Financial Security Practitioners

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We aim to keep our clients up-to-date with news and relevant opinions which concern your finances. Our regular email bulletin is designed to inform and share views with our members.

RBA Media Release, November 2019

By Jack Wellings

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.

While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.

Interest rates are very low around the world and a number of central banks have eased monetary policy in response to the persistent downside risks and subdued inflation. Expectations of further monetary easing have generally been scaled back over the past month and financial market sentiment has improved a little. Even so, long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at the lower end of its range over recent times.

The outlook for the Australian economy is little changed from three months ago. After a soft patch in the second half of last year, a gentle turning point appears to have been reached. The central scenario is for the Australian economy to grow by around 2¼ per cent this year and then for growth gradually to pick up to around 3 per cent in 2021. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.

Employment has continued to grow strongly and has been matched by strong growth in labour supply, with labour force participation at a record high. The unemployment rate has remained steady at around 5¼ per cent over recent months. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth remains subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

The recent inflation data were broadly as expected, with headline inflation at 1.7 per cent over the year to the September quarter. The central scenario remains for inflation to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Your Franking Credits are Safe.

By Jack Wellings

The cloud has lifted. You are not going to lose your Franking Credits. What a boost for the moral - and financial well-being - of retirees!

The retention of Franking Credits means there will be no reduction to pensions and share-dividend income.

The depressing prospect of up to a 30% reduction in share dividend income that has seemed to be a foregone conclusion for the past several months suddenly disappeared late Saturday evening.

All retirees - but especially low-income retirees - were in grave danger of experiencing up to 30% reduction to their living income. This will now not take place.

Politics notwithstanding, we regard this as a victory for common sense and honesty.

Also bear in mind that it wasn’t just investment Income that was going to be affected. Capital Gains Tax was also going to increase - by a massive 50%! That isn’t going to happen either.

Neither will we see the loss of tax deductibility of negative gearing.

(Negative gearing essentially means that where the ‘running costs’ (mortgage interest, maintenance, rates, insurance, etc) exceed the rental income of the property, then the investment runs at a loss; such loss then being offset against the taxpayer’s other income earnings.)

We should recognise that tax deductibility of negative gearing has been an underlying principle in the supply of rental housing in Australia for the past half-century or more. We should also recognise that the vast majority of residential property investors are not, as often portrayed, ‘the top end of town’, but are typical Mum & Dad investors seeking to provide for their own and their children’s future financial security.

And let's not ignore the salient fact that this ‘loss of taxation revenue to Treasury’ is actually ‘money in the bank’ for Treasury, as Treasury ultimately gains revenue - by Capital Gains Tax - when the property is eventually sold. Up to 23.5% of the gain, in fact.

Couple the loss of tax deductibility of negative gearing with a 50% increase to Capital Gains Tax, and why would anyone have wished to invest in residential real estate?

In summary, it's a case of the classic maxim “If it ain’t broke, don’t fix it.” Thank goodness, we didn’t.

So here’s to the continuing prosperity of our great nation, and thereby to the financial security and well-being of each of us who are privileged to be Her beneficiaries.

Let's Change the Headline

By Jack Wellings

Dow Jones Industrial Average Share index drops 4.6%, or 1,175 points, in biggest drop since 2008 financial crisis.

In Sydney, the ‘All Ords’ dropped 1.63%, or 101 points yesterday, and will likely do the same again today. 

WHOOPEE! Crack the bubbly! Let’s celebrate!

Let’s Change the Headline:

‘The price of cars, petrol, electricity, bread, milk, clothes, wine, beer, all fell by 4.6% yesterday!'

What would you do?

GO SHOPPING, OF COURSE! AND HOPE THE PRICES DON’T RISE AGAIN TILL YOU’VE FINISHED SHOPPING.   

Does this reasoning seem weird to you? Well, yes it does - if you are a share-trader. A speculator. A gambler. 

But if you bought your shares to secure a reliable, consistent income-stream, what does today’s price matter? Apart from the fact that you could buy that same income-stream for less today.

In fact, if you are a regular contributor to your SuperFund, you ARE buying cheaper today. Whoopee!

OK, so it’s the same old message we’ve been preaching since 2002; ie ‘It’s not about the All Ords. It’s about the economy, Stupid!’

