Investing on behalf of your children

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Investing on behalf of your children can help give them a financial leg up and introduce them to good financial practice at an early age. Here are some considerations to help you find an appropriate kind of investment vehicle to set them on their way.

Whether it’s birthday cash from proud grandparents, a slice of an inheritance, or you just want to set them up with something in their own name, many parents want to invest on behalf of their children.

Picking an appropriate investment for your child

Just as you wouldn’t set off across the Nullarbor on a hovercraft, it’s important to pick an appropriate vehicle. Tax, social security and the appropriate structure will all affect your decision.

The first thing to consider is why you want to invest. There’s a plethora of products you could select, so think about which goals you’re aiming to achieve. Setting something up to fund year-on year educational expenses might be quite different from a fund to establish a deposit on a first home, where the aim is a lump sum.

Alternatively, you may simply to want to open a bank account to give them the feeling of ownership, the equivalent of the old over-the-counter passbook. This might be a first step towards financial literacy in adulthood.

Once you’re clear about your aims, it pays to bear in mind the effects of taxation.

Minors and tax

In Australia, children under 18 on the last day of the financial year (30 June) are considered minors as far as tax is concerned. Minors are generally taxed at penalty rates on unearned income such as interest, rent and dividends.

There are exceptions for certain children working full-time, with disabilities or who are entitled to a double orphan pension.

Further, the above minor penalty tax rates don’t apply to amounts of excepted income received by children – these amounts will be taxed at adult rates. Excepted income includes income from employment, their own business, or from a deceased person’s estate.

Mario is 15 years old and is not an excepted person. His income consists of a $500 family trust distribution and $8,000 wages from casual work. Mario also has $180 in deductions relating to earning his wages.

In whose name?

The most common approaches are to hold the investment in the child’s name, or in the parent or grandparent’s name, with them as a trustee. Whichever you choose, it helps to think upfront who will be liable for any tax and what the social security impacts might be.

For tax purposes, the ATO determines who has control of the assets, and therefore who pays tax on the income earned.

If the money to set up the investment is given without any conditions, such as pocket money, or earned and used by the child and no-one else, then income, and any capital gain or loss, is assessable to the child. It’s the same if the investment is held under an informal trust agreement and the ATO is satisfied that the money belongs to the child. This applies in most cases where the money is a genuine gift.

However, if the money for the investment is provided by the parent and the parent uses the money as if it were their own, then they should declare the income on their return.

Note that children are not exempt from quoting a tax file number (TFN) and can apply for one at any age. Whichever investment vehicle you choose, make sure you supply the right TFN, if one is required.

Investment vehicles

These are some of the popular options parents turn to:

Bank accounts

Opening a bank account is usually the most straightforward. This doesn’t require the child to sign a legal document and so can be registered with your child’s name. However, if they are under 16, the bank will often require parental permission.

Managed funds

Managed funds and share investments generally require legal capacity, which doesn’t apply to under-18s. Therefore, these are usually registered in an adult’s name. The fund manager or share registry may allow for a name that reflects the intention, ie John Smith in trust for the late Jane Smith.

Insurance bonds

An insurance bond is a type of life insurance policy, with a range of investment options. It may be withdrawn in part or full at any time, although there may be tax implications. It can be established in the child’s name for those aged 10 to 16 with parental consent. Anyone over 16 can invest without consent.

For children under 16, insurance bonds generally also offer a ‘child advancement option’, where a parent or grandparent invests on behalf of the child, with ownership passing at a nominated ‘vesting’ age. This might tie in with making funds available for education, home deposit or travel and so on.


Although it may seem odd for an under-18 more into skateboards, it’s never too early to think about super.

Children can become members of a super fund, if the rules of the fund allow this. Generally, a parent or guardian needs to sign the application form and there are additional considerations if the child will be a member of a self-managed super fund (SMSF).

