only in reverse. Be clear about what you want and why you’re talking to them. 

Children don’t want to think about your mortality any more than you do. They’ll think you’re overreacting and probably won’t thank you for the information – not right now anyway. But that’s the nature of kids.

The main thing is that when your time comes, they’ll realise you’ve saved them a lot of heartache.    

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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Retirement, time to get busy enjoying life

Posted on June 19, 2024 by Arrowroad

Many people eagerly anticipate retirement. Others approach with trepidation, worried over how they’ll fill their days.

Bob retired from work in his early sixties and, deciding he was way too young to retire from life, downsized his suburban home for a country lakeside retreat. He bought a little boat, adopted a shelter dog, and got busy.

The local volunteer fire service deemed him past firefighting age, so Bob helped by cleaning the station and equipment. During emergencies, he was an important member of the team manning relief centres and distributing food and drink to the firefighters.

At home, he grew vegetables and revisited the hobbies of his youth: re-learning the guitar and painting landscapes. Summer afternoons found Bob and his dog out on the boat. During winter Bob did odd jobs around his cottage.

His children complained that he was never around, but Bob had worked since he was fifteen and had been hanging out for retirement. He’d planned for it, dreamed about it, and now he was living it.

Australians are living longer; it’s not unreasonable to assume you’ll be retired for 20 or 30 years. In the years leading up to retirement, it’s a good idea to start thinking about what retirement will mean to you. If you have a partner, talk to them about their goals for retirement. Together come up with some specific plans as to how you will work towards achieving these goals. Having a clear direction for your retirement will help you easily settle into your new life and ensure it will still have a certain amount of structure and purpose.

  • What do you want to achieve?
  • Do you want to make a difference?
  • Do you want to change people’s lives?
  • Do you want to chase dreams?

To better prepare for retirement, it’s also a good idea to:

  • spend time with like-minded people, brainstorming the possibilities for activities to add purpose to your life;
  • talk to retirees for advice and guidance, and find out what sort of activities they’re participating in and how they are putting their newly found free time to good use.

If retirement has snuck up and caught you unprepared, think about what you enjoy doing, what your skills and interests are, and get busy. You’ve still got a lot of living to do – and finally, it’s all about you!

Not sure how you’ll fill all those days? We have a few ideas to kick-start your new life.

Learn/Teach something or be a mentor

Do you have skills and talents you can share with others? Are you interested in learning from others in return? The University of the Third Age (U3A) may be your kind of group.

Located all over Australia, U3A groups meet regularly to provide learning and engagement for older people and disabled younger people. Organisers run structured courses with professional leaders or casual knowledge-share sessions conducted by group members or guests.

Look up the U3A in your area or visit www.u3a.org.au for information.

Keep active

You’ll have more time to dedicate to your training. Return to your favourite sport or learn a new one. Sports like archery and golf are Olympic sports! Or closer to home, you can begin preparing now to enter the Pan Pacific Masters Games.

Write your memoirs

Everyone has a story to tell – yes, even you! You may think your life is rather ho-hum, but your children and grandchildren might disagree. With digital printing options nowadays, you can produce a beautiful memoir with a short print run, perfect for family and friends.

Community

Feel like giving something back? The Australian Men’s Shed Association is a body that supports the health and wellbeing of men. It’s a terrific organisation for retirees with academic or practical skills to share through events and learning activities. To find a Men’s Shed near you, go to www.mensshed.org for details.

If that’s not your thing, or you’re the wrong gender, consider helping 4-legged friends at your local animal shelter. Love children? What about becoming a “Pyjama Angel”? Full details can be found on the Pyjama Foundation website www.thepyjamafoundation.com. Or check out your community notice board or online for local opportunities like Meals on Wheels.

Many types of organisations appreciate volunteers. Think about what matters to you and what you’re passionate about, and you’ll find one that is perfect for you. Volunteering is a great way to stay busy and valued, meet new people, and feel good about yourself while contributing to a good cause.

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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10 tips to prepare for retirement

Posted on June 19, 2024 by Arrowroad

Looking forward to an enjoyable retirement? Check out our top 10 tips to make sure you’re on track.

Tip 1: Take stock

How do you want to live in retirement? How much will it cost? Do the numbers. Now, what does your super balance look like? Do the figures meet your expectations? If not, what action do you need to take now?