The simple fact is that lower share-prices means that you can buy more dividend-producing shares. Just like you could buy more bread, milk, petrol, etc.

And, incidentally, if you’re now retired and living on your dividend income, your income doesn’t change because there’s a temporary (they all are) fall in share prices. In fact the prognosis for dividends this year and next year (because it’s about the economy, Stupid) is nothing less than very positive.

Enjoy your day. Have a glass of bubbly. Celebrate.

I will. 

Securely yours,

Jack Wellings

Please Update your Records

By Jack Wellings

After 22 years in our Lindfield office, we have relocated to Hornsby on Sydney's upper north shore.

You will now find us at:

Suite 604, Avanti Building
90 George Street
Hornsby 2077

Our new land-line is (02) 9476 2200

We look forward to welcoming you at your earliest opportunity.

From the Paris Desk

By Jack Wellings

I happen to be on holiday in Paris at this moment. Zero degrees, but nothing can detract from the wonder of this beautiful city.

And, of course, the financial news here is the same here as everywhere else in the developed World;  "Markets spooked as oil leads commodity crash". Always 'the markets'. Oh dear!

In other words, the price of oil on World markets has fallen. Of course, for oil-producing countries, including the US, but particularly Nigeria, Saudi Arabia, Norway, Canada, Indonesia and Russia, this is not welcome news.

But cheaper oil means good economic news for the rest of the World, and will be a spur to economic growth. And, of course, you will be paying less for your petrol.

So, yes, there's a very positive spin on this.  But, then, share prices are down, and - as an investor - and as always - you're supposed to panic.

And if you're 'in the market'; that is, as a trader (ie, a gambler), maybe you would panic.

But as a serious, security-minded investor, who holds shares (particularly Australian 'blue chip' shares) in your SuperFund, and does so because they produce a consistent, reliable (and increasing) income-stream from company dividends, which continue unabated, why should you care about lower share-prices? Certainly, your fund value may be lower, but your Income is safe. And, in any case, prices can't stay down forever - not in a growing economy, now benefiting from lower oil prices!

So, in summary, what should we think about what is happening?

Here Are The Facts

  • There is no sign of a recession on the horizon for the US, Australia or China and there are no signs of negative global growth
  • Growth in Europe isn’t shooting the lights out but it is accelerating
  • Japan is doing what Japan does with growth trending at about 0.5% per annum thanks to population issues.
  • There is no collapse in the banking/payment system or credit squeeze like there was in 2008.

Holding (not trading) shares, as a conservative, security-conscious investor, doesn't mean you are 'in the market'. You bought your shares (at least your SuperFund did), and - unless you're selling them, prices simply don't matter.

It's an excellent time to be buying though!

Three Lessons on Investing

By Jack Wellings

Lesson One

Your investment is only as good as the economic environment

In a sound and healthy economy, conditions are conducive to economic enterprise operating profitably. By definition, inflation will be well under control; that is, money will hold its purchasing power and investment returns will not be eroded by rising prices.

Also in a low-inflationary environment, increasing productivity can take place, leading to increasing profitability and capital values. Companies have more funds to invest in increased productivity; they make even more profit and pay bigger and bigger dividends. And so the cycle of wealth creation continues.

Lesson Two

It’s not about the All Ords

It’s not about share prices, nor about buying and selling (ie trading). It’s about creating a secure, continuing income stream.

For example, let’s say you owned 2,000 Woolworths shares, purchased in 1997. What if the selling price of your shares had increased over the past year by (say) 10%? What would you do? Cash in and go on a spending spree? No, of course not. 

But if your shares had returned you a dividend – an actual payout (‘hot cash’ so to speak) - of say $1500, would you feel free to spend it? Of course you would. Because this is the real return on your investment. And you wouldn’t be jeopardising the security of your investment; you’d be conserving it for next year’s bounty!

(By the way, your 2,000 Woollies shares would actually have paid you a dividend of $2,780 over the past year (2015). In your PensionFund this would actually be $3,971 due to tax credits. Not a bad year’s Income return on a $10,000 investment wouldn’t you say?)

(And, incidentally, your $10,000 investment – essentially because of current dividend earnings - would today to be worth $48,980!)

Lesson Three

Don’t bother trying to do it yourself

Our position at Wellings & Associates is not to recommend direct share ownership, but to use managed funds.