Because of its concessional tax treatment, super is a popular savings vehicle. However, depending on your purpose for setting up the investment, it may not be right for your child as they may not be able to access their funds until their own grandchildren have skateboards.

Social security

Where a parent or other adult holds investments on behalf of a child, Centrelink typically treats these as protective trusts. As a result, assets will most likely be attributed to the adults, up until they transfer to the child.

It’s important to evaluate the pros and cons to get a suitable approach for your family. These can be complex, so you may wish to speak to your adviser.

Source: AMP



How to review your SMSF investment strategy

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Super law sets out some requirements that trustees of regulated super funds need to consider when formulating an investment strategy.

These requirements include (but not limited to) the composition of investments, risk and return, liquidity, insurance and the ability to pay liabilities (including member benefits) as they become due.

Looking first at the composition of investments, there isn’t a requirement that SMSF investments must be diversified, and there are some SMSFs that have large investments in a single asset or asset class.

Most commonly this occurs where the SMSF has a direct property investment, with a comparatively smaller investment in cash in order to make relevant payments as necessary.

Whether or not this approach is right is a question for the trustees of each SMSF to determine for themselves, but the old saying of “not putting all your eggs in one basket” is worth considering.

Using this example, what would happen if the property market was to fall? Do you have enough time to ride out fluctuations and get your money back? This points to the next consideration of risk versus return.

With any investment decision, a consideration of the risk involved in a particular investment balanced against the potential returns or reward should probably be undertaken. Of course, these are both forward looking.

History may tell us a little about the risks and returns for particular investments over a period of time, but there are no guarantees about what will happen in the future.

This is why it’s usually important for SMSF trustees to spend some time making an assessment of these important characteristics.

However, it is unlikely that a consideration of risk and return is just limited to the actual investments themselves. Often the best starting place is what the SMSF trustee’s risk and return parameters are.

If the market was to fall by 10 per cent, how long would they be willing to stay invested in the same asset to recover the capital?

This can help determine how much risk the SMSF trustee is willing to take on. And this consideration may not be about a particular investment, but rather the composition of all the assets in the SMSF.

How much to allocate to growth assets (which usually have higher risk) compared to how much to invest in more stable investments (which are generally subject to less volatility).

Risk may only be one side of the equation – return may be equally as important to consider. In fact, given one of the key objectives of super is to grow wealth towards retirement, generating an appropriate level of return is important, and invariably involves taking on some element of risk.

Another requirement may be liquidity and the ability to pay liabilities as and when they fall due.

There is no doubt that you need to be able to pay for the ongoing running costs of your SMSF, but consideration of liquidity takes on heightened importance as members approach retirement.

With super used to fund members’ retirement lifestyles, the need to ensure there is sufficient liquidity is arguably more important, and will involve a consideration of how much should be held in cash (or other liquid investments) and how much should stay invested in less liquid investments to provide for future potential growth in the SMSF.

SMSF trustees are also required to consider the insurance needs of members in formulating the investment strategy.

Given that quite often the trustees of an SMSF are also the members of the SMSF, this is about considering whether you have sufficient insurance of your own, and if not, whether you should acquire more cover through your super.

Depending on the type of investments in your SMSF, you should also consider if you need the fund to take out other types of insurance. This could be an important consideration if you hold property.

So what makes a good SMSF investment strategy? It’s likely one that aligns to the future goals of the members (the trust deed should cover this) and what they are trying to achieve, and ensures this is done with appropriate consideration of the risks in achieving these goals. It should also comply with super legislation and the sole purpose test.

Source: BT

The search for dividend yield in a low-growth environment

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Investors have faced a low-growth environment with low yield for some time now and this does not appear to be changing anytime soon.

Global economic activity is slowing notably, reflecting a combination of factors affecting the major economies.

Historically investors who look for income in the form of interest payments – also called yield, have looked to fixed income (bonds) and cash (bank deposits) in a normal low growth environment, but with record low interest rates these returns as a measure over inflation have proven harder to find. One of the strategies investors have been forced to look at is to invest into the share market for dividend yield, which is yield paid in the form of a dividend.

