Dividends, franking credits and retirement income goals

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By Jeff Rogers

Previous Chief Investment Officer, ipac (retired)

 

The Labor Party’s proposal to eliminate cash refunds for excess franking credits continues to generate lots of discussion by self-funded retirees and members of self-managed super funds (SMSFs) even after some refinements that narrow its impact.

The stated policy intention is to broaden the tax base by eliminating what is described as an anomaly in the operation of the current system. It may also be targeting perceived issues of intergenerational equity and be trying to further curb the growth of self-managed superannuation. None of that sounds too contentious, so why all the angst?

Dermot Ryan has recently discussed the implications of the proposed changes and the actions that SMSF members might consider taking in response. I have previously expressed my view on whether cash refunds for excess franking credits do indeed represent an anomaly. The aim of this article is to try to explain why there is concern among a large group of retirees. I contend that there are both emotional and financial reasons for this.

Doing the right thing

Research in behavioural finance has explored how the emotional needs of investors influence their behaviour. I believe that an expression of loyalty and patriotism, along with comfort from a sense of familiarity, are important factors driving the investment choices of retirees. The home country bias in SMSFs can be interpreted as reflecting an emotional preference for investing in one’s own country. Remember that during the 1990s Australians were actively encouraged to become shareholders in privatised and demutualised domestic entities.

Retirees are clearly affronted by any suggestion that they have been rorting the tax system through the receipt of cash refunds for excess credits. They feel they have been obeying all the rules over the past two decades and have been doing the right thing by allocating capital domestically.

Members of SMSFs see themselves as unfairly targeted since their contemporaries with similar financial resources, but whose superannuation is held within large funds regulated by the Australian Prudential Regulatory Authority, are unlikely to be impacted by the proposals. Worse still, many self-funded retirees are of an age where they are not permitted to change the location of their assets to shield themselves from the effect of the proposal.

Impacts on consistency of cash flows

From a financial perspective, it is apparent that many retirees would see a reduction in the after-tax return on their Australian shares if Labor’s proposal were to be implemented. What is less well appreciated is that it would likely also lead to an increase in the variability of cash flows delivered from their retirement portfolios. Australian companies with large and sustainable dividends turn out to be particularly attractive investments for retirees looking to fund a reliable income stream in retirement.
This observation isn’t entirely intuitive to people schooled in thinking that risk and portfolio volatility are one and the same. From a goals-based perspective, portfolio volatility and the risk of failing to meet a retiree’s essential spending goals represent different concepts.

In a recent whitepaper, Darren Beesley notes that a key goal for retirees is to maintain confidence that they will be able to draw consistent cash flow, growing with the cost of living over time, from their retirement portfolio. The capacity to take investment risk and the appropriate characteristics of those risks are informed by their spending goals. A retiree’s investment problem is different to that of an accumulator who has a predictable sequence of future inflation-linked contributions.

Correlation between Australian shares and retirement goals

So, why is investment in a portfolio of profitable companies whose shares have attractive return prospects, and where a large proportion of that return is delivered through sustainable dividends and associated imputation credits, so well-suited to reliably fund a retirees’ spending goals?

First, shares of such companies can deliver attractive returns on a standalone basis. If history is any guide, portfolios with these characteristics are likely to have a superior total return per unit of investment risk relative to a traditional equity portfolio.

Second, and most importantly, spending on essential needs in retirement has the characteristic of a series of cashflows that rise with the cost of living over time. A retiree needs to fund these cash flows through income from their security holdings supplemented by the progressive sale of assets. Consequently, a share portfolio that generates a high level of sustainable dividends and imputation credits has very attractive attributes because it reduces, or potentially eliminates, the need to sell assets at times of weak asset prices.

Shares with these characteristics may not only improve the reliability of retirees’ financial outcomes but also deliver favourable behavioural benefits by restricting the extent to which volatility of markets is transmitted into uncomfortably large variability of future cash flows from their portfolios. That’s why the implementation of Labor’s proposal could be financially disruptive for a large cohort of retirees.

Possible outcomes

Some commentators have suggested that Australian super funds are over-invested in Australian shares and it would be a good thing if that exposure were to be reallocated to other asset classes, especially global equities. This may well be sound advice for an accumulator in super or a wealth-maximising investor looking for high total return while limiting overall portfolio volatility. However, it isn’t quite right for a retiree looking for confidence in their spending power. Further, retirees looking to reallocate offshore need be thoughtful about the type of shares in which to invest.