Tip 2: Plan for the rest of your life

Most people are retired longer than they expect. While your health and family longevity will influence your life span, if you’ve survived life’s early risks, such as accidents or illnesses, you could easily live into your nineties or older. Plan for the long term, and don’t forget that you may need extra assistance or care as you get older.

Tip 3: Review your investments

For your savings to last the rest of your life, you need to invest for the long term. And that means getting the investment mix right with a balance of income and capital growth. Diversifying your investments across cash, fixed interest, shares and property can help to reduce risk and achieve smoother, more consistent returns over time.

Tip 4: Stick to your plan

Investments can quickly change in value. While it can be tempting to sell everything when the market falls and put all your money in cash, that can be a bad decision. It’s important to remain focused on the long term as markets can recover if given enough time.

Tip 5: Get the structure right

By changing the way you own investments and receive income, you may be able to reduce the amount of tax you pay while also increasing your Centrelink or DVA benefits. Even if you aren’t eligible for an age pension, you may be entitled to discounts and other benefits, which can save money over time.

Tip 6: Get your affairs in order

Estate planning allows you to pass on the right assets to the right people at the right time. The first step is putting a Will in place, but you should also speak with your solicitor about an Enduring Power of Attorney and medical care directive. These can help your family fulfil your wishes if you’re not able to make decisions yourself. And remember to review your estate plan at least every three years.

Tip 7: Stay fit and healthy

If you stay mentally and physically active, you’re more likely to enjoy a long and healthy life. Take up a hobby, learn a new skill, work part-time or volunteer in your community

Tip 8: Re-think the move

Some retirees have moved away from friends and family to their dream location only to realise it wasn’t what they hoped for. If the coast or bush is beckoning, try living there temporarily first. It will give you time to work out if it’s the right move.

Tip 9: Think about the “what ifs”

The last thing you need in retirement is for your finances to be affected if something unexpected happens to you. Review your circumstances and needs on regular basis to minimise the potential impact of unexpected events on your retirement. Don’t forget health and travel insurance cover (if available), especially if you plan to join the grey nomads.

Tip 10: Get help

Making financial decisions can be complex. Getting the right advice early enough can make a huge difference to your retirement. Give us a call.    

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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3 things you may have forgotten to plan for in retirement

Posted on June 19, 2024 by Arrowroad

Retirement should be a time to wind down and enjoy life, however, there are a few important topics often overlooked when planning for retirement. This article explains three of these aspects including re-contribution strategies, death benefit nominations, and having a spending policy in place.

Retirement can be an exciting phase in your life. But all the recent changes to superannuation bring with them lifestyle and financial issues you need to be aware of as you plan your retirement.

Retirement means different things to different people. For some, it’s an opportunity to travel, to begin that project they’ve been putting off for years, or to just relax, spend time with the grandkids and dabble in their favourite hobbies. Retirement should be a time to relax and be free to pursue your lifestyle goals.

Plan smart for a stress-free retirement

Your retirement should ideally be free from financial stress. Planning and good advice from a qualified financial adviser is the key to confidence in retirement.

If you’re considering retirement, there are issues you need to think about and plan for before you take the plunge. Here are 3 decisions retirees commonly miss in planning for their retirement:

1. Have a re-contribution strategy

Few prospective retirees have heard about a ‘re-contribution strategy’ but you do need to know what it is and how it works.

Your superannuation entitlements generally comprise both taxable and tax-free components. A re-contribution strategy is one where you withdraw your money from your superannuation account and re-contribute that cash back into your fund.

Why a re-contribution strategy is important

Re-contributing all or part of your withdrawn funds back into your superannuation as a tax-free non-concessional contribution increases the level of tax-free funds in your superannuation account.

This reduces the tax payable on your superannuation pension if you dip into that pension while under 60 years of age. A re-contribution strategy can also lower the tax payable on benefits paid to your beneficiaries when you direct your superannuation benefit to your non-dependent beneficiaries following your death.

2. Death benefit nominations

A lot of retirees often forget superannuation death benefits are payable to your nominated beneficiaries  or your estate from your superannuation fund upon your death. Your superannuation does not form part of your estate upon your death and is treated separately to your Will.

