Archive for category: News & Media

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.

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

Source :Flying Solo  February 2019

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

 

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.

By Nader Naeimi
Head of Dynamic Markets and Portfolio Manager of Dynamic Markets FundSydney, Australia

In a recent address to senior Chinese Communist Party officials, President Xi Jinping warned of the threat posed by “black swans” and “grey rhinos”. They are both terms that have entered popular use over the last decade to describe perceptions of risk in a market economy. But what do they – and other animal metaphors used to describe economic conditions – mean?

Black swans

The term black swan was coined by the ancient Greeks to describe an impossible event. It was used for centuries by Europeans who had only ever seen white swans. This changed when Europeans discovered Australia and saw, for the first time, black swans.

A black swan is now used to describe an event which is outside the realm of prior expectations, but which carries an extreme impact, and is prone to post-rationalisation in order to explain its occurrence. The terrorist attacks of September 11, 2001 are often described as a typical black swan; it was unanticipated, but easily explained in hindsight, and the signals for such attacks in the future are now commonly discussed and recognised.

Grey rhinos

In contrast to the low-probability black swan, the grey rhino is a high-impact, high-probability event that for various reasons is usually ignored by investors and policy makers. It could be used to characterise problems such as climate change, debt, and economic inequality.

Why the animal names?

The use of animals as metaphors dates back to the some of the earliest human literature, with the likes of Aesop employing animal characters to explain the limitations of human reasoning. John Maynard Keynes, in his General Theory of Employment, Interest, and Money, coined the term ‘animal spirits’ to describe economic decisions taken as a result of a spontaneous urge to action, rather than a rational evaluation of the consequences¹.

Bulls, bears and bunnies

Today analysts continue to ascribe animal characteristics to market behaviour, most notably in reference to bull and bear markets. The most interesting theory for the origin of these terms comes from the North American bearskin trade, where ‘bear-jobbers’ would short-sell skins in the hope that prices would fall². The term ‘bear-jobber’, later shortened to ‘bear’, found its way to the stock market, and a ‘bear’s market’ became common terminology for a falling market. According to this explanation, the term ‘bull’ was added later.

More recently, the zoo has expanded to include gummy bears (bear markets which satisfy technical definitions but which return to pre-bear levels within a year) and grizzly bears (where falls are much deeper and last much longer, as in the global financial crisis).

In my experience, the progression through both bull and bear markets can be characterised by a number of stages:

The three stages of a bull market:

1. A few forward-looking people begin to believe things will improve or get less bad.
2. Most investors realise improvement is actually taking place.
3. Everyone concludes things will get better forever.

The three stages of a bear market:

1. Just a few investors recognise that despite the prevailing bullishness, things won’t always be rosy.
2.  Most investors recognise things are deteriorating.
3. Everyone’s convinced things can only get worse.

The final, and perhaps least-known, member of the menagerie is the bunny market, the meaning of which should be immediately obvious: it’s a market which hops up and down but doesn’t really go anywhere.

Need a new reason to get up in the morning? Enrich your life by finding and developing your next passion, with tips from psychology researcher Angela Duckworth.

Ever watch The Great British Bake-off? It’s an addictive reality TV show about the hunt for Britain’s best amateur baker. Few of the contestants cook for a living — baking is simply their passion. And it’s passion that carries them through weeks of competition and critiques, past weeping pie crusts and sad meringues. At every new challenge, they’re just excited to do what they love and to do their best.

Wouldn’t you want a passion like that?

Psychologist Angela Lee Duckworth thinks a lot about how to find and nurture a passion — it’s part of her work on what she calls “grit.” Simply defined, grit equals passion plus persistence.

Passion is not something you discover, she says — “it’s not like a lost set of keys!” Instead, she says: “Passions tend to be developed. It’s not just about being intense about what you’re doing but waking up week after week, month after month, year after year, wanting to think about the same thing.” It’s something fulfilling and enjoyable, but it’s not that easy; Duckworth calls it “hard fun.”

Here are five steps to help identify your next passion — or cultivate one you already have.

