When the coronavirus pandemic hit financial markets in March 2020, almost 40 per cent was wiped off the value of shares in less than a month.[1] Understandably, many investors hit the panic button and switched to cash or withdrew savings from superannuation.

With the benefit of hindsight, some people may be regretting acting in haste. Although for others, accessing their super under the early release due to COVID measures was a difficult but necessary decision at the time.

As it happened, shares rebounded faster than anyone dared predict. Australian shares rose 28% in the year to June 2020 while global shares rose 37%. Balanced growth super funds returned 18% for the year, their best performance in 24 years.[2]

While every financial crisis is different, some investment rules are timeless. So, what are the lessons of the last 18 months?

Lesson #1 Ignore the noise

When markets suffer a major fall as they did last year, the sound can be deafening. From headlines screaming bloodbath, to friends comparing the fall in their super account balance and their dashed retirement hopes.

Yet as we have seen, markets and market sentiment can swing quickly. That’s because on any given day markets don’t just reflect economic fundamentals but the collective mood swings of all the buyers and sellers. In the long run though, the underlying value of investments generally outweighs short-term price fluctuations.

One of the key lessons of the past 18 months is that ignoring the noisy doomsayers and focussing on long-term investing is better for your wealth.

Lesson #2 Stay diversified

Another lesson is the importance of diversification. By spreading your money across and within asset classes you can minimise the risk of one bad investment or short-term fall in one asset class wiping out your savings.

Diversification also helps smooth out your returns in the long run. For example, in the year to June 2020, Australian shares and listed property fell sharply, but positive returns from bonds and cash acted as a buffer reducing the overall loss of balanced growth super funds to 0.5%.

The following 12 months to June 2021 shares and property bounced back strongly, taking returns of balanced growth super funds to 18 per cent. But investors who switched to cash at the depths of the market despair in March last year would have gone backwards after fees and tax.

More importantly, over the past 10 years balanced growth funds have returned 8.6 per cent per year on average after tax and investment fees. High growth funds returned 10.3 per cent per year and the most conservative funds returned 5.5 per cent per year.ii

The mix of investments you choose will depend on your age and tolerance for risk. The younger you are, the more you can afford to have in more aggressive assets that carry a higher level of risk, such as shares and property to grow your wealth over the long term. But even retirees can benefit from having some of their savings in growth assets to help replenish their nest egg even as they withdraw income.

Lesson #3 Stay the course

The Holy Grail of investing is to buy at the bottom of the market and sell when it peaks. If only it were that easy. Even the most experienced fund managers acknowledge that investors with a balanced portfolio should expect a negative return one year in every five or so.

Unfortunately, we can only ever be sure when a market has peaked or troughed after the event, by which time it’s usually too late. By switching out of shares and into cash after the market crashed in March last year, investors would have turned short-term paper losses into a real loss with the potential to put a big dent in their long-term savings.

Even if you had seen the writing on the wall in February 2020 and switched to cash, it’s unlikely you would have switched back into shares in time to catch the full benefit of the upswing that followed.

Timing the market on the way in and the way out is extremely difficult, if not impossible.

Looking ahead

Every new generation of investors has a pivotal experience where lessons are learned. For older investors, it may have been the crash of ’87, the tech wreck of the early 2000s or the global financial crisis. For younger investors and many older ones too, the coronavirus pandemic will be a defining moment in their investing journey.

Now that shares and residential property prices have rebounded strongly, investors face new challenges. That is, how to make the most of the prevailing market conditions while ignoring the FOMO (fear of missing out) crowd.

By choosing an asset allocation that aligns with your age and risk tolerance then staying the course, you can sail through the market highs and lows with your sights firmly set on your investment horizon. Of course, that doesn’t mean you shouldn’t make adjustments or take advantage of opportunities along the way.

We’re here to guide you through the highs and lows of investing, so give us a call if you would like to discuss your investment strategy.

[1] https://www.forbes.com/sites/lizfrazierpeck/2021/02/11/the-coronavirus-crash-of-2020-and-the-investing-lesson-it-taught-us/?sh=241a03a46cfc

[2] https://www.chantwest.com.au/resources/super-funds-post-a-stunning-gain

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Fixed term rates have never been lower in Australia but with some lenders starting to move fixed rates and further changes on the horizon, is it time to have a look around to ensure you are getting the best deal?

Fixed rate loans have provided the lowest rates in the market for some time, with the official cash rate stable at an all-time low and lenders setting their variable rates essentially betting that the cash rate will remain low.

While the Reserve Bank of Australia (RBA) is still currently anticipated to keep the cash rate low until 2024, other forces including concerns about inflation and changing lending conditions are impacting lenders’ decisions about fixed rates.