There are four types of death nominations. You can make a binding death benefit nomination while you are alive. This is a written direction to your superannuation trustee establishing how you wish your superannuation death benefits to be distributed. These must be reviewed and updated every 3 years.

Secondly, a reversionary beneficiary is where a superannuation fund member receiving an income stream nominates an eligible beneficiary to receive those payments upon their death.

Thirdly, you can make a non-binding death benefit nomination guiding how you wish some or all of your superannuation death benefits to be distributed following your death. However, being a non-binding nomination, the Trustee of the superannuation fund may still exercise discretion at the time of making the payment.

Lastly, you may make a non-lapsing binding death benefit nomination directing your superannuation trustee to distribute some or all of your superannuation death benefits to your nominated beneficiaries or Estate. This nomination, if allowed by your fund trust deed, remains in place unless the member cancels or replaces it with a fresh nomination.

Why a Death Benefit Nomination is important

If you don’t make a valid death benefit nomination,  the trustee of your fund will have discretion as to who should receive your superannuation death benefit in the event of your death.

A valid death benefit nomination is the one that is in line with superannuation legislation.  If your nomination is deemed to be invalid, the trustee of the superannuation fund will exercise discretion following your death and will decide who should receive your superannuation death benefit. In addition, tax may be payable by your beneficiaries depending on the tax components of your superannuation and to whom is the benefit being paid.

3. Ensuring your money will last and the Age Pension

Australia’s social security system is means tested. It is designed to act as a safety net. So, the higher your income or assets you have on retirement, the lower your Age Pension entitlements may be.

If your income or assets exceed the set cut-off limits, you will not be eligible for an Age Pension at all. Hence we are expected to use more of our savings to fund our retirement.

Currently, under the assets test assessment, for every $10,000 of assets above the allowable lower threshold your pension drops by $390 per year each if you’re a couple or $780 per year for a single person.

It is important to note that your assessable income will also be taken into consideration when determining the rate of Age Pension.

Why ensuring your money lasts is important

The more heavy lifting your Age Pension does, the less you’ll draw on your retirement savings. This is important as our increased life expectancies coupled with a turbulent investment environment make it challenging to ensure your retirement savings will go the distance.

Final observation

Planning your retirement can be complicated. As you can see from the above three issues, the various legislative frameworks are complex. While it pays to understand how retirement works, it is important that you contact a qualified financial adviser to discuss your personal situation and retirement needs.

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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What is money… really?

Posted on June 19, 2024 by Arrowroad

This article explains the difference between money and currency. It includes a brief history of how banking and money originated and how this has evolved into today’s banking. It also lists the key criteria of real money.

That $50 note in your pocket. What’s it worth? “$50,” you say, probably thinking it’s a dumb question. But is it really? Or a sheet of plastic and a bit of ink that likely cost the note printer less than a cent? Your $50 note only has value because the government declares that it does.

This lack of intrinsic value means your $50 note, and the balances of bank accounts that represent most money in circulation, might better be described as currency rather than ‘real money’. For the majority of us, most of the time this distinction is of no great importance, but there are times when it matters a great deal.

Over the past few thousand years, all sorts of items have been used as currency, from shells and cocoa beans to soap and cigarettes. But to be considered real money, several key criteria need to be met. The most important are that it is:

  • Recognised as a medium of exchange and accepted by most people within an economy.
  • Durable.
  • Portable, having a high value relative to its weight and size.
  • Divisible into smaller amounts.
  • Resistant to counterfeiting.
  • A store of value over long timeframes.
  • Of intrinsic value, i.e. not reliant on anything else for its value.

Throughout history, gold and silver have come closest to meeting these and other criteria, though nowadays you’ll have difficulty paying for your groceries with gold Krugerrands. Also, you’ll want to keep your gold and silver in a safe place, and it was people seeking to do just that which gave rise to paper money and our current system of bank-created money.

What started as a good idea…

Centuries ago, goldsmiths would take in gold and silver for safekeeping and issue the owners receipts, or notes, confirming the amount of gold held. The depositors soon discovered that these notes could be used for payment in place of the physical gold, making them an early form of paper currency. But the goldsmiths noticed something else. It was rare for anyone to redeem all their notes at once. They saw the opportunity to issue notes as a loan that borrowers paid back over time, with interest. And, because the redemption of the gold was relatively rare, they could create loans worth many times the value of the gold they held. Provided borrowers paid back their loans on time and only a small proportion of owners wanted their gold back at any given time, all was well, and goldsmiths transformed into bankers.

