Any supporters of the Aussie Test Cricket team who watched the recent Headingly Test would have felt like they were on an emotional rollercoaster akin to the uncertainty, fluctuations and volatility that financial markets can deliver.

When the English captain J. E. Root fell to N. M. Lyon (aka the ‘Greatest of All Time’) on the 3^rd ball he bowled that day, The Ashes were all but retained, but alas it was not to be. To be fair, it was an outstanding game of cricket in anyone’s language…probably one the Aussies let slip through their fingers, but hats off to B. A. Stokes who played one of Test cricket’s all-time mighty innings under intense pressure to keep England ‘alive’.

What does Test cricket have to do with dividends?

Well, dividends can provide certainty of returns…unlike that damn Headingly Test.

Dividends have been, are, and always will be an important component of portfolio construction because:

• They provide a reliable source of returns from Australian companies year-in, year-out.
• The amounts paid are not impacted by the current level of the share market.
• The dividend yield can act as a ‘safety net’ in times of volatility.

A source of reliable returns

Over the long term, returns from equities come from capital growth and the dividends paid along the way.  Below is a comparison of the returns from those two sources over the last 20 & 40 years:

As can be seen from the table above, dividends have provided more than half of the returns over the last 20 years, and 40% of returns