New Year (personal finance) housekeeping
February 05, 2016 | Robin Bowerman, Vanguard Investments Australia
The holiday break may have provided an ideal environment away from the usual day-today distractions to think about practical ways to improve your personal finances over the next 12 months and beyond.
One way to begin your personal finance housekeeping is to take a clean sheet of paper - or set up a new document on your computer - and jot down a few pointers or resolutions for 2016 and well into the future.
Here are a few starters to consider and to perhaps discuss with your financial planner early in the New Year:
- Get your savings and investment fundamentals in shape. These fundamentals include developing (or revising) suitable saving and budgeting plans to work towards your goals, setting an appropriate long-term or strategic asset allocation for portfolio and minimising your investment costs. And resolve to keep emotions out of your investment decisions by focusing on your long-term goals and on your strategic asset allocation - without becoming swayed by the latest bout of “noise” in the markets.
- Check the state of your retirement savings. Are your savings on track to finance your intended standard of living in retirement or should you step-up your super contributions if possible? (See following points regarding salary-sacrificed contributions and transition-to-retirement pensions.) Keep in mind that superannuation retirement calculators, such as Vanguard's version, can provide a valuable insight into how much retirement income your super savings may produce.
- Check if can make higher voluntary concessional (salary-sacrificed or personally-deductible) super contributions without exceeding your annual contributions cap? For 2015-16, the concessional contributions cap is $30,000 for members under 49 at the beginning of the financial year or $35,000 for members aged 49 or older. Don't overlook that the concessional contributions cap includes compulsory contributions. (Concessional contributions are taxed at 15 per cent rather than marginal tax rates while earnings within a super fund are concessionally taxed.)
- Check whether you become eligible for a transition-to-retirement pension in 2015-16. These are designed so that those who have reached their superannuation preservation age (at least 56 if born after July 1960) and are still working can receive a super pension. (Earnings of super fund assets backing the payment of a super pension are not taxed while super pension payments are no longer taxable once members reach 60.) Some fund members choose to re-contribute at least part of their transition-to-retirement pensions as part of a saving strategy.
It is worth emphasising that these suggested points to begin your financial housekeeping exercise have nothing to do with trying to predict what may or may not happen on investment markets.
Whenever you feel an urge to take decisive action during particularly volatile markets, it can be a time to undertake a little investment housekeeping rather than trying to time the sharemarket - attempting to pick the best times to sell or buy.
When a month seems a long time...
February 05, 2016 | Robin Bowerman, Vanguard Investments Australia
While volatility in investment markets cover both up and down moves in prices, it is naturally the big negative moves that capture attention. It is a rare investor indeed who is unhappy about sudden moves up.
It is the disconcerting sense of instability that flows from periods of significant market volatility that promotes the natural concern of investors.
The headline for 2016 so far may be that volatility is back - but in reality it never went away. Hibernated is perhaps a better description. Experienced investors understand that markets will go through different cycles. What is overlooked in the media commentary tracking daily market moves is that investment markets have been somewhat benign for the past three years with relatively smooth, steady growth.
Cast your mind back to December 2012 when you were doing your annual review of your portfolio's asset allocation - perhaps with the help of a trusted adviser.
If the adviser had said to you that your growth portfolio (70 per cent in growth-oriented assets and 30 per cent invested in income-oriented investments) would deliver you a return of around 12 per cent a year would you have thought that was an acceptable outcome?
Certainly that is a pretty common asset allocation for most large super funds and according to the January report on fund returns from research group SuperRatings, super funds have delivered the fourth consecutive year of positive returns for members up to the end of December 2015.
The SuperRatings research report focuses on returns for the balanced option - typically the default offering of the fund - which covers investment options with between 60 per cent - 76 per cent invested in growth style assets.
On a rolling three-year basis, according to SuperRatings, the median fund returned 10.1 per cent after fees and taxes. Once again the question is if that had been offered to you three years ago, would you have thought that was a good outcome?
Apart from being a challenge on the memory front - some of us may struggle to remember what we were doing last December, let alone December 2013 - the key issue for investors is one of framing and context.
Superannuation savings are by both design and regulation long-term. So periods of volatility over a person's working life and retirement are both inevitable and - just like periods of sustained growth - will not last forever. However, the impact depending on your age and lifestage can clearly vary significantly.
The clarity that comes with hindsight is far from a definitive guide as to how things will work out in the future. Yet there is still value in understanding the historical journey when it helps investors set realistic, long-term expectations that they measure their superannuation portfolio against.
What the marshmallow test means for patient investors
January 31, 2016 | Robin Bowerman, Vanguard Investments Australia
You have probably heard of the classic marshmallow test conducted more than 40 years ago by US psychologist Walter Mischel.
Professor Mischel, then at Stanford University, led this unique research into delayed gratification - that is, the ability to wait for something that is really wanted.
Hundreds of children aged four to six were taken into a room, one at a time, and given a single marshmallow. They were offered a choice: eat the marshmallow immediately or wait 15 minutes and receive a second one as a reward for waiting.
Only a minority of the children ate their marshmallow immediately after the researchers left the room. A third managed to resist the temptation for a few minutes while the final third earned a second marshmallow.