So now that rates are again on the move – is it time for you to make a change? Here’s what you need to know about what’s happening to help you decide whether or not to fix your rate.

Current environment for rates

Interest rates set by lenders are independent of, although strongly influenced by, the cash rate set by the RBA. The cash rate was reduced to 0.1% in November 2020 – down from the previous record low of 0.25% and most banks passed on the cut by correspondingly reducing their rates.

These low rates have boosted Australia’s property market, with over 100,000 first home buyers buying property since the start of the pandemic. [1]

Current low interest rates have also spurred existing mortgage holders to review their arrangements. If you’re looking to refinance, you’re joining a growing number of Aussies doing so – 1.5 million according to a recent realestate.com.au survey, with the most common motivator being competitive rates, followed by wanting to consolidate debts or unlock equity. And 45% of new lending is occurring at fixed rates, reports Commbank – this is usually around the 15% mark, so it’s a notable increase.[2]

Why banks might shift rates

Despite the RBA stating they don’t intend to raise the official cash rate until 2024, some lenders have started to increase their longer-term fixed interest rates.

Concerns about inflation are having an impact on fixed rates. There has been conjecture that the RBA may be forced to increase their rates earlier than 2024 to put the brakes on inflation as the economy recovers from the COVID induced recession.

Changes to lending conditions are also contributing to recent rate rises. Lenders have been able to access money at very low interest rates through the RBA’s term funding facility, which was put in place to mitigate the impact of the coronavirus crisis. However this expired on June 30.[3] And with bond yields on 4-, 5- and 10-year fixed rates increasing, there is pressure on lenders to increase longer-term rates.

Money website Mozo recently reported that at least 25 out of 99 lenders have increased their fixed rates since January, the majority being for 4- or 5-year terms.[4] Some of the larger banks that have increased interest rates include Westpac, Commbank, NAB and UBank.

Is it worth fixing your rate?

Despite some lenders beginning to lift some fixed rates, it can still pay to look around for lower rates. Refinancing may put you in a better financial position and fixed rates could be the way to go, but it’s worth being mindful that if you need to break a fixed loan early, this could prove costly.

And even with record low rates, always be aware of the possibility that rates can drop, in which case you could be spending more. Fixed rate loans also tend to be more restrictive than variable as you won’t be able to make additional repayments, or if you are, they will be capped. They also tend to have fewer features so you may not be able to link to an offset account or redraw funds.

Should you want out, you will have to pay a ‘break fee’, and this doesn’t tend to come cheap. Savings.com.au reported break fees from a few thousand to much more, so this is something to keep in mind. While fixed rates are less flexible than variable, it could be argued that there has been no safer time to choose a fixed rate than now, so you’re less likely to want to get out of the loan.

If you have an existing loan, it’s always a good idea to reassess your rates and check that the type of loan you have in place is the best match for your circumstances. And for prospective homeowners, it is important to get advice on what loan is most appropriate for you before signing on the dotted line. There are a lot of things to take into consideration beyond getting the best rate so reach out today to find out more.

Fixed rate home loans

Average 2 year fixed rate for owner occupiers – June 2021

Average Fixed Home Loan Rates at a $400,000 loan amount, 80% loan-to-value ratio, owner-occupier, principal and interest, from the mozo.com.au database. Source: Mozo

If you’d like help or more information give us call.

[1] https://www.news.com.au/finance/economy/australian-economy/how-interest-rate-increase-would-impact-aussie-house-prices/news-story/e90dcf416558b4938884d8c3fd1b6abc

[1] https://www.smartline.com.au/mortgage-news/interest-rates/borrowers-rush-to-fix-loans-as-lenders-lift-longer-term-rates/

[2] https://www.savings.com.au/home-loans/term-funding-facility-ending-june

[3] https://mozo.com.au/home-loans/articles/more-lenders-hike-up-home-loan-fixed-rates-will-variable-rates-follow

[4] https://www.savings.com.au/home-loans/the-potential-35-000-cost-of-breaking-a-fixed-home-loan

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Stay up to date with what’s happened in Australian and global markets over the past month.

Our July update video takes you through key economic indicators so you can understand how the Australian economy is faring as we recover from the COVID-19 induced recession of 2020.

Please get in touch if you’d like assistance with your personal financial situation.

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The principle of ‘salary sacrificing’ may not sound very appealing. After all, who in their right mind would voluntarily give up their hard-earned cash. But it can have real financial benefits for some in terms of reducing your taxable income, which could see you pay less at tax time.

A salary sacrifice arrangement Is also commonly referred to as salary packaging or total remuneration packaging. In essence, a salary sacrifice arrangement is when you agree to receive less income before tax, in return for your employer providing you with benefits of similar value. You’re basically using your pre-tax salary to buy something you would normally purchase with your after-tax pay.