But this didn’t always work out. An economic shock might see everyone wanting their gold back, and if the bank couldn’t deliver the full amount that was demanded, it went broke. To help prevent this, many countries created central banks, with some governments even acting as lender-of-last-resort.

While government control and the rules around banking have evolved over time, private banks are still the source of most currency created today using a process that is much the same as that used by goldsmiths of old. However, gold no longer plays a part. Most countries did away with the gold standard during the 20th century.

Banks may be better regulated than they were in the past, but that doesn’t prevent crises happening from time to time. Reckless selling of mortgages to people who had no hope of repaying them, then bundling them up in complex financial instruments that multiplied debt was the cause of the sub-prime lending scandal that sparked the Global Financial Crisis.

When things get real

In economically stable times it’s easy to think of currency and real money as the same thing. However, a couple of examples reveal the difference between the two.

One is when a government1 starts printing money to pay for its programs. Inflation usually results, and the value of the currency can plummet. In the case of hyperinflation, paper money and bank deposits can quickly become worthless as happened in Germany in the 1920s.

And banks still go bust, as Lehman Brothers proved in 2008.

In Australia, depositors are protected by a government guarantee, but this is limited to $250,000 per person per Authorised Deposit-taking Institution (ADI).

In both situations ‘real’ money such as gold retains its intrinsic value. All else being equal, if a unit of currency halves in value due to inflation, the price of gold will double. And provided gold is stored securely, it can’t be consumed by the debts of a mismanaged bank2.

The difference between currency and real money and the issue of intrinsic value has implications for other investments. If you would like to learn more, talk to your financial adviser.   

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://moneysmart.gov.au/glossary/australian-government-guarantee-on-deposits ↩︎
  2. https://www.investopedia.com/terms/f/fractionalreservebanking.asp ↩︎
Posted in Economic History, Economic Insights, Financial Literacy, Financial Stability, Investment Strartegies, Personal Finance | Tagged , , , , , , , , | Comments Off on What is money… really?

How much do you know about investing?

Posted on June 19, 2024 by Arrowroad

Investing is normally a topic that conjures up images of pin-striped executives and sophisticated financial markets.

In reality, the act of investing is part of our daily lives; all of us are doing it throughout the day, though we might not consciously stop to think about it.

By exercising and pursuing good eating habits, we invest in our health; taking good care of our families and looking out for friends is an investment in our relationships, and commitment to education is an investment in our future. These are but a few examples and many more can be found. The point is that – as a way of life – we consistently invest time, effort, and other resources, in matters that are important to us.

The largest investment for most of us is the countless hours spent on earning a living; a substantial part of our life is absorbed by working to make ends meet. Consider this basic truth: there are only two ways to earn a living – you must work for your money, or your money must work for you.

Our money must work hard for us so that we can comfortably maintain our quality of life.

So how does your savvy about financial investing stack up right now? Try this quick quiz to find out.

QUESTIONS

How would you describe an asset?

  1. something that suits my personal taste
  2. something useful or valuable
  3. only objects that I can see or touch

Is investment income taxed?

  1. no, not at all
  2. maybe, depends on whether you have a job
  3. yes

What is meant by “bull market”?

  1. the farmers market
  2. the price of meat
  3. rising financial markets

What is a managed fund?   

  1. a pool of investors’ money controlled by professionals
  2. investment opportunities only for high value individuals
  3. managing your own financial affairs

What is a share?

  1. a fund manager’s share of the investment profits made for clients
  2. when industry professionals share the same client
  3. ownership title in a company giving you the right to share in profits

Which is a riskier investment – property or term deposit?

  1. property
  2. term deposit
  3. depends on whether it’s short term or long term

What is a dividend?

  1. when your investments are divided into cash and shares
  2. when a company pays out profits to its shareholders
  3. when your investments are divided into taxable and tax-free

What is negative gearing?

  1. the opposite of a bull market
  2. when advisers caution against a particular investment
  3. when you borrow money to buy an investment asset that will result in a current loss

ANSWERS

How would you describe an asset?