Ironically, our goal-based analysis suggests that if there is a desire to reduce access to franking credit it would be better if restrictions were to apply in the accumulation phase of superannuation rather than in the pension phase. That’s unlikely to happen. What may be more likely is that Labor responds to community concerns by allowing self-funded retirees some limited access (say up to $5,000 per year) to refunds on excess credits.

How to avoid some of the credit card traps

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By Noel Whittaker | 15 March 2019

See why credit cards can create issues for travelers, families and retirees alike.

Love them or hate them, the fact remains that credit cards are a necessity for most people.

You can hardly book accommodation, airfares or a rental car without them and they take the worry out of carrying cash when you shop. Still, you still need to be aware of the traps.

A classic is having just one credit card when you are travelling and finding it blocked when the hotel demands you hand it over at check-in, to guarantee any purchases you may make while you are staying there.

Another major problem is supplementary cards.

To save on fees, many families have one main credit card, with the partner and other family members using supplementary cards.

Unfortunately, with many cards, all associated cards are blocked as soon as one of the cards becomes lost or stolen. This can be particularly embarrassing if you’re travelling overseas.

Obviously, the solution is for couples to have individual credit cards but, as a recent email from a reader points out, it is becoming increasingly difficult for retirees to qualify for a credit card.

She wrote: “My husband and I have had a 40-year association with a major bank, have paid off numerous loans, and have a history of never missing a payment.

We are 62 and 73 and are self-funded retirees with substantial assets.

After reading your articles, I decided to apply for a credit card in my own name, which has to be done online. It was declined by the bank’s computer on the grounds I had no taxable income.

I can’t see the logic of this, and am concerned that my 40 years’ loyalty with the bank appears to count for nothing.

The bank’s decision makes me feel discriminated against — both as a married woman and a grandmother. Do you have any ideas how I can overcome this absurdity?”

I telephoned the bank on her behalf and spoke to one of their senior people, who promised to look into it. Within five days I received an excited email from the reader telling me that a credit card in her own name had been approved. She was over the moon!

I phoned the executive I’d been dealing with to relay the good news and asked him the obvious question: what is the mechanism for a person in her situation to get a credit card?

There is a Plan B

It’s ridiculous to expect that the only way for a card to be approved is for somebody in the media to bring it to the bank’s notice.

To his credit, he was most helpful. He suggested that the first line of attack should be to go to a bank branch, talk to a staff member face-to-face, and make sure all details of the conversation are recorded.

In most cases, this should solve the problem. But if it doesn’t, he also suggested a Plan B.

Apparently, all the major banks have an Advocate, whose job is to handle matters such as this for aggrieved customers.

Seek the help of the Advocate

Anybody who feels they have been badly treated can contact the Advocate, who will investigate the case and help the customer achieve an outcome that works for both parties.

I must confess that this is a term which is new to me but if you do a web search you will find every bank’s Advocate is clearly shown.

I guess it’s good to know that in this age of computers we still have a human avenue of appeal if needed.

 

This article was originally published by The Sydney Morning Herald on 3 February 2019. It represents the views of the author only and does not necessarily reflect the views of Tailored Lifetime Solutions.

5 REASONS WHY SMALL BUSINESSES FAIL

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By Flying Solo contributor John Refalo

For many people starting a business is a dream but, at the same time, a significant risk when not done properly.

While we see a number of clients citing issues with the Tax Office as the catalyst for problems that upend them, there’s many reasons why a business can fail.

Let’s now explore what I believe are the five most common reasons why businesses fail.

1. YOU HAD POOR PLANNING

We may be sick of that saying “Businesses don’t plan to fail, they fail to plan” but this rings true. This is why we need a business plan—a good start is the template found on www.business.gov.au. To summarise quickly, a business plan is a document that goes through every aspect of your business, from establishing your vision and mission statement, to industry analysis and all the way to specifics like budgeting, employees, and expenses.

Spending adequate time creating a business plan will give you complete understanding of your business. You may be reading this now thinking “I am the owner … of course I know my business”. That may be true but a business plan forces you to:

  • Consider your capital requirements;
  • Define the direction that your business is going to take (vision, mission statement);
  • Examine how your business is perceived in the market (quality, cost);
  • Consider how you set yourself apart from your competitors (unique attributes);
  • Deal with current and future threats to your business;
  • Manage your income and expenses through budgeting;
  • Consider finance arrangements to fund your part or all of your business;
  • Consider opportunities in the industry/economy; and
  • Define the employees’ roles and who is responsible for helping you achieve your direction.