Why? Well, why bother, when you can have a well-diversified portfolio (even if you invest in only one fund), well-diversified investment management, all the book-keeping looked after, plus regular uptodate reports and tax statements.

And the cost? A mere 1 or 2 percent of your portfolio, per year.

And with the ongoing guidance of qualified, experienced financial advice, what more could you ask?

So please don’t go it alone.

What makes an investment safe?

By Jack Wellings

This includes your Super account, Pension account, or any investment account you may have. 

The normal answer to this question is ‘I can’t lose my money’; that is, safety of capital. But is it only safety of capital? And what makes an investment safe?

It really depends on what the purpose of the investment is. For example, is it capital held in reserve for a ‘rainy day,’ or to meet some future capital payment (a future debt, or tax liability for example)? Or is it to cover present or future regular expenditure, such as retirement living expenses? ie: Is it for a Capital purpose, or an Income purpose?  

Capital or Income? 

Clearly, if you need to meet a future Capital obligation, the capital has to be there. And if you need a regular Income- stream, you need to know the Income will be there.

In regard to the latter, clearly Capital is of less importance than if you had to meet a capital liability. In other words, the safety you need for your Income-stream is the assurance that your Income-stream will be there come what may. 

Of course, you need the capital to fund the income stream, but that’s a relatively simple matter of knowing how much Income you require, and how much capital you initially need to fund that Income. 

Sounds obvious? Yes, it is. But it also depends on how the investment generates the Income-stream. Is the income Interest-income (earned on money ‘lent’ to a financial institution), or is it Investment-income (ie profit) earned on some asset you own, such as company shares, or a rental property? (We call this equity investment.) 

There is a big, big difference! The difference is that the capital value in the Interest-income investment remains constant (excluding re-invested interest), whereas the capital value of the Investment-income asset will tend to change, even day by day, despite the constancy of the income-stream. 

But in a normal, healthy economic environment, the Investment income- stream will tend to increase year-by-year. And as the Investment income increases, so too will the capital value of the investment asset. It must. 

What deceives many investors, however, is that the Income-stream and the asset value don’t automatically increase at the same time. The asset value may increase ahead of, or lag behind, the increase in the Income- stream. Sometimes, in fact, the Capital value will decrease, although the Income-stream is increasing. 

But if the Income–stream is increasing, and expected to continue increasing, then clearly, falling asset values don’t matter. The assurance of the Income-stream is what matters! And if the Income-stream does increase, and capital values ultimately follow, then we can regard the investment as safe. 

 This simple concept is the ‘trick’ to understanding share investment (or, as we at Wellinvest prefer to call it – ‘Investment in economic enterprise’). 

It is also the secret to having Peace of Mind in regard to your investment capital, and thereby in regard to your whole financial security. 

Share prices around the World have declined over the past twelve months (though have recovered somewhat over the past few weeks). However, here in Australia particularly, our economy continues to prosper and grow. Income from most of Australia’s major companies in 2008 is expected to exceed its 2007 levels. Does this suggest that shareholders in these companies have a safe investment? Even though their share prices are currently lower than they were a year ago? 

 Let us, however, recognise that this is not the lesson taught by much of the media, nor even by the investment industry itself. As we have said many times previously “It’s not about the All Ords.” 

Footnote: Many investors do invest essentially for Capital Profits, and pay scant attention to Income generation. This however is gambling – it’s speculation – no matter how calculated, or how ‘systematic’. And gamblers don’t usually win. There is no need to gamble with your Capital; it can be safely (and very profitably) invested by understanding the above guidelines. 

What is being 'rich'?

By Jack Wellings

Everyone aspires to being rich. Of course we do. But what is being rich?  

What does it take to be rich? 

In response to these questions, answers include ‘Having a secure, well-paid job’; ‘Owning your own home’; ‘Having no debts’; and of course ‘Winning the Lottery.’ 

And whilst all of these answers contain a large degree of truth, they don’t really tell us why, or how, they would make us rich. 

So, what IS being rich? 

If you have a secure, well-paid job, are you rich? Well, not if you don’t own a home. Not if you owe an arm and a leg to a finance company. Lots of people have highly-paid jobs, but with mortgages, credit-cards and car loans, are they rich? 