This strategy has pushed money into Australia’s traditionally high dividend-paying stocks, also driven by the benefit of our franking credit system – which has in-turn been one of the underlying reasons why our share market and many other developed countries share markets have risen strongly since the Global Financial Crisis in 2008.

The share market can be a generator of income, in the form of annual dividends from companies – but not all companies pay a dividend, and it is not compulsory. However, Australian companies pay out a high proportion of earnings as dividends, as measured by the dividend payout ratio. Listed companies have, on average, paid out 65% of their earnings in the form of dividends from 1917 to today.

Over time, dividends can provide a contribution to the total return earned from shares. In fact, just under half of the long-term return from holding Australian shares comes from the dividend component, looking at the market’s “total return” index, the S&P/ASX 200 Accumulation Index.

Over the last 10 years to June 2019, the S&P/ASX 200 Accumulation Index has generated a return of 10.0% a year, versus 5.3% a year for the S&P/ASX 200 price index – meaning that dividends are responsible for 4.7% a year, or just under 50% of the total return.

The importance of dividend yield in stock selection

A benefit for long-term investors who receive the dividend component of the total return, especially for large, mature companies listed on the Australian share market, is that it can be less volatile than the capital growth component, as such companies tend to ‘smooth’ the payment of dividends through the use of available cash flows, that is independent to the  changes in the company’s share price from time to time.

However, there are several aspects of the stocks-for-yield strategy that make it one that should be constantly monitored. First, a stock market dividend yield cannot be considered as certain, because the dividend amount is at the discretion of the company, each reporting period. Second, the risk of share-price capital-loss, while holding shares for yield, is always present.

How to find high yield growth stocks

For active stock-pickers with a value orientation – that is, those who like to buy  ‘unloved’ stocks at what they see is good value based on fundamental metrics – opportunities might look like they are thin on the ground, but they are usually present: it might just require a harder look.

The key to this process is to think of the businesses represented by the stocks on the stock exchange. Where short-term market volatility is often driven by macro-economic or geo-political events, the underlying fundamentals of businesses are what essentially drive the returns from the stock market, through the “duration effect” of a company’s ability to grow its value over time through the compounding of its cash flow.

From time to time, the stock market will under-value some businesses, and over-value others.

There is little correlation between the performance of individual stock-exchange-listed businesses and economic growth, because each company has specific factors that drive its revenue and profitability.

There are always stocks out-performing the market, and certainly out-performing the economy: whether the investor wants to back these stocks for short-term trading opportunities, or longer-term investment, is up to the investor. But they are always there to be found.

Source: BT


Five global themes that may impact your investment portfolio

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It’s important for investors to be aware of some of the key global and economic environmental factors that may impact their investment portfolio.  Here we look at five global themes that are currently playing out in world markets, and how they may potentially impact their investment portfolios.

1 – Trade Wars

Trade tensions between the United States and China have shown their ability several times to cause turmoil in the investment markets.

The showdown kicked off in July 2018, when the US implemented its first China-specific tariffs. In turn, China has retaliated with its own tariffs, and threatened a range of other measures that may affect US businesses operating in China.

Things escalated in May 2019, as the US extended tariffs on a range of imported goods from China, drawing further tit-for-tat measures from Beijing.

With the solution of the trade tensions having a long way to go; nobody wants to see a full-blown trade war. The prospect makes markets nervous, and that may mean volatility for portfolios.

2 – Slowing global economic growth

Global economic growth is an important driver of investment performance, but to a certain extent is hostage at present to the trade war concerns.

In March 2019, the Organisation of Economic Co-operation and Development (OECD), Australia’s peer group of developed countries, said in its Interim Economic Outlook that global trade growth had slowed from 5.25 per cent in 2017 to about 4 per cent in 2018.