How does salary sacrifice work?

The main benefit of salary sacrificing is that it reduces your pre-tax income, and therefore the amount of tax you must pay. For example, if you’re on a $100,000 income, you may agree to only receive $75,000 as income in return for a $25,000 car as a benefit.

Doing this would reduce your taxable income to $75,000 which could lower your tax bill because you’re essentially earning less as far as the tax office is concerned.*

This arrangement must be set up in advance with your employer before you commence the work that you’ll be paid for and it’s advisable that the details of the agreement are outlined in writing.

What can you salary sacrifice?

According to the Australian Tax Office (ATO), there’s no restriction on the types of benefits you can sacrifice, as long as the benefits form part of your remuneration. What you can salary sacrifice may also depend on what your employer offers.

The types of benefits provided in a salary sacrifice arrangement include fringe benefits, exempt benefits and superannuation.

Fringe benefits can include:

• cars
• property (including goods, real property like land and buildings, shares or bonds)
• expense payments (loan repayments, school fees, childcare costs, home phone costs)

Your employer pays fringe benefit tax (FBT) on these benefits.

Exempt benefits include work-related items such as:

• portable electronic devices and computer software
• protective clothing
• tools of the trade

Your employer typically does not have to pay fringe benefits tax on these.

Superannuation

You can also ask your employer to pay part of your pre-tax salary into your superannuation account. This is on top of the contributions your employer is already paying you under the Superannuation Guarantee, which should be no less than 9.5% of your gross (before tax) annual salary, though this may rise in the near future.

Salary sacrificed super contributions are classified as employer super contributions rather than employee contributions. These contributions are called concessional contributions and are taxed at 15 per cent. For most people, this will be lower than their marginal tax rate.

There is a limit as to how much extra you can contribute to your super per year at the 15 per cent tax rate. The combined total of your employer and any salary sacrificed concessional contributions cannot exceed $25,000 in a single financial year. If you exceed the cap, you could be charged additional tax on any excess salary sacrifice contributions.

Most employers allow employees to salary sacrifice into super, but not all employers will allow salary sacrificing for other benefits.

Is salary sacrifice worth it?

Salary sacrifice is generally most effective for middle to high-income earners, while there is little to no tax saving for people who are already in a low tax bracket.

If you are a middle to high-income earner, then it may be worth considering salary sacrifice to reduce your taxable income and to take advantage of some of those benefits.

Before you do, make sure you talk to us so we can help ensure it is an appropriate strategy for your circumstances.

Footnotes

*Note: This example illustrates how salary sacrifice arrangements can work and does not constitute advice. You should not act solely on the information in this example.

Source for all information in this article: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Salary-sacrifice-arrangements/

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Whether it’s the booming price of Bitcoin, or record-breaking prices for investments paid for in digital currencies, cryptocurrencies continue to feature in the media and in dinner conversation. This has reignited debate about whether we are witnessing an old-fashioned bubble about to burst or a new asset class in the making.

The price of Bitcoin has gone from around $13,800 a year ago to a recent high of $84,350 [1]. Undoubtedly, some people have made money on the way up, but experts urge caution. While cryptocurrencies are being accepted more widely, the Australian Securities and Investments Commission (ASIC) warns they are high risk, difficult to value and unregulated*[2]

You may also have seen recently that a digital artist known as Beeple sold a work at auction for $89 million, while Twitter founder Jack Dorsey sold his first tweet for $3.8 million. Both were paid for in cryptocurrencies in a trend called non-fungible tokens (NFTs) [3]. NFTs are a unique bit of digital code that cannot be duplicated or counterfeited, making them particularly attractive for collectors.

Cryptocurrencies and NFTs have one thing in common – they are both enabled by a technology called blockchain.

What is blockchain?

Blockchain is a system of recording and storing information that helps keep track of ownership securely and transparently.

It is essentially a digital ledger of transactions stored in blocks that is duplicated and distributed across a network of computer systems forming a blockchain. Every new transaction that occurs on the blockchain is added to every participant’s ledger.

This means if one block in the chain is changed, it would be immediately apparent that it had been tampered with, making it near impossible to change, hack or cheat the system.

History teaches us that fortunes are more likely to be made selling shovels to miners in a goldrush, than buying a shovel and joining them. So could it be that long-term value is more likely to come from investing in the underlying blockchain technology than chasing quick profits from the likes of Bitcoin and NFTs?

Given rising concerns about hacking and data breaches, it’s no surprise that blockchain is being embraced by government and businesses alike.