If you own you own home – with no mortgage, and no debts – are you rich? Not if you can’t afford to buy decent food, pay your electricity bill, or run your car! Australia has a vast number of retired people who live in high-value, un-mortgaged homes, but who are trying to eke out a living on the Age Pension. Are they rich? 

And if you’ve just won the Lottery? Well you’ve certainly got the money. But what will you need to do with it to live a great life-style, to enjoy absolute financial security? 

Of course, you’ll spend some of it; maybe have a spending spree; cars, clothes, holidays. And you’ll buy a house (or pay off your mortgage), and get rid of all your debts. Fantastic! Then what will you do? 

Yes, you’ll invest it – never mind how at this stage – even just to keep it ready for the next spending spree. But why else? Well, you wouldn’t want to lose it would you, or even find you’ve spent it all. Perish the thought! 

Assume you were sensible. You would want your investment to earn income. To earn enough income to maintain your standard of living and life-style, and to continue doing so for the rest of your life, and without having to ask for your job back! 

So. In a nutshell, you would be rich, because you own all your assets. And, more importantly, you have a secure, lifetime income-stream. 

Conclusion:

Assets alone are not the key to being rich. Having an adequate and assured investment income is the key to having a lifetime of comfort, financial security and Peace of Mind. 

And Financial planning is about attaining this goal. 

 

Do You Have A Term Deposit?

By Jack Wellings

Are You Looking For A More Meaningful Return?

If today you hold any funds in a Term Deposit – in your Superfund, Pensionfund, or in your own name – you would be aware of the continuing downward pressure on interest rates, and your attendant lower income.

An Attractive Alternative

Given that one of the major attractions of a Term Deposit is the certainty and continuity of interest earnings, is there a more competitive alternative?

Yes, there is.

Really, the key consideration is CERTAINTY AND RELIABILITY OF INCOME.

And equally importantly, the LEVEL OF INCOME.

A product that certainly satisfies both of these requirements is MLC’s Income Builder Fund.

This fund generated a handsome SEVEN PERCENT return to investors over the past 12 months. (In fact, even higher in a superfund or pensionfund, due to tax concessions.)

Income Builder is an exclusively Australian Industrial share-fund. Its investments are selected for their long-established track-record of high and consistent dividend payments. Such investments may typically include ANZ, CBA, NAB, Westpac, Woolworths, Telstra, etc.

How Reliable Is This Income?

For example, had you invested $100,000 across these six companies in January 2001, you would have received $5,570 (5.57%) over the year.

Over the 2012 year, you would have received $11,281 (11.28%) income.

Today, a typical* Term Deposit would pay you $3,550.

If you are seeking solid, consistent and rising income,
Income Builder may be your answer.

*NAB 12 Month rate as at 28/5/2014

More information?

Call us on (02) 9416 7544, or contact us here.

See the latest Income Builder Report (31/3/2014).

Asset Allocation - the Golden Key to Financial Security

By Jack Wellings

Asset Allocation is the key to securing your future retirement income.

What is Asset Allocation?

We use this term to describe the amounts of money allocated to the different types of investment available in an investment portfolio. Broadly, these fall into three categories; these being company shares, real-estate, and interest-bearing deposits.

As you would expect, returns on these different investments vary over time. For example, over the past few years, Australian industrial shares have paid higher investment income than bank deposits and property rental income.

Many economic factors determine which investments perform better over different time periods. It is vital hold your funds in the right assets at the right time; that is, to have the right Asset Allocation.

The vast majority of SuperFunds have a 'default' asset allocation; this being how your fund is  invested unless you give your fund manager explicit instructions to the contrary. (This default allocation is now known as the 'MySuper' option.)

Generally, the asset allocation of a default/MySuper option does not vary over time. Clearly, therefore, it stands to reason that there will always be some proportion of such a fund which is performing less than optimally. This weakness will ultimately be reflected in a less-than-satisfactory pension-income when you retire.

The Solution?

A competent Financial Adviser will inform and guide you as to how your funds should be allocated, and periodically adjusted, according to economic conditions, as they change over time.

Appropriate Asset Allocation - and its ongoing management - is the key to ensuring you get the very best performance out of your SuperFunds.

And that means securing the best pension-income by the time you retire. 

Far better than leaving it to MySuper - and chance.

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