In April 2019, the International Monetary Fund (IMF) cut its global economic growth forecasts for 2019 and said growth could slow further due to trade tensions. The IMF lowered its growth forecast for the global economy in 2019 from 3.5 per cent, which it expected back in January, to 3.3 per cent with the ongoing trade tensions remaining a risk for the global economy.

Any further deterioration in the outlook for world economic growth could mean volatility for equities.

3 – Growth in China and how it affects Australian Resources

As China’s economy has grown, the world has become used to spectacular numbers: its gross domestic product (GDP, the amount of goods and services produced in the economy) grew at an average annual rate of 9.5 per cent between 1989 and 2019, with a peak of 15.4 per cent in the first quarter of 1993.

Falling Chinese economic growth rates is not good for investors, as it raises concern for global economic growth. Investors are now conditioned to expect Beijing will stimulate the economy when growth rates slip, but there are also concerns about its ability to sustain this given China’s huge levels of debt.

One of the closest exposures to China that many Australian investors have is through holding shares in the big miners that supply the country’s voracious heavy industries including: BHP (iron ore and steelmaking coal), Rio Tinto (iron ore) and Fortescue Metals Group (iron ore). While China is a concern at the portfolio level, in terms of the sensitivity of the broader share market to perceptions of Chinese economic health, at the company level, these stocks continue to benefit from selling to China.

The big miners are also benefiting from the fact that iron ore supply from Brazil has suffered in the wake of January’s tailing dam disaster. Brazilian miner Vale has stated that it could be up to three years before it resumes exporting at full capacity, and the supply disruption means that iron ore prices are likely to stay stronger than had been expected over that time.

4 – The low-interest rate environment

The low-interest-rate environment that has been the investment setting for several years appears unlikely to change anytime soon.  This is mainly due to central banks being reluctant to lift interest rates from long-term lows and bond yields pushed lower as investors become pessimistic about economies.

The dilemma for yield-oriented investors is that income is difficult to find in the traditional areas, meaning that higher risk has to be borne to generate higher levels of income.  In Australia, listed shares have been popular for this purpose, using Australia’s dividend imputation system: infrastructure investments, real-estate investment trusts (REITs) and corporate bonds have been other alternatives used.

The challenge of a global low-interest-rate environment for investors looks like it will remain for some time.

5 – New and disruptive technologies

An area that has opened up for investors recently is new and disruptive technologies.  These include advances in areas such as cloud computing, artificial intelligence, virtual reality as well as social and new media.

Companies that have “disrupted” established industries by doing business differently such as the likes of Amazon, Uber, Netflix and Airbnb, have created new levels of value in very short periods of time, but now find themselves vulnerable to disruption.

The digital and IT-powered revolution will continue to pose both risks and opportunities for investors: the only certainty for an investor is that technological advances cannot be ignored.

Source: BT


Investment strategies for your superannuation

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Your superannuation returns may be doing ok, but could they be better?  Being actively involved in how and where your superannuation is invested, could make a real difference to your retirement savings over the long-term.  This article considers four examples of investment strategies for your superannuation.

The importance of diversification

Before we discuss the various investment strategies, it’s important to highlight the significance of diversification.  Like any type of investment, spreading your super across different types of investment options, can help to build a strong portfolio and manage risk.

Why? Because if you were to invest all of your super into one asset class such as property, your investment may suffer a loss if the property market was to fall in value. However, if you spread your money across multiple assets, you may have a different result.

Investment strategy type 1: Growth

If you don’t think you’ll be accessing your super for at least 10 years or more, a growth strategy may work for you as a longer timeframe may help an investment portfolio withstand volatility while aiming for returns.

A growth strategy that follows a higher risk, higher return approach tends to have a larger focus on assets that are exposed to capital appreciation. That is, investing in assets which are expected to grow at a higher rate than the industry or overall market.

For instance, this may involve an investment of around 70-85 per cent in shares or property with the rest in fixed interest and cash-based investments.