Government backs digital technologies

In the 2020 Federal Budget, the Australian government set aside $800 million to invest in digital technologies, including blockchain technology pilots to cut business compliance costs [4].

This followed the launch two years ago of the government’s National Blockchain Roadmap, developed in collaboration with industry and universities to highlight the technology’s potential to save businesses money and open new business and export opportunities.

According to the Roadmap, blockchain technology is predicted to generate an annual business value of over US$175 billion by 2025. By 2023, blockchain will support the global movement and tracking of US$2 trillion worth of goods and services annually. By next year, it is predicted to save the financial services industry US$15-20 billion annually[5].

Practical uses of blockchain

In Australia, the biggest user of blockchain is the financial services industry. For example, the Australian Securities Exchange (ASX) is working on a new blockchain system to finalise local equity trades which will replace the old CHESS system in early 2022.

But it also has applications across the economy in sectors including trade, logistics, real estate, energy, water, resources and agriculture. The cost to Australian food and wine producers of direct product counterfeiting and substitution was estimated to be over $1.7 billion in 2017 alone (5)

Take the example of the wine industry. Blockchain can help with inventory tracking, facilitate automated payments between supply chain members, and reduce counterfeiting through provenance transparency.

Investment opportunities

Thanks to government and industry support, a growing number of blockchain companies are listing on the ASX. There are companies using blockchain to:

• Keep track of financial data and identity documents for compliance
• Verify human engagement on social media to prevent interaction with bots and fake profiles
• Make supply chains transparent in combination with artificial intelligence technology (6)

Other companies have integrated blockchain into parts of their business to enhance security on digital platforms or to accept and settle payments.

While the local ASX-listed technology sector is still relatively small and high risk, it does offer investors increasing opportunities to invest in cutting-edge technologies with real world applications.

If you would like to discuss your overall investment strategy, don’t hesitate to get in touch.

Footnotes

*Disclaimer: We cannot advise clients on investments in Bitcoin or any other cryptocurrency as they are not regulated financial products.

[1] https://au.finance.yahoo.com/quote/BTC-AUD/history/?guccounter=1

[2] https://moneysmart.gov.au/investment-warnings/cryptocurrencies-and-icos

[3] https://www.businessinsider.com.au/what-are-risks-of-investing-in-nft-2021-3

[4] https://www.coindesk.com/australia-to-spend-575m-on-tech-including-blockchain-to-boost-pandemic-recovery

[5] https://www.industry.gov.au/sites/default/files/2020-02/national-blockchain-roadmap.pdf?ref=hackernoon.com

[6] https://stockhead.com.au/tech/these-asx-blockchain-companies-are-leading-the-distributed-ledger-race/

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We all lead busy lives so juggling family, work and personal responsibilities can be complicated – particularly when people we love need increasing levels of care and support. This article takes a look at what to consider and where to start when you have older parents.

Encouraging older parents to accept help, can be difficult. But when help is accepted, as a member of the “sandwich generation” you may find yourself sandwiched between obligations to help with care of older parents and young grandchildren – and just when you were thinking about your own retirement.

Life might feel a bit overwhelming. Knowing where and how to access support for your parents and yourself may make all the difference.

Helping you – the carer

A good place to start your research is the Carer Gateway (carergateway.gov.au). This website can help you to identify and connect with available support services.

As a carer your physical and emotional well-being is vital. Don’t feel that you need to do it all and don’t feel guilty about taking some time out for yourself. This is where respite care can step in. Respite provides short-term temporary care when you need some time out for several hours, overnight, days or even weeks.

The government subsidises respite care to make it affordable, but you may first need to arrange an Aged Care Assessment Team/Service (ACAT/ACAS) – so plan ahead.

If your care duties prevent you from being able to work you might qualify for a Carer Payment from Centrelink to provide you with income support. If you are not eligible for this payment, you might be eligible for a Carer Allowance to help with some of the costs you are likely to incur.

Helping your parent

Depending on how much help is needed by your parents, you may want to look at support in the home or in residential care. These services may be government-subsidised, with the starting point through MyAgedCare (myagedcare.gov.au).

Home care can help with needs such as house cleaning, personal care (such as bathing), social support and even some home modifications to adapt to your parent’s care needs. Even if your parent is living with you, they may still be eligible for subsidised home care.

Helping to understand the finances

Subsidised care can help to make care more affordable. But be warned, there might be a long wait for a home care package, so don’t wait until the need is urgent before applying. You might also need to find cashflow to contribute towards the cost or fund additional care.

We have helped many clients to navigate through the aged care system, providing our clients with peace of mind and a clearer direction on the potential options for structuring finances.

Call us today and arrange an appointment to discuss how we can help you and your family.

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