Why do we focus on your risk profile?
Whenever we are asked to help a client invest some money, be it their Superannuation or other funds, we always focus on clarifying both goals and the investor’s risk profile. Why?
Firstly, clarifying what are your goals – to save for a bigger house or children’s education, to pay off the mortgage within 10 years, to have the option of an early retirement, to have a certain level of income throughout retirement, etc. – is critical to ensure that the strategy being pursued with your investments gives you a high probability of achieving those goals.
Your timeframe is an important part of this as, the longer the expected period of the investment, the more comfortable we can be that you will achieve your goals despite inevitable fluctuations in investment performance from year to year.
Secondly, we need to establish your risk profile so that we understand how willing you are to take investment risk e.g. how you feel and act in market downturns. Your feelings and reactions during the GFC in 2008 is a good guide to this. Typically, taking more investment risk results in higher returns over time (an example is the dividends from bank shares versus bank term deposits), but riskier investments are more volatile and there is a greater risk of an unfavourable outcome, such as loss of capital. How you feel about this varies from person to person.
The third step is that we need to evaluate your risk capacity i.e. whether you have a high probability of achieving your goals if we help you invest in line with your risk profile. For example, determining whether a retiree is likely to generate a sufficient return from their investments to support their desired income level through many years of retirement. Alternatively, whether investing in line with their risk profile runs a real risk of the money running out if they live beyond their 80’s or if there is a significant market downturn, particularly in the first decade of retirement.
Sometimes your risk capacity, the likelihood that you can achieve your financial goals, is out of kilter with your risk profile. For example, you may want the security of bank term deposits and government bonds but the return they produce may be unlikely to generate the annual income you want. Using this example, a $1 million portfolio earning 3% per annum wouldn’t support a desired income of $60,000 p.a. if rates didn’t rise significantly and if you lived for another 30 years. You would be guaranteed to run out of money.
As financial advisors we help you to establish goals that are consistent with your risk profile and your risk capacity and then we help you invest your money appropriately.
The Big Picture as we head into 2016 (geopolitics)
- While the US economy continues to recover with unemployment down significantly over the last few years, the US is in relative decline as other countries, China in particular, grow more rapidly. China is widely predicted to be a larger economy than the US within the next decade and some would argue China is already larger than the US on a purchasing parity basis.
- China is also changing significantly as its export led growth model is transitioning to an economic model more reliant on domestic demand. This is a natural progression as Chinese incomes continue to grow but is also necessary as the US consumer is no longer able to continuously increase consumption of Chinese made goods as was the case up until the GFC.
- With average incomes in China now around US $7,000 per annum, slower growth rates in the Chinese economy are inevitable and this will very likely also mean slower growth in the global economy in coming years. The implications of this for Australia, for whom China is our biggest export market, are obvious.
- Weaker global growth is also partly a result of continued weakness in Europe and Japan combined with slower growth in emerging markets such as Brazil, Russia, Turkey and South Africa.
- Expect global growth to remain low (around 3% p.a.) for some years given demographic headwinds, high debt levels and overcapacity in many industries.
- The very substantial fall in oil and gas prices over the past 18 months, brought on in large part by the revolution in the US energy markets as shale gas production has exploded, is a positive for global growth but a negative for energy exporters, including Australia. There is no evidence that energy prices will recover significantly anytime soon as OPEC members are unwilling to cut production despite their desire for higher prices.
- Oil and gas are not the only commodities to have seen substantial price falls over the last year or two with coal, iron ore, copper, nickel and many other commodities also seeing very significant price falls. The relatively weak global economic outlook, combined with limited production cutbacks, so far, suggest that any significant recovery in the price of these commodities is some way off.
- Weak global growth and very low inflation in most countries strongly suggest that interest rates will remain close to current levels, which are historically very low, for some years. US interest rates will likely increase very modestly over the next year or two but rates in other major economies are unlikely to follow.