Historically, over any 20-year period, a growth strategy has delivered better returns than more conservative portfolios which would mainly be invested in fixed interest and cash.   However, over a short-term period, you may experience significant losses as a result of market volatility.

Another key benefit of a growth strategy is that by making greater returns on your investment, your savings are more likely to keep up with the rising cost of living. This is arguably important because over time inflation may reduce the value of your retirement savings, which could make it difficult to maintain your standard of living when you’re retired.

Investment strategy type 2: Balanced

Similar to a growth strategy, if you aren’t planning to access your super anytime soon, opting for a balanced investment portfolio may be another option.

This strategy is aimed at balancing risk and return so your portfolio has enough risk to provide reasonable returns, but not enough to cause significant losses.

A balanced strategy typically involves investing around 60-70 per cent in shares or property, with the rest in fixed interest and cash-based investments.

Investment strategy type 3: Conservative

A safe or conservative strategy follows a lower risk, lower return approach so it’s really about preserving the value of your investment portfolio. While there may be less risk of losing money, a downside could be that your returns may not keep up with inflation. For example, this could involve investing around 20-30 per cent of your super in shares and property, with the rest in fixed interest and cash-based investments.

Investment strategy type 4: Ethical and sustainable

You may choose not to invest in certain companies based on ethical grounds. For example, taking a stance against investing in firearms. This approach is called ethical or socially responsible investing.

There is also sustainable investing which goes beyond incorporating just ethical and social factors. That is, it approaches investing from an environmental and governance lens too. Some super funds now offer this, so if these factors are important to you, speak to your super fund for more details.

Review your investment approach

Revolution Financial Advisers can help you to review your current investment approach with your super fund or SMSF to consider how it aligns with your goals and risk comfort.

Source: BT

Should I borrow to invest in shares?

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Borrowing, or gearing, can help you accelerate your wealth creation. It can allow you to buy assets such as an investment property, or shares that you may not be able to afford outright. However, borrowing to invest is considered a high risk strategy and can result in you losing more than your invested capital.

Before taking out a share investment loan, you should ensure that you can service the costs associated with the loan, including repayment of the loan principal. You should also seek professional financial and tax advice regarding the potential risks and benefits of geared investing.

How do I borrow to invest in shares?

You can take out a margin loan to invest in shares. A margin loan allows you to buy shares by paying only a fraction of the cost of the shares upfront, and the lender uses your shares as security for the loan.

The prices of shares move frequently and you risk losses if they fall in value. Lenders often express your level of gearing using a loan-to-value ratio (LVR) or gearing ratio. The LVR is the amount of your loan divided by the total value of your shares.

If the value of your shares falls to where LVR exceeds an approved maximum, you may be required to top-up your loan collateral or repay some of the loan. This is known as a margin call. If a margin call is not met within a timeframe set by the lender, your shares may be sold by the lender to satisfy your margin obligations. This may result in you suffering a loss.

How do I manage the risks associated with a margin loan?

There are a few strategies that can help you manage the risks associated with a margin loan:

  • set a borrowing limit you are able to comfortably repay and stick to it;
  • make regular interest repayments on your loan to keep your loan balance within a manageable limit;
  • check your LVR regularly, because the value of your investments can change quickly;
  • have funds available to deposit if your lender makes a margin call and you do not wish to sell your shares.

What are the benefits and risks of borrowing?


  • You can build a larger portfolio than if you were using just your own funds;
  • Some lenders allow you to borrow using an existing share portfolio as collateral. This allows you to increase the size of your investment without having to deposit additional cash;
  • Manage concentration risk by diversifying your portfolio. For example, if your share portfolio is overweight in a certain sector and you do not want to sell the shares, you could use the equity in your current portfolio to borrow and invest in companies in other sectors;
  • Potential tax efficiencies associated with borrowing.