  1. something that suits my personal taste
  2. something useful or valuable
  3. only objects that I can see or touch

Investments, such as shares – are called assets because they are valuable and are intended to make our money grow. Physical items that can be put to good use –such as machinery – are also called assets because they may fulfil important roles; for instance, to manufacture consumer products.

Is investment income taxed?

  1. no, not at all
  2. maybe, depends on whether you have a job
  3. yes

Investment income is taxable. An example is the interest that you receive on funds held with banks and financial institutions.

What is meant by “bull market”?

  1. the farmers market
  2. the price of meat
  3. rising financial markets

When financial markets are upbeat and optimistic it’s referred to as a bull market. The opposite, when a market is pessimistic, is called a bear market.

What is a managed fund?   

  1. a pool of investors’ money controlled by professionals
  2. investment opportunities only for high value individuals
  3. managing your own financial affairs

Managed funds are vast amounts of money, made up of the contributions of many individuals placed together. The funds are invested in various assets and managed by experienced and skilled professionals.

What is a share?

  1. a fund manager’s share of the investment profits made for clients
  2. when industry professionals share the same client
  3. ownership title in a company giving you the right to share in profits

Companies raise the money that they need for their operations – also called capital – by selling shares. The people and legal entities who have bought into a company are called shareholders. They have the right to vote on company matters and to receive a portion of its profits.

Which is a riskier investment – property or term deposit?

  1. property
  2. term deposit
  3. depends on whether it’s short term or long term

The return on your term deposit is guaranteed by the financial institution, whereas property investment returns fluctuate in line with property market values. The value of property can swing significantly and even fall.

What is a dividend?

  1. when your investments are divided into cash and shares
  2. when a company pays out profits to its shareholders
  3. when your investments are divided into taxable and tax-free

The directors of a company decide each year how much of its profit can go to the shareholders and how much should be held for the ongoing operations of the business. The portion of the profit that gets paid out to the shareholders is called a dividend.

What is negative gearing?

  1. the opposite of a bull market
  2. when advisers caution against a particular investment
  3. when you borrow money to buy an investment asset that will result in a current loss

An example of negative gearing is through property. An investor usually finances a rental property through a mortgage. The mortgage interest and property maintenance costs are offset against the rental income. If these costs exceed the income, the property is negatively geared. In usual circumstances, one benefit of negative gearing is claiming tax deductions for the costs during the life of the loan. This practice should only be attempted in a rising property market.

So, how did you go?

Although it can be complicated, the financial markets can offer a great opportunity to make our money work hard for us. Sensible investments can mean the difference between reaching our financial goals, or not.

If the quiz shows that your own investment knowledge needs some work, we can help.

Financial advisers are qualified and licensed professionals who stay in touch with the fast-moving financial world and can provide solid guidance across all types of investing.

Contact us to see how investing can help you on the way to reaching your own financial objectives.

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. 

Useful links:

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Why the interest in index funds?

Posted on June 19, 2024 by Arrowroad

This article describes index funds and lists reasons for their recent popularity. It also covers how to access these funds, the disadvantages of this type of investment, and finishes with a recommendation to speak to your financial planner for further information.

An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the S&P/ASX 200 index. An index fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their nominated benchmark index regardless of the state of the markets1.

An index investment fund seeks to deliver a similar return, less fees, as the index it has chosen to benchmark. In its simplest form, an index fund purchases the same shares in the same proportions as its index. For example, an S&P/ASX 200 index fund will hold shares in Australia’s 200 largest companies. An MSCI BRIC index fund will invest in major companies in Brazil, Russia, India, and China. Index funds cover shares, commodities, precious metals, and other asset classes.

With a vast range of indices to choose from, index funds are a useful tool for investors seeking access to both broader and more narrowly focused segments of global investment markets.

The alternative to index (or passive) investing is to either pick individual shares or invest in an active fund. Through stock picking and active trading, active fund managers seek to outperform their selected indices.

Both index and active funds may be listed, in which case units are traded on a stock exchange in much the same way as shares. Or they may be unlisted, with investors buying and redeeming units directly with the fund manager.

What are the advantages of index funds?