Follow-up studies of these children 20 years later and again 40 years showed that those who managed to delay their gratification with marshmallows tended to be higher achievers - emotionally, academically and vocationally - as their lives progressed.
Delayed gratification, patience and successfully investing for retirement are indelibly linked. Our superannuation system, for instance, is based on spending less today so we can spend more in retirement. It's as straightforward as that.
Indeed, delayed gratification has been described as the essence of investing. It is a matter of waiting for a potentially greater reward.
It could be said that investors who attempt to time the market - that is, trying to pick the best times to buy or sell - are seeking instant gratification rather than focusing on their long-term goals.
In a recent discussion paper - Long-Term Investing: The Destination Is Better than the Journey - Peter Gee, research products manager for investment researcher Morningstar, discusses the rewards from taking a long-term perspective to investing. In other, words, he is writing about delayed gratification.
Gee writes that the adage "it's time in the market, not market-timing" that really matters for investment success is often quoted for good reason - it often holds true.
"One of the key elements to successful investing is patience," Gee adds. "It is important to remember that a long-term mindset is required to achieve investment goals. Returns in the short-term can be volatile and unpredictable..."
Gee points to Morningstar research showing the short and long-term returns from super funds with balanced portfolios. Their after-fees, after-tax returns to August 2015 were examined over three time periods: rolling one-month, rolling one-year and rolling 10 years.
Even with these broadly-diversified portfolios, the 10-year returns were significantly smoother and much-less volatile than over the short-term.
One of the great benefits from delaying gratification with a carefully constructed and diversified long-term portfolio is the compounding of returns, as income is earned on income as well as an investor's initial capital.
Investors can certainly learn much from that classic marshmallow test.
The secrets of supercharged savers
January 31, 2016 | Robin Bowerman, Vanguard Investments Australia
A recent personal finance article in The New York Times features the real-life stories of "supersavers" who heavily focus on wealth creation at almost every opportunity - yet without sacrificing an occasional indulgence.
One of these supersavers, for instance, is an IT security specialist who set himself a goal at 29 of having US$1 million in an investment account by his 35th birthday.
Much discipline would be necessary to achieve his goal as he was earning US$75,000 at the time and had relatively modest investment savings. He reached his target by saving hard, cutting costs and investing successfully
Financial advisers interviewed for this article say supersavers typically set their goals and then work towards those goals in a highly-disciplined way. And interesting, it seems a common characteristic among supersavers is a willingness to be coached by advisers into developing good savings habits.
Particularly given the inadequacy of Australia's retirement savings supercharged savers can set a much-needed excellent example to the rest of us.
The latest Retirement Savings Gap report, compiled by Rice Warner Actuaries, calculates that Australia had a retirement savings gap of $768 billion at June last year (taking into account the Age Pension) or an average $70,100 per person. (When the Age Pension is removed from the calculations, Australia's retirement savings gap is much, much higher.)
This savings gap is defined as the amount of extra money needed to provide a "reasonable" retirement lifestyle for the life expectancies of Australians. The reality is that half of us will live beyond our life expectancy.
For someone wanting to supercharge their savings, a helpful starting point may be Vanguard's Principles for Investing Success. This core publication for Vanguard emphasises the importance of setting a clear and appropriate investment/savings goal, setting and monitoring a regular savings target, and taking a disciplined approach to savings and investing.
Clever budgeting is, of course, critical to any efforts to boost your saving. ASIC's personal finance website, MoneySmart, provides practical budgeting tips and a useful budget planner.
It should be recognised that our capacity to save more in the future depends on personal circumstances including our financial obligations at different stages of our lives. Nevertheless, regularly saving even a little more can make a big difference over the long haul.
Good news on credit card debt but take care
January 11, 2016 | Robin Bowerman, Vanguard Investments Australia
Retailers may not like it but many shoppers are demonstrating a reluctance to spend up on their credit cards in the lead-up to Christmas.
The latest Reserve Bank statistics show that the average outstanding balance for interest-charging credit cards fell by $25.90 or 6.3 per cent during October to $1,953.20. This is almost a 10-year low for an October month.
The fall may seem modest in dollar terms at least. Nevertheless, it is part of a clear trend of reducing average credit card debt, falling credit card transactions per card and increasing purchases using debit cards.
Economic Insights, published by CommSec, notes that the use of the credit card spending limits - in other words, "spending to the max" - is at a 14-year low for an October. And the number of purchases and cash-withdrawal transactions on debit cards - in other words, spending your own money - is up by an average of 12 per cent a year over the previous two years.
But here's a possible rub. This apparent restraint in credit-card spending will obviously be sorely tested over Christmas.
ASIC's personal finance website, MoneySmart, provides useful tips for trying to keep spending on credit cards under control. These include:
- Pay as much as possible off your credit card bill each month to minimise interest - at least make the required minimum payment to avoid late payment fees. (Some disciplined cardholders, of course, pay off their entire bill each month to avoid any interest.)
- Monitor your credit-card spending to ensure that you don't overshoot your credit limit or spend beyond your repayment capability.
And you could consider reducing the credit limit for your card in order to reduce the temptation of over-spending during Christmas.
MoneySmart's credit-card calculator enables you to calculate how much you can save by paying off your debt faster. Further, the calculator lets you calculate how long it will take to pay back money - before you actually spend it.
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