1. Clear out the distractions.

One reason you may not know your passion: you haven’t given yourself the time and space to pursue it. Now, many of the distractions in our lives — picking up kids from daycare, writing a proposal for work, dealing with a burst pipe in the basement — are non-negotiable; they come with being a human in the world.

But what about the negotiable distractions? One major source is right there in your pocket: your phone. “Whether it’s watching frivolous videos or scrolling through social media, there’s enough that you could do those things forever,” says Duckworth. “But it’s time that doesn’t really add up to anything.”

She asks: “How committed are you to not doing that anymore? Reflect on how you’re using your time, and whether or not you want to be distracted by these temptations.”

2. Think of a passion as like an internship.

Most internships serve as a trial run for a job — while you’re acquiring skills and knowledge, you’re also trying to see if you want to commit. “You might figure out you don’t love the field as much as you thought you did,” says Duckworth, “but you find out something else about yourself that is a clue to something that’s a better fit.”

Just like an internship, a passion is something you learn by doing. “You can’t figure things out on paper, or think about them,” says Duckworth. “That’s not how you develop a passion — you have to do things. It takes experience; it takes trial and error.”

To help her children start cultivating passions, Duckworth made them each choose one “hard thing,” such as learning ballet or playing soccer. Because she knows passions don’t develop overnight, she made rules of what they could pick — “it has to entail practice with feedback; they can’t quit in the middle; and they must choose the activity for themselves” — to prevent them from dropping it when they hit a speed bump.

3. Be patient.

Don’t expect to fall in love immediately. “A reason why passions take time to develop is that at the very, very beginning of things, we’re all clumsy and awkward and the learning curve is very steep,” says Duckworth. “Frankly, it’s hard to be in love with something when you’re that clumsy amateur.”

Her daughter Lucy picked the viola as her “hard thing.” But Duckworth says, “It didn’t become her passion in year one or year two. I wouldn’t say she was wildly enthusiastic, but she kept wanting to do it. Now she’s good enough that it can be enjoyable to her in a way that wasn’t possible in the beginning.”

During the learning period, you’ll need to tap into the other aspect of grit: persistence. In keeping with Duckworth’s rules for her kids, just make sure you give yourself a real chance before you move on to another activity. “I’m not saying you should stick with everything you’ve ever tried,” she says. “Use your judgment.”

As you progress with your activity, look out for this sign that you’re nurturing a passion: “You never get bored; in fact, you get more and more interested,” says Duckworth.

4. Stay motivated by remembering the bigger picture.

Every passion has its share of less exciting moments. For playing the viola, it may be practicing scales for the umpteenth time. For baking, it could be washing up; for teaching seventh-grade English, grading papers. The secret to not letting them derail you is to see how every way you engage with your passion — no matter how small or dull — is a step toward something bigger.

“I have to check my email today, read a bunch of research articles, write a revision of an article, and these can be total drudgery if I treat them like isolated tasks that need to get done,” Duckworth says. “But when I understand that they help me become a better scientist and that helps me help children thrive, and when I think, ‘That is the only thing I want my life to be about — to help children live better lives’ — then all of a sudden the emails, articles and revision become meaningful.”

This shift in perspective may seem subtle, but it’s effective in keeping you engaged. “Connecting your short-term work with your long-term ambitions can be enormously helpful to people who feel like they’re losing their drive,” she says.

5. Avoid burnout with this one weird trick.

It is possible to go overboard while pursuing a passion. Are you just not making progress like you want to? Is your passion less fun than it used to be? Duckworth suggests: “The first thing I’d ask is: Are there objective things you can do to just take care of yourself?” Ask yourself if you’re really burning out on your passion or if you just need more sleep.

But if your burnout feels deeper than that, it’s time to step outside your own problems — and look for someone who is similarly frayed and fried. Yes, really.

“It sounds paradoxical that when you’re exhausted, you should use your energy to help another person,” says Duckworth. “But we’re wired to help each other. When we give advice to others, sometimes we’re counseling ourselves in the process. It can draw your own attention to things that you can do. In research, we’ve found that it can boost your confidence and give you the sense that progress is possible.”

Angela Duckworth’s book Grit: The Power of Passion and Perseverance is now out in paperback.

Watch her TED talk here: