Excessive Doom & Gloom in Australia

Recently there have been many negative stories in the press about Australia’s position and outlook, including such things as:

  • Economic growth is slowing and a recession is increasingly likely in the next year or two, particularly if China slows further and the drought worsens
  • The mining boom is over and there is nothing to fill the gap
  • The Australian dollar is likely to keep falling
  • The residential property market is a bubble and a bust is likely
  • Our high wages make us uncompetitive in the world
  • Government finances are a mess and we need urgent action to cut the deficit

While there is some legitimacy to most of these issues, I think the sense of doom and gloom is somewhat overdone, particularly if you take a medium to longer term perspective which is more important for investors. Some positives include:

  • Consensus Economics forecasts Australian GDP to grow at 2.7% p.a. over the decade from 2015 to 2025, higher than any other significant developed economy
  • We remain a favoured destination for migrants from all over the world
  • Credit Suisse’s Research Institute 2015 Global Wealth Report says our average wealth per adult is higher than any other country with the exceptions of Switzerland & New Zealand (that’s a surprise!)
  • Most importantly, we have the largest percentage of people in the middle class, 66%, of any country and only 7% have net worth below US$10,000 compared with 28% in the USA and 71% for the world as a whole.
  • The lower Australian dollar is already helping tourism and the education sector
  • Almost all the fastest growing countries in the world are in Asia and most are our major trading partners, such as China. Recently signed free trade agreements should help the growth in exports to continue.
  • Life expectancy in Australia is close to the longest in the world; equal #2 overall in 2013 at an average 83 years across males & females according to the World Health Organisation.
  • Despite changes of Prime Minister & state Premiers we have a functional political system when compared with almost all other countries. Also, Transparency International ranks us #11 of 175 countries for corruption. Should be better but we are ahead of the US, UK, Japan & Germany, amongst others.
  • The Reputation Institute ranks Sydney #1 and Melbourne #2 in its 2015 City study which combines statistics around “appealing environment,” “effective government” which includes safety, well-respected leaders, transport and infrastructure and “advanced economy” which includes stable future growth and technology.

 

Dollar Cost Averaging – what it is & how does it work?

Dollar Cost Averaging is a commonly used investment strategy which allows an investor to buy into the market for shares or managed funds over a period of time with regular purchases of fixed dollar amounts. This technique is used as an alternative to investing all of your capital at one time i.e. in a lump sum.

Dollar Cost Averaging is often used when there is uncertainty in the markets. Dollar Cost Averaging allows an investor to avoid investing a large sum at the “wrong time” and having their portfolio reduce significantly in the event of a fall. Essentially, Dollar Cost Averaging is the purchase of fixed dollar amounts over multiple tranches in order to benefit from any downward fluctuations in the market.

With Dollar Cost Averaging, you take a lot of the emotion and fear out of investing because where the market goes in the short-term is far less important to you, as long as you stick to a regular investment plan. If the market has one of its periodic corrections and your investment falls in value, you just end up buying more shares at a lower price.

Dollar Cost Averaging is a strategy that is best suited for investors with a lower risk tolerance and a long-term investment horizon. This strategy is most valuable when implemented with investments that are subject to volatility, such as shares, and is less suitable for more stable investments such as bonds or term deposits.

The following is an example of how Dollar Cost Averaging works:

Assumptions: You are buying XYZ share, currently trading at $50 per share, and you have $100,000 to invest. You could simply buy the shares at $50 and receive 2,000 shares. Or you could use the Dollar Cost Averaging method.

Amount per InvestmentShare priceShares acquired
$20,000$50400
$20,000$45444
$20,000$40500
$20,000$46435
$20,000$52385
$100,000Average price per share is $46.212,164

 

In the above example, you have acquired more shares at a lower cost per share than if you had simply acquired the shares in a single block. However, it is important to understand that in a rising market, the average cost would be higher using Dollar Cost Averaging.

 

HELP (HECS) Repayments

On 1 January 2005, the Higher Education Loan Program (HELP) replaced the Higher Education Contribution Scheme (HECS).  Existing HECS debts have been rolled over into HELP.  The same rules for compulsory repayments under HECS apply for HELP debts. The following table details the required minimum repayment rates required in 2015-16 by those with loans outstanding.

HECS-HELP rate 2015-2016
Help repayment incomeRepayment rate
Below $54,126Nil
$54,126 – $60,2934.0% of HRI
$60,294 – $66,4574.5% of HRI
$66,458 – $69,9505.0% of HRI
$69,951- $75,1915.5% of HRI
$75,192 – $81,4336.0% of HRI
$81,434 – $85,7196.5% of HRI
$85,720 – $94,3327.0% of HRI
$94,333 – $100,5207.5% of HRI
$100,521 and above8.0% of HRI

From 1 July 2009, HRI is the sum of taxable income plus any total net investment loss, (which includes net rental losses), total reportable fringe benefits amounts, reportable super contributions and exempt foreign employment income. An exemption applies for taxpayers whose family income is below the Medicare Levy upper threshold.

This newsletter contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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