There are several reasons why index funds have become so popular:

  • Lower fees. Without expensive investment analysts picking shares, and with relatively low levels of buying and selling, it costs less to run an index fund.
  • More tax efficient. Active funds have higher turnover rates of their underlying shares, which triggers more capital gains tax events. Tax paid along the way can reduce the total capital pool on which compound interest can work its magic.
  • Better returns. Many studies have shown that, on average, index funds do better than active funds. In part that’s because of the lower fees and tax efficiency, but it also reflects how difficult it is to pick winners in the share market.

What are the disadvantages of index funds2?

Index funds do have some downsides:

  • No outperformance. Some active managers do have good records of beating the market. However, it’s difficult to identify who these are in advance.
  • More risk in a falling market. Index fund managers don’t use stop-losses, hedging, or shorting to protect their portfolios when things head south. Index funds follow the market down, as well as up.
  • Lack of choice. You invest in the assets that make up the index, even if that includes companies you don’t approve of, perhaps due to poor records on environmental or social responsibility.
  • They’re boring. Many people enjoy backing their investment hunches, either through direct stock picking or selecting specialist managed funds. That fun isn’t available to the pure index investor.

How can index funds be accessed?

Index funds can be held directly, just like any managed fund. Many investment platforms include unlisted index funds on their investment menus and may also provide access to listed index funds. Public offer superannuation funds that provide a wide range of investment options will usually have index funds on their lists.

What’s right for you?

At one extreme there will always be determined DIY stock pickers with no interest in managed funds of any variety. On the other hand, there are investors for whom index funds provide all the tools they need to construct well-diversified, low cost investment solutions3.

Between them is a large group of investors who use index funds to build the foundation of their portfolio, while looking to add some icing to the cake via active funds or share selection.

There are many ways in which index funds may be used to help you reach your investment goals. To find out more, talk to your financial planner.   

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://www.investopedia.com/terms/i/indexfund.asp ↩︎
  2. https://www.investopedia.com/articles/stocks/09/reasons-to-avoid-index-funds.asp 5 reasons to avoid index funds ↩︎
  3. https://www.thebalance.com/index-funds-vs-actively-managed-funds-2466445 Index Funds vs. Actively-Managed Funds ↩︎
Posted in Active Investing, Financial Planning, Index Investing, Investment Strartegies, Market Trends, Personal Finance, Wealth Management | Tagged , , , , , , , , , | Comments Off on Why the interest in index funds?

How to go broke trying to get rich quick

Posted on June 19, 2024 by Arrowroad

Can you really become wealthy from a get-rich-quick scheme? This article addresses the many “investment opportunities”, both legal and illegal, that promise big returns over a short period of time, explaining the risks associated with each, and the importance of professional advice.  

According to the Collins English Online Dictionary, a get-rich-quick scheme can be defined as, a promise to make a person extremely wealthy over a short period of time, often with little effort and no risk.

If you think that sounds a bit dodgy, you could be right. Yet ordinarily sensible and cautious people signup to such schemes every day. If it seems too good to be true…well, you know the rest.

Remember those pyramid-style investments we saw back in the 1980s? Fraudulent arrangements where investors’ money was used to pay earlier investors. The plan worked well for those in at inception, but later investors lost out. The most well-known pyramid scheme was created by Charles Ponzi in the 1920s, which is where the phrase ‘Ponzi scheme’ originated

These days, pyramid schemes are illegal, but there are plenty of legal investment strategies out there that appeal to our desire to earn big returns over a short period of time, like gearing, crypto-currencies, and even gambling. However, being legal doesn’t mean you should throw caution to the wind. All investments come with risk – it’s about how much risk you can afford or are willing to accept.

We understand the risks associated with gambling – after all, casinos and other gambling outlets are not in the business of losing money! But what about the risks associated with other investment opportunities?

Gearing can potentially yield strong returns but can just as easily generate great losses. Let’s say you borrow at low interest rates to purchase an investment property. All this scenario needs is a period where you lose your job, the property is untenanted, or, interest rates increase rapidly, and suddenly you’re unable to service the loan.

You may be forced to sell the property at a loss. Conversely, if selling for a gain, you’re most likely up for capital gains tax (CGT), reducing your anticipated profit.

Cryptocurrencies are quick and easy to transact, but they’re also anonymous, a feature attracting all kinds of investors – including crooks!

The crypto world has been used for nefarious activities like money laundering and illegal dark-web purchases, (think firearms). As online ne’er-do-wells have access to the latest technology, just like the rest of us, it can be difficult to spot an illegitimate scheme, and since there’s no regulator, there’s no claims process if you believe you’ve been swindled.