  • While a share investment loan can help accelerate the growth of your portfolio, it can also magnify losses if prices move against you and you can lose more than your invested capital;
  • Interest costs associated with your loan may reduce your profits. Interest rates are also subject to change, and can result in an increase in the cost of servicing your loan;
  • LVRs, or margin rates, are subject to change at the lender’s discretion. This can lead to a requirement for you to deposit additional cash at short notice. In some cases, your shares can be sold by the lender to satisfy your margin obligations. This can result in your shares being sold at a loss and you will still be required to repay the outstanding balance of the loan.

To find out whether gearing may be a suitable strategy for you, please Revolution Financial Advisers for a confidential chat.

Source: Macquarie Group Limited

How much do I need to start investing?

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While investing might seem daunting, you don’t need a huge amount of money to start. Investing into traditional property might require a significant deposit, and a commitment to a long investment horizon, investing in shares, ETF’s, managed accounts or managed funds can be accessed with a much smaller outlay along with the benefit of shorter term access to the value of your investment should the need arise.

It’s all about knowing where to start, which is quite often the hardest step. But we all have the potential to be successful investors – all it takes to get started is being armed with the right knowledge.

Taking the first steps

While some prefer to take the first few steps alone, others seek professional advice before investing. Either way, it’s important to select an investment type after you have done your research, determined your personal goals, and weighed up how you feel about risk.

Considerations such as your investment timeframe, current market conditions, expectations of future market conditions, and your tolerance to capital loss, and volatility (both positive and negative movement in returns) all need to be taken into account when choosing the right type of investment. This step alone is critical in assessing your propensity to take certain levels of risk to achieve an expected return over a given timeframe.

As mentioned above, it doesn’t take a lot to get started. You can begin investing directly in shares, or a managed investment (offering a diversified range of investment assets including shares), with a lump sum of as little as $1000, or less when setting up a regular investment plan. You can also contribute regularly to steadily grow your investments and build a diversified portfolio – while taking advantage of the benefits of compounding returns.

Paying yourself first

If your budget isn’t quite working and you’re struggling to set aside funds to grow initial capital, there is an alternate strategy.

Called ‘pay yourself first’, instead of aiming to save whatever is left over after regular bills and expenses, consider setting aside a fixed percentage of your regular wage or salary as soon as you get paid. Better still, set up an online funds transfer with your bank timed with each pay day, so that this amount goes directly into your savings account – you may be surprised how quickly you can accumulate funds to start investing.

Doing the groundwork

Be sure to do plenty of research so you understand the market and assets in which you’ll be investing. You should also research the products you’ll use to invest in that market, such as a managed fund (you should always read the Product Disclosure Statement for the fund itself). For shares in a listed company, it might mean looking at companies’ annual reports, analyst research reports or on a stock exchange’s website.

The key point is, there’s a wealth of information you can, and should use, to help decide which investments to consider. This information should also provide insights into the risks and to some extent the tax implications of the investment you are considering.

Another critical piece of research and decision making driver when choosing the types of investments to use is looking at the costs of investing. Things such as brokerage when purchasing shares, management fees and buy/sell costs when purchasing managed funds are key when investing as when investing small amounts, fees can play a major part in impacting your initial outlay.

Source: BT, 2019

How you can benefit from share market fluctuations

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When share markets experience a downturn, it’s easy to get nervous about the impact on your investments.  But this kind of volatility doesn’t always necessarily spell bad news – as billionaire entrepreneur Warren Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.”

While it may seem strange to buy when everyone else is selling up, the fact is that even a declining market can present opportunities.  The key is to choose a mix of investments that allows you to take advantage of both positive and negative market movements.

Here are some strategies that every savvy investor should keep in mind.

Understand share price changes

When markets are driven lower by negative sentiment, assets can potentially fall below their fundamental value. These conditions may then provide valuable opportunities for investors to temporarily buy shares at a discount.