- There is some evidence that the increasing globalisation of the world economy that has occurred since around 1980 has stalled and may even be reversing. This has happened before, such as in the 1930s and during World War II, so it will be very interesting to see where we go from here.
- Another interesting geopolitical change is that the continuing expansion of the broader European/Eurasian block and NATO eastwards, which followed the collapse of the Soviet Empire in late 1991, appears to have ended. Russia’s annexation of Crimea is one indicator of this.
The Big Picture for Australian Investors in 2016 – challenging
- Cash & Term Deposits provide very low yields and this is likely to remain true through 2016 and beyond as any significant increase in rates would likely result in a recession given our weak economy and high levels of personal indebtedness. Also, rates are unlikely to rise in other countries with the possible exception of the US.
- With the end of the mining boom Australia’s economy has been rebalancing towards other sectors such as property construction but this rebalance faces some challenges next year: mining capital expenditure will continue to fall; the domestic car producers will wind down further; residential property investment is unlikely to contribute as much to growth in 2016 as this year; and El Nino suggests that there’s a serious risk of drought reducing farm production.
- Australia’s listed equity market has a much larger exposure to financials (around 48%) and materials, which includes miners, (around 11%) than overseas share markets (around 16% and 3% respectively). Fund manager Schroder says that “Through the last forty years, materials (dominated by mining stocks) as a proportion of the ASX have never been at lower levels; whilst financials (dominated by banks) as a proportion of the ASX have never been at higher levels”. So our overweight to materials is nothing new and less of an issue than it has been historically. Unfortunately, at this time, Australia’s equity market is overweight two sectors, which appear, as Gerard Minack says, to be “at the end of their super-cycles; it (Australia) is overweight the past and underweight the future”.
- The fall in the Australian dollar has been a positive for business with overseas earnings and also for domestic businesses in areas like education and tourism. A further fall in the AUD is possible and that will help such businesses further.
- International share funds, which have significantly outperformed Australian equities over the past 1, 3 and 5 years, particularly those where the currency is unhedged, may well outperform Australian equity funds again in 2016 if the AUD tracks lower.
- While the overall global and Australian outlook doesn’t appear very encouraging, all markets (property, shares, etc) move in cycles and there is plenty of reason for optimism in the medium term.
- Also, it’s wise to keep in mind that any predictions can be blown out of the water by what well known economist and writer Don Stammer refers to as X Factors – those unexpected events that no one foresees. These can have a very positive or negative influence on investment returns.
Commonwealth Seniors Health Card (CHSC) for Self-funded Retirees
The CSHC is available to eligible self-funded retirees who are of age pension age (currently 65 or older) but who are not eligible for the Centrelink (Federal Government) age pension due to the income or assets test. Along with meeting residency requirements, to be eligible to receive the CSHC the retiree’s annual adjusted taxable income* must be less than $52,273 per annum for singles or $83,636 for couples ( $104,546 per annum for illness-separated couples).
* Adjusted taxable income is taxable income plus net investment losses, target foreign income, fringe benefits, reportable super contributions and deemed income from account-based income streams.
Grandfathering rules mean that deeming of income streams (non Centrelink pensions) does not apply to exiting CSHC holders who held an account-based pension (ABP) before 1 January 2015, provided they remain eligible for CSHC.
There is no assets test when determining eligibility for the CSHC.
The CSHC can be quite valuable. Cardholders receive a discount on prescription medicines through the Pharmaceutical Benefits Scheme (PBS). Other services may include bulk-billed GP appointments, at the discretion of the GP. The Australian Government provides financial incentives for GPs to bulk-bill concession card holders. State, Territory and local governments and some private companies offer discounts on health, household, transport, education or recreation costs. These are at their discretion.
CSHC holders also receive an energy supplement from the Federal Government. The energy supplement is currently $14.10 per fortnight for singles and $10.60 per fortnight each for couples.
This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.