This document is so important that even the banks require it when providing finance!

And while it’s up to you if you adopt one to this extent, or at all, spending some time looking at this (at least once a year) will hopefully change your focus on the ‘what’ you do in business to ‘why’ and ‘how’ you do business.

2. YOU FAILED TO BUDGET

Simply put, a budget will quickly tell you if you should be in business or not. It maps out your income and expenditure over a period of time which is especially crucial for those businesses that have cyclical or seasonal fluctuations (i.e. hospitality, agriculture, etc). By estimating the amount of revenue, or the peak periods when revenue is generated, businesses can see how much revenue is needed to keep the business alive during the slower months. On the flip side, focus on expenses is just as important (paying employees, meeting financial obligations, paying taxes) because it highlights what a business can afford.

3. YOU FORGOT TO COLLECT YOUR CASH!

Unless you are a ‘Not-for-Profit’, you are in business to make money. So when you complete a job, you expect to be paid for it … right?

These days, a lot of businesses operate on credit terms – sometimes necessary to secure customers. But when payment is due, a number of businesses are not doing enough, if anything, when collecting their debts!

I recently worked on the administration of a plumber that had a majority of ‘mum and dad’ customers on credit terms on its books accounting for $60,000 which was overdue. Had the owner followed up his customers and collected this amount, a lot of his short-term cash flow problems  could have reduced.

4.  YOU TOOK (A BIG) WAGE

Business owners usually have a lot of sentimental attachment to their business, and for good reason. Some people pour their blood, sweat and tears into it. It’s for this reason that some business owners will use their business’ money as if it was their personal bank account.

This can have pretty serious consequences. For example I have seen businesses been used to pay for personal holidays, lavish lifestyles, mistresses, mortgage repayments and even a burial plot!

Diverting money from the business’ needs and focusing it on your own, limits the money available to grow your business, let alone to trade it! So next time, take a (reasonable) wage and once it hits your bank account, do whatever you want. We will revisit the seriousness of these personal transactions using a business’ funds in a future article.

5.  YOU DIDN’T SET YOUR PRICE APPROPRIATELY

A tricky question for business owners is: how can I price my product or service so I cover my costs but at the same time stay competitive? This is important because properly pricing your product or service determines how much profit you can make.

Specific budgets can help here on project-focused work where materials and labour are estimated, a percentage of meeting overheads (those costs not directly attributable to the job), provisions, and then applying a margin (a formal way of saying “the cream on top”).

If business owners take the time to price appropriately, they can see where their costs are being incurred and, more importantly, if they are undercutting themselves. There is no shame in walking away from a job because it is not profitable.

While there are many other issues that can be attributable to business failure, the above issues are what I believe are common for business owners, especially those starting out.

 

About Tailored Lifetime Solutions:

At Tailored Lifetime Solutions we pride ourselves on staying true to our core values of:

  • Genuine Care
  • Keeping it simple and
  • Providing Security and Peace of Mind.

Tailored Lifetime Solutions has been helping Australians secure their Financial future for over 18 years. We understand each of our clients is unique and as such require tailored financial advice to meet their needs. We work to partner our clients on their financial journey, to ensure financial fitness throughout life’s various stages and secure your future financial security.

With over 70 years of financial planning experience between us, our areas of advice include:

  • Wealth creation
  • Lending and mortgage broking
  • Superannuation advice
  • Self managed superannuation funds
  • Aged Care advice
  • Lifestyle financial planning

Providing quality financial advice in Balwyn and the Eastern Suburbs for almost 20 years.

Important information

This information is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.

Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Source :Flying Solo  February 2019

This article by John Refalo is reproduced with the permission of Flying Solo – Australia’s micro business community.

 

Why I still love dividends and you should love them too

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 4 Mar 2019

Key points

  • Dividends are great for investors. They augur well for earnings growth, provide a degree of security in uncertain times, are likely to comprise a relatively high proportion of returns going forward and provide a relatively stable source of income.
  • Including reinvested dividends, the Australian share market has surpassed its 2007 record high.
  • It’s important that dividend imputation is not weakened in Australia to ensure dividends are not taxed twice.

Introduction

Prior to the 1960s most share investors were long-term investors who bought stocks for their dividend income. Investors then started to focus more on capital growth as bond yields rose relative to dividend yields on the back of rising inflation. However, thanks to an increased focus on investment income as baby boomers retire, interest in dividends has returned. This is a good thing because dividends are good for investors in more ways than just the income they provide.

Australian companies pay out a high proportion of earnings as dividends. This is currently around 65% compared to around 45% for global shares. However, some argue that dividends don’t matter – as investors should be indifferent as to whether a company pays a dividend or retains earnings that are reinvested to drive growth. Or worse still, some argue that high dividend pay outs are a sign of poor long-term growth prospects, that they are distraction from business investment or that they are often not sustainable. And of course, some just see dividends as boring relative to speculating on moves in share values. My assessment is far more favourable.

Seven reasons why dividends are cool

First, dividends do matter in terms of returns from shares. For the US share market, it has been found that higher dividend payouts lead to higher earnings growth1. This is illustrated in the next chart, which shows that for the period since 1946 when US companies paid out a high proportion of earnings as dividends (the horizontal axis) this has tended to be associated with higher growth in profits (after inflation) over the subsequent 10 years (vertical axis). And higher profit growth drives higher returns from shares. So dividends do matter and the higher the better (within reason). There are several reasons why this is the case: when companies retain a high proportion of earnings there is a tendency for poor hubris driven investments; high dividend payouts are indicative of corporate confidence about future earnings; and high payouts indicate earnings are real.

Source: Global Financial Data, Thomson Reuters, AMP Capital

Second, dividends provide a stable contribution to the total return from shares, compared to the year-to-year volatility in capital gains. Of the 11.7% pa total return from Australian shares since 1900, just over half has been from dividends.

Source: Global Financial Data, AMP Capital Investors

Third, the flow of dividend income from a well-diversified pool of companies is relatively smooth. As can be seen below, dividends move in line with earnings but are smoother.

Source: Thomson Reuters, RBA, AMP Capital

Companies like to manage dividend expectations smoothly. They rarely raise the level of dividends if they think it will be unsustainable. Sure, some companies do cut their dividends at times, but the key is to have a well-diversified portfolio of sustainable and decent dividend paying shares.

Fourth, investor demand for stocks paying decent dividends will be supported as the ranks of retirees swell.

Fifth, with the scope for capital growth from shares diminished thanks to relatively high price to earnings ratios compared to say 40 years ago, dividends will comprise a much higher proportion of total equity returns. More than half of the total medium-term return from Australian shares is likely to come from dividends, once allowance is made for franking credits.

Sixth, dividends provide good income. Grossed up for franking credits the annual income flow from dividends on Australian shares is around 5.7%. That’s $5700 a year on a $100,000 investment in shares compared to $2150 a year in term deposits (assuming a term deposit rate of 2.15%).

Source: Bloomberg, RBA, AMP Capital

Finally, while Australian shares are still 10% below their 2007 high, once reinvested dividends are allowed for (ie looking at the ASX 200 accumulation index) the market is well above it.

Source: Bloomberg, AMP Capital

Another way to look at dividend income

How powerful investing for dividend income can be relative to investing for income from interest is illustrated in the next chart. It compares initial $100,000 investments in Australian shares and one-year term deposits in December 1979.

Source: RBA, Bloomberg, AMP Capital

The term deposit would still be worth $100,000 (red line) and last year would have paid $2,200 in interest (red bars). By contrast the $100,000 invested in shares would have grown to $1,111,435 as at December last year (blue line) and would have paid $47,792 in dividends last year (blue bars). Or around $62,240 if franking credits are allowed for. Over time an investment in shares can rise but a term deposit is fixed.

But don’t dividends crimp capex?

This issue has been wheeled out repeatedly since the GFC. But it’s ridiculous. First the rise in dividends this decade has mainly come from cashed up miners and it’s hard to argue they should invest more after the mining investment boom. Second the dividend payout ratio is not high historically. Third the reasons for poor business investment lie in: business sector caution after the GFC & the rise in the $A above parity, which squeezed competitiveness; the fall back to more normal levels in mining investment; and the shift to a capital lite economy based around IT and services. Don’t blame dividends for poor capex.