This is because the value of an individual stock is the sum of the returns it can potentially generate over the company’s lifetime.  So while short-term shockwaves such as recessions or political events can affect the immediate share returns on an asset, they won’t necessarily impact its intrinsic worth.

But be careful as this doesn’t mean you should buy anything and everything that’s on sale.  For instance, a company’s share prices may be falling because of other factors that will erode the long-term potential of those shares.  And with any investment, you want to be reasonably confident that its value will rise in the future.

Investment managers and financial advisers work hard to identify undervalued assets and take advantage of market dips.  That’s why it’s always important to seek professional advice before you make any major investment decision.

Take a long-term view

A down market offers the potential to earn greater returns than an up market.  This is because, theoretically speaking, the lower your starting point, the higher your stocks can move.  However, this is usually only true if you adopt a long-term investment strategy that will help you ride out any future market fluctuations.

Despite periods of short-term fluctuations, historically share markets tend to move upwards, and shares are an investment vehicle designed to be held for periods of five years or more.  So, whether the market is up or down, you may be wise to ‘buy and hold’ so you can increase your potential for strong returns in the long run.

Diversify your portfolio

Even the most seasoned investor knows how difficult it is to time the market.  Rather than trying to predict future movements, some say it helps to take a measured approach by investing regularly over months and years, regardless of how the market is performing.  So if you continue investing consistently when prices fall, you’ll be able to buy a larger number of shares for the same amount you usually invest.

It can also help to diversify your portfolio by investing in defensive assets such as fixed-interest investments and cash.  These tend to be less dependent on market cycles, so they can provide stable earnings through periods when markets are on the move.

Most importantly, remember that a financial adviser can help tailor your investment strategy so you can make the most of market movements.  Your adviser can also ensure your portfolio is robust and diversified, so you can protect your investments and keep your financial plan on course.

Source: Colonial First State

Buy, sell or hold: How to deal with market movements

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When share markets fall, every investor has a different emotional response.  Some investors get anxious and sell up at the first drop in value, whereas others are happy to ride out short term fluctuations to realise the long-term benefits of their investments down the track.

One of the reasons for these different reactions is that all investments carry some level of risk, and we all have different perspectives on how much risk we’re willing to accept.  This is because many personal factors can impact our investing style – from our financial situation and investment timeframe to our lifestyle goals and even our personality.

But when markets are in flux, how do you know if it’s time to change your strategy?  Here are some things to keep in mind.

How do you react to market fluctuations?

A study by Colonial First State Global Asset Management (GAM) examined how a recent period of market movements impacted people’s investment decisions.

The results showed that as confidence declined, portfolio activity increased as more investors moved away from the stock market.  In fact, the group most likely to switch out of shares were investors aged 50 and over.  This is perhaps because they were seeking to preserve their capital and minimise their risk exposure as they headed towards retirement.

While investors of all ages often respond to uncertainty in the market by taking a more active approach to their investments, this may not always work in their best interests.  Not only is switching costly, but it can also mean missing out on opportunities when the market recovers.

What happens if you sell?

Before you withdraw from an investment, it’s important to make sure you understand all the implications, including the risks and costs involved.  For one thing, if you sell your asset you may be liable for capital gains tax (CGT), which can reduce the profit you stand to make.

What’s more, even if you’re only planning to sell off part of an investment, it’s not just the face value you’ll be giving up.  You’ll also miss out on the benefits of compounding, which means you won’t be able to earn further returns on the shares you sell.

But that’s not all: if the value of your investment is falling, this is only a hypothetical or ‘on paper’ loss.  If share prices begin to rise again, your investment could soon return to profit without you doing anything.  However, if you sell your investment while its value is down, you essentially crystallise your losses – making them real and irreversible.

Are there alternative options?

When tailoring your investment mix, it’s important to focus on the big picture and think long term.  That way, you’ll be able to ride out short-term fluctuations and take advantage of growth opportunities.