Additionally, cryptocurrency investments are volatile; their value can sky-rocket overnight, but just as quickly plummet. Of course, such volatility can work to your benefit, but if your investment keeps you awake at night, it’s probably not right for you.

So, is it really possible to get rich quick?

That depends on your definition of quick which is why you should always seek professional advice before making any financial decisions.

Keen to invest capital in a business? Your accountant and financial planner will be able to help.

Fancy borrowing to invest in property or shares? Perhaps you’ve had your eye on a commodity you think is about to take off.

Your financial adviser can help create a strategy that meets your specific needs and attitude to risk.

And as for gambling, well you can ask your financial adviser about that too, just don’t bet on the response!

Helpful links:

https://www.collinsdictionary.com/dictionary/english/get-rich-quick-scheme Definition of ‘get-rich-quick scheme’

https://techbullion.com/pros-and-cons-of-investing-in-cryptocurrency/ Pros and cons of investing in cryptocurrency (21 April 2022)

https://www.heraldsun.com.au/leader/victorians-bamboozled-out-of-22m-in-cryptocurrency-scams/news-story/5efd6730b580273e27c8c0309e5c2f26 ‘Victorians ‘bamboozled’ out of $22m in cryptocurrency scams’

Posted in Financial Health, Investment Strartegies, Personal Finance, Risk Management, Wealth Building | Tagged , , , , , , , , , | Comments Off on How to go broke trying to get rich quick

The female investor

Posted on June 19, 2024 by Arrowroad

Currently, many women are retiring in poverty, but this may be about to change. This article discusses why female investors are quickly rising in numbers and how their portfolios tend to differ from their male counterparts.

Investment and portfolio building has traditionally been a male-dominated world, but these days more women are trading on the market – and they’re good at it!

According to an ASX Australian Investor Study completed in 20201, women make up 42% of Australian investors, yet 45% of those only began investing in the previous year.

Younger women, aged 18-25, known as Next Generation Investors, are starting to invest in stock portfolios. Typically, the goals for this cohort include saving for a holiday (50%) or paying down existing debt (34%).

The ASX study highlighted a few other interesting points:

  • Women prefer products more commonly understood, such as direct Australian shares (53%), residential investment property (37%), and term deposits (31%).
  • Women are less concerned than men about low interest rates and market fluctuations, but consider issues like whom to trust, hidden fees, and liquidity.
  • Typically, while men are more accepting of market volatility (higher risk), women prefer stable or guaranteed investment returns (lower risk).

While we’re about breaking down stereotypes, the study found that women are generally more successful in their investments than men. This could be because women are cautious by nature, take longer to research investment choices, and once settled, prefer to ride out market ups and downs. Conversely, men tend to regularly review their portfolios and trade aggressively, buying and selling assets, potentially incurring additional fees and losses due to market swings.

In recent times there has been a surge in Australian women backing other Australian women in start-up business ventures. Interestingly, support for Indigenous businesswomen is increasing as women’s investment networks strive to encourage women from diverse backgrounds. According to SmartCompany.com.au2, female venture capitalists are recognising that entrepreneurial women face a specific set of challenges, such as a lack of networking and mentoring opportunities, and lingering perceptions around gender-based work/family roles. Fact is, almost 40% of Australian women who are single for reasons of divorce, widowhood, or otherwise, will retire in poverty. Issues around the gender pay gap are recognised contributors to women generally having less money in savings and/or superannuation: with women saving an average of $598 per month compared with $839 for men3.

To improve these figures, many women strive to secure their financial futures through self-education: magazines, blogs, podcasts, etc. Others seek professional advice through a referral from a trusted friend or relative.

A great place to start is your local library, where you’ll find financial books and magazines. Check out the ASX online education centre, your local TAFE, or the government’s MoneySmart website for short investment courses and information.

The financial planning industry recognises that more women are actively investing.

As professional financial planners, we can ensure all your decisions are well-informed and that your personal needs and goals are considered.

Women are proving themselves very capable investors45, and we’re here to assist you in your path to a better financial future.