Source: Thomson Reuters, RBA, AMP Capital

Why dividend imputation is so important

Dividend imputation was introduced in the 1980s and allows Australians to claim a credit against their tax liability for tax already paid on their dividends in the hands of companies as profits and boosts the effective dividend yield on Australian shares by around 1.3 percentage points. However, over the years it has been subject to claims that it creates a bias to invest in domestic equities, that it biases companies to pay dividends and not invest and that it benefits the rich. This is all nonsensical as dividend imputation simply corrects a bias by removing the double taxation of company earnings – once in the hands of companies and again in the hands of investors. The removal of dividend imputation would not only reintroduce a bias against equities but would also substantially cut into the retirement savings and income of Australians, discourage savings and lead to lower returns from Australian shares.

Labor’s proposal to make franking credits in excess of a taxpayer’s tax liability non-refundable could be argued to remove an anomaly in the tax system as dividend imputation was designed to prevent the double taxation of dividends, not to stop them being taxed at all. But a problem is that many Australians have planned their retirement around receiving such refunds. This is a subject for another note. But it is worth noting that Labor’s proposal does not affect at least 92% of taxpayers who will continue receiving franking credits as they have a sufficient income tax liability (as will pensioners who will be exempted). If it sets off a broader wind back of franking credits, then it would be a bigger concern.

Concluding comments

Dividends provide a great contribution to returns, a degree of protection during bear markets and a great income flow. For investors needing income the trick is to have a well-diversified portfolio of companies paying high sustainable dividends.

Putting superannuation on your list of resolutions for 2019

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By Bianca Hartge-Hazelman | 27 Feb 2019

What’s a resolution you’ve made for 2019? Put sorting superannuation on your list to boost your retirement savings this year

If closing the retirement savings gap in superannuation is high on your New Year’s resolution list, then there are probably a good dozen or so things that you could be doing better in 2019.

But the big question is, how many of you will do any of them?

It’s often said that most resolutions die hard and fast in the first few months of the year, which means that any extra wealth you could be adding to your nest egg, could go kaput too.

Questions to ask your employer about superannuation

If you want to build your retirement savings, here are three things to ask your current, or even prospective employers on superannuation.

  1. Does your employer pay more than the compulsory Super Guarantee (SG)? (Standard is 9.5%)
  2. Do they pay superannuation on paid or unpaid parental leave?
  3. Is there an opportunity to link performance bonuses with additional employer super contributions?

Time for women—and men—to engage with their super

As the latest Financy Women’s Index for the December quarter showed, women retire with about 34% less, on average, in superannuation savings than men.

This shortfall is primarily due to women taking career breaks to be the primary carer of children.

Of course there’s more to it, such as women tending to earn less than men and working part-time.

But it’s not just women facing a superannuation shortage and a common link is engagement – or lack thereof.

Consider these questions in your 2019 superannuation “how engaged are you” review:

  • What’s your superannuation balance and do you have multiple accounts?
  • How much are you paying in fees?
  • Are you paying for appropriate insurance cover to protect you from adverse events?
  • When did you last check if your investment choice was actually right for you?
  • Have you kept your beneficiaries up to date?
  • Have you ever topped up your super or considered salary sacrificing?
  • Did you know that you may now be able to claim a tax deduction for your personal superannuation contributions?
  • Are you eligible for a Government Co-contribution?
  • And do you know how much you need or want to retire on?

The ASFA Retirement Standard December 2018 quarter figures indicate that many of us won’t have enough in superannuation to retire comfortably.

The average couple aged around 65 needs $60,977 per year and singles need $43,3171.

That means if you hope to live a good 20 years in retirement, what’s needed is around $1 million with or without a partner.

Most of us aren’t even close to that amount. The latest data from the Australian Bureau of Statistics on gender balances in super, from the 2016 financial year, shows, that the average balance for those aged 15 and over was $101,700 for women, compared to $153,000 for men2.

Such statistics are often cited in the hope of sparking a call to action that not only gets us more engaged with our superannuation but also gets us thinking about how they can build their own retirement wealth.

How to take advantage of super rule changes

For those who want to take action now, here are some of the measures introduced or which took effect in 2018 that have the potential to significantly boost your superannuation savings.

  • From July 2018, a new measure allows unused concessional super contributions to be accumulated over five years. While the annual limit on concessional contributions is $25,000, individuals can make use of up to five years of previously unused contributions, provided the individual’s total super balance is less than $500,000. This measure is expected to really help women returning to the workforce after taking time off to have children, giving them the ability to ‘catch-up’ on super by making higher concessional contributions without breaching the annual cap.
  • 2018 was also the first calendar year that women could unlock the extended spouse contribution tax offset. This tax offset could become available to the higher earning partner in a relationship if they make super contributions on behalf of their lower earning partner, as long as the lower earner has an income below $40,000. The full tax offset will now be available where the lower earning partner has an income of $37,000, an increase from the previous $10,800.
  • Women in retirement who need to boost their super may also benefit from the downsizing into superannuation rule change that took effect in July 2018. This makes it possible under certain conditions for over 65s to top up their super by up to $300,000 by using the proceeds from the sale of their home.

