The Six Biggest bull runs and what happened next

 This chart from global investment house, Schroders, highlights just how significant the rise in US share prices has been since the GFC. Recently new records have been set and despite numerous geopolitical issues, such as the US-China trade war, the stock market heads upwards.

Note, however, that historically “bull runs” (periods of strong share price appreciation) are followed by significant corrections so it is reasonable to expect when the current party ends there will be a significant drop in share prices. Of course, no one knows when this will happen or what will cause it. Fortunately, while significant corrections are inevitable, they normally don’t last too long.

Tech Stocks have rocketed but many valuations look stretched

There is no doubt that our lives are being transformed by various technology companies and that is certainly well recognised by investors. Rob Arnott & Mike Aked from Research Affiliates have noted that on 30 September, six stocks, what they call the FANMAGs – Facebook, Amazon, Netflix, Apple, Google and Microsoft – had a market capitalisation of approximately US$4.4 trillion (A$6.5 trillion). “If these six stocks were viewed as a single nation, the country of FANMAG would be larger than the stock market capitalisation of the UK, China, or France and three times the size of the Australian Securities Exchange (ASX)”.

“Over the past decade, the FANMAG stocks’ aggregate market cap has grown tenfold, delivering a 10-year return averaging a cumulative 836 per cent! All of these stocks, except Apple, currently trade at higher price-to-earnings (P/E) multiples than the overall share market, and two are in excess of 50 times earnings. “

Australia has experienced similar enthusiasm for technology stocks. Arnott & Aked say, “Similarly, for the largest IT sector company on the ASX, Xero’s price is up over 14 times since listing in 2012 with a P/E level of over 5,000 times. WiseTech Global and Appen, despite recent pullbacks in their share prices, are up about 7 and 41 times over shorter periods of time.

“Can these trending tech-flying market leaders collectively outperform on a long-term basis without some of them devouring the others’ market share? Unlikely. More likely, we are seeing a new tech bubble, if not in all tech stocks, then in some.

“A bubble is a market or an asset, an individual company or a sector, in which an investor has to use implausibly aggressive assumptions to justify current valuations. While this isn’t true of Apple or Microsoft, in our view it is absolutely true of Tesla and Twitter.

“And there’s a second part to the bubble definition – the average buyer doesn’t care about valuation models. Netflix, Twitter, Tesla, are all companies that people are buying without using a valuation framework and without having a valuation basis for the investment.

“Maybe things are different this time and these companies have staying power. After all, they are disruptors, so perhaps they’re going to continue rocking the marketplace, rocking their industries.  We say, not so fast. If history is a guide, the continued outperformance of today’s most dominant technology companies is unlikely to be sustainable in the long run.”

Transition to retirement tax strategies

Setting a tax strategy before you start a transition to retirement (TTR) pension is an important step in helping increase both your savings and you super.

Account-based pensions may either be retirement phase pensions or TTR pensions. The difference between the two types of pensions is primarily the way in which they are internally taxed.

Retirement phase pensions

This type of pension, often known as an account-based pension, can be commenced when a super fund member has met a full condition of release, such as retirement after reaching preservation age, and income on the Member’s investments, including capital gains, is not taxed.

Transition to retirement (TTR) pensions

Since 1 July 2017, TTR pensions can be commenced once a super fund member reaches preservation age (at least 57, depending on birth date), and are now taxed up to 15% on the earnings including capital gains. This means they are no longer as tax effective as they were prior to 1 July 2017.

Tax implications of a TTR pension

The tax treatment of income payments from a TTR pension hasn’t changed. If you are 60 or over when you receive income payments from a TTR pension, the income payments are still tax-free (provided the super fund is a taxed scheme). If you are under age 60, the taxable portion (often less than 100% of the pension balance) is taxed at your marginal tax rate less a 15% tax offset.

Can you leave your Super/Pension to your Grandchildren?

Often a member of a superannuation fund provides for any remaining balance on death to pass to their spouse/ partner and, if the spouse should predecease them, to their children. Sometimes the member wants it specified that if one of their children predeceases them, the benefit should instead go to their grandchildren.

Superannuation benefits can only be passed onto eligible beneficiaries as defined under superannuation law and while children are eligible, grandchildren are not.  Given that grandchildren are not eligible beneficiaries of the grandparent and if the grandchildren are to share in the death benefit, the death benefit must be paid to the estate of the grandparent (technically, their legal personal representative) and the terms of the Will must provide that the death benefit is to be paid to the grandchildren.

So the short answer is yes, but only through your Will and not via a Superannuation death benefit nomination.

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.

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