If you’re investing for the long term – for instance, with your superannuation – it’s important to have a diversified portfolio.  This means investing in a variety of different asset classes. GAM’s research revealed that Australian investors tend to react to uncertainty overseas by reducing their exposure to international shares.  But while this may seem like a sensible move in theory, it also means your overall portfolio will become dependent on a smaller pool of asset classes.

On the other hand, a diverse portfolio allows you to spread your risk exposure across different asset classes and markets, rather than putting all your eggs in one basket.  This provides a financial buffer whenever an individual asset class declines in value.

If you’re thinking about changing your investment strategy, a financial adviser should be your first port of call.  They can review your portfolio to make sure you have the right investment mix, taking into account your financial goals, investment timeframe and risk appetite.

Source: Colonial First State

Diversification – why it should be your best friend

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Diversification is the act of spreading the money you have to invest across a number of different types of investments.  For example, rather than putting all your money into shares in one company, you split it across multiple shares in companies which operate in different industries or different countries.  You might also spread to other types of investments like bonds or property.

Why do this?  Because different investments behave in different ways.  When one peaks, another may plummet, while another stays flat.  Some provide investment returns in the form of income (for example, dividends or rent), others through increasing in value.  Diversification ensures that an investment portfolio is not at risk of suffering too much if one or more of its parts fall in value.

Diversify, yes – but also think of your objectives

Diversified investment portfolios vary substantially, but can be grouped according to what the owner (the investor) wants from their portfolio and how much risk they are prepared to take on. Broadly speaking, we can bucket portfolios under one of three labels: conservative, balanced and growth.

Conservative portfolio:

This may have the bulk of its money (70% or more) invested in cash and fixed interest (bond) investments, with the rest in growth assets such as  shares and property which are, generally speaking, more volatile.  This type of portfolio is designed to achieve lower variability in returns, albeit with lower returns than balanced and growth portfolios.

Balanced portfolio:

As the name suggest, more of a balance, with around 30% – 40% invested in cash and fixed interest and the remainder in growth assets, with slightly more varied returns through time.

Growth portfolio:

The alter-ego of the conservative portfolio, this kind of portfolio will typically have at least 70% – 85% in growth-oriented investments, aiming to provide higher returns over the long term, but with a greater likelihood of shorter term volatility. This means in some years you could see losses – even significant losses – but also higher returns in the good years.

The traps of diversification

When you manage an investment portfolio on your own, there are many risks to contend with.  First is a basic lack of knowledge.  ASIC research shows that 10% of people have at some point invested in something they didn’t understand, and 69% of people either had not heard of or did not understand the concept of risk and return trade-off.  Furthermore, some 41% of people view real estate as a low or very low risk type of investment.  A lack of knowledge and experience means many investors could be open to:

  • Buying into an investment before prices drop significantly, or selling before they increase (known as timing risk);
  • Failing to understand which investments are low risk and which are considered high risk;
  • Investing too much in one investment simply because it has already performed well.

The concept of not putting all your eggs in one basket seems logical, but working out how you do this with your own money and actually doing it – yourself – takes a lot more effort.  A financial planner can sit down and help you work out what you want from your money over time and define your financial goals.  Furthermore, Australia has a well-developed market for investment products, including managed funds, to provide one-stop diversified investment options for individuals.

About managed funds

Investing in a managed fund allows you to access investment professionals to manage your money.  In a managed fund your money is pooled with that of many others.  The investment manager controls where this pool of money is invested, using their investment process and experience to the mutual benefit of the investors.  The investment manager cannot just invest where they please; each managed fund has its own governance structure, rules to abide by and specific investment objectives – like providing long term growth, or regular income.

There is a wide range of managed funds available including well diversified options such as conservative, balanced and growth funds.  You will pay a fee for ongoing management, but beyond the investment manager’s expertise, what you buy is freedom to ‘get on with life’, as managed funds are one of the easiest ways for time-poor or knowledge-poor people to establish and manage a diversified portfolio.

Source: BT