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://www.asx.com.au/investors/investment-tools-and-resources/australian-investor-study Australian Investor Study – Investor Profiles ↩︎
  2. https://www.smartcompany.com.au/startupsmart/analysis/women-investing-in-women-diversity-entrepreneurship/ Analysis, Venture Capital (Stephanie Palmer-Derrien, March 2021) ↩︎
  3. https://au.finance.yahoo.com/news/how-much-the-average-aussie-your-age-has-in-savings-201946477.html How much the average Aussie your age has in savings (Lucy Dean, January 2021) ↩︎
  4. https://www.finder.com.au/news/women-rule-at-investing-so-why-dont-more-of-us-do-it Women rule at investing, so why don’t more of us do it? (Kylie Purcell, March 2020) ↩︎
  5. https://www.finder.com.au/news/are-women-better-investors-than-men Are women better investors than men? (Alison Banney, March 2019) ↩︎
Posted in Financial Health, Investment Strartegies, Personal Finance, Retirement Planning, Women's Empowerment | Tagged , , , , , , , , , | Comments Off on The female investor

You might be surprised at what really drives interest rates

Posted on June 19, 2024 by Arrowroad

Why do banks decide to increase or decrease interest rates and who influences their decision? This article explains as simply as possible what drives interest rates.

The Reserve Bank of Australia (RBA) and the major trading banks may play the most visible role in setting interest rates, but in many cases, they are being reactive rather than proactive.

A wide range of external factors feed into their decision-making process, including in no small part, our collective behaviour as investors and savers, borrowers, and consumers. Then there’s the rate of inflation and wages growth, foreign currency exchange, the economic health of our trading partners, and the interest rates paid by local banks to borrow money from overseas.

Suddenly it’s not so easy to figure out where interest rates are headed, even in the short term.

A fine balance

To look at just one part of the puzzle: the RBA dropped the cash rate to 0.10% in November 20201, the lowest rate on record, and a rate which remained unchanged for the following 16 months. This has made it cheaper for businesses to borrow and invest in job-creating activities. However, mortgage rates also followed the cash rate down, allowing homebuyers and investors to borrow more, which subsequently also drove up house prices.

So how can the RBA keep a lid on housing costs without choking business activity and consumer spending?

One way is to get by with a little help from its friends, in this case, the banking regulator, the Australian Prudential Regulation Authority (APRA). APRA can impose a range of restrictions on the banks. These include capping new interest-only lending and limiting the growth in lending to investors. Lenders can also be ordered to keep a tight rein on ‘risky’ loans, for example, where loans exceed 80% of the value of the property.

While APRA’s main motive is to make the banks more resilient to any shocks such as another global financial crisis and the economic slowdown caused by the COVID-19 pandemic, a side effect is that the banks will have to reduce the amount they lend for housing. And according to the rule of supply and demand, if less money is available then the cost of that money – the interest rate – will go up.

Benchmarking

Interest rates in Australia are also affected by the Bank Bill Swap Rate (BBSW). This is calculated by the ASX at the same time every day and is based on the rates being bid and offered by approved trading institutions on short-term interest-bearing securities. General interest rates are set by financial institutions in reference to the BBSW.

Navigating uncertain waters

Appreciating the complexity of interest rates doesn’t always help in deciding how to respond to them. Even the experts often get it wrong when trying to predict where interest rates are going. This doesn’t help answer borrowers’ eternal question: “do I lock in a fixed rate, or opt for a variable rate?”

Harley Dale, chief economist at CreditorWatch, cited several key developments that influenced the RBA’s March 2022 decision to hold rates. “The Ukrainian crisis provides substantial geopolitical uncertainty. Consumer confidence has already been trending down for nearly 12 months and supply chain issues associated with the crisis is likely to lead to a higher demand in groceries, sparked interest rates and steeper mortgage repayments.”, Mr Dale said2.

Not sure what to do? If your mortgage is due for a review or you’re looking to invest or buy, talk to us, your licensed financial planner, or mortgage broker to get a professional opinion.

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://www.rba.gov.au/statistics/cash-rate/ ↩︎
  2. https://www.investordaily.com.au/regulation/50875-rba-makes-interest-rate-call ↩︎
Posted in Economic Insights, Financial Health, Financial Planning, Mortgage and Loans, Personal Finance | Tagged , , , , , , , , , , , | Comments Off on You might be surprised at what really drives interest rates