So there are options available that could help you reconnect with and build on your superannuation in 2019. But it’s a good idea to seek advice to see which options suit your individual circumstances.

All that’s needed is for you to make a start.

6 things to avoid as a newbie investor

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Whatever your age, if you’re thinking of dabbling in investments like shares, managed funds or cryptocurrencies, here are a few things to steer clear of.

You might be looking to invest your money in something (whether it be shares, manage funds or cryptocurrencies, such as bitcoin) for a variety of reasons.

You may have money in savings and property, and want to diversify, or you might simply be looking to invest in something affordable, should investing in things like real estate be a bit out of your reach.

If your goal is to get rich quick (wouldn’t that be nice), spoiler alert – that’s probably not going to happen, as more often than not things like time in the market, compound interest and avoiding unnecessary risk will be the keys to success (I know, sorry to burst your bubble).

Meanwhile, if you are very close to dipping your toe in the water, here’s a list of common mistakes newbie investors tend to make which are generally worth steering clear of.

Investment mistakes beginners make

1. They fail to plan

When looking to invest, it’s generally wise to think about:

  • your current position and how much you can realistically afford to invest (consider what other financial priorities you have or existing debts you may be paying off?)
  • your goals and when you want to achieve them
  • implications for the short/medium and long term
  • whether you understand what you’re actually investing in
  • whether you know how to track performance and make adjustments
  • if you want to invest yourself, or with the help of a broker or adviser.

2. They don’t know their risk tolerance

As a general rule, investments that carry more risk are better suited to long-term timeframes, as investment performance can change rapidly and unpredictably. However, being too conservative with your investments may make it harder for you to reach your financial goals.

  • Low-risk (or conservative) investment options tend to have lower returns over the long term but can be less likely to lose you money if markets perform badly.
  • Medium-risk (or balanced) investment options tend to contain a mix of both low and high-risk assets. These options could be suitable for someone who wants to see their investments grow over time but is still wary of risk.
  • High-growth (or aggressive) investment options tend to provide higher returns over the long term but can experience significant losses during market downturns. These types of investments are generally better suited to investors with longer term horizons who can wait out volatile economic cycles.

Try our ‘What style of investor am I?’ tool to help understand what level of risk you might be comfortable with.

3. They think investment returns are always guaranteed

The idea of guaranteed returns sounds wonderful, but the truth when it comes to investing is returns are generally not guaranteed.

There are risks attached to investing, which means while you could make money, you might break even, or even lose money should your investments decrease in value.

On top of that, liquidity, which refers to how quickly your assets can be converted into cash, may be an issue. Depending on what type of investment you hold or what may happen in markets at any point in time, you mightn’t be able to cash in certain investments when you need to.

4. They put all their eggs in one basket

Investment diversification can be achieved by investing in a mix of:

  • asset classes (cash, fixed interest, bonds, property and shares)
  • industries (e.g. finance, mining, health care)
  • markets (e.g. Australia, Asia, the United States).

The reason diversifying may be a good thing is it could help you to level out volatility and risk, as you may be less exposed to a single financial event.

5. They believe the opinions of every Tom, Dick and Harry

Changing your strategy on the basis of market news may or may not be a good idea. After all, people have made all sorts of market predictions over the years, all of which haven’t necessarily come true.

On top of that, we all have that one friend that likes to pretend they’re a property, share or general investment guru, who while may come across as persuasive in their market commentary, does not have the qualifications to be giving people advice.

With that in mind, if you’re looking for guidance, you’re probably better off consulting your financial adviser who may be able to give you a more well-rounded picture of the current climate and the potential advantages and disadvantages you should be across.

6. They make rash decisions based on fear or excitement

Many investors get caught up in media hype and or fear and buy or sell investments at the top and bottom of the market.

Like with anything in life, it is easy to get stressed and concerned about the future and act impulsively but like with other things this may not be a smart thing to do.

While there may be times when active and emotional investing could be profitable, generally a solid strategy and staying on course through market peaks and troughs will result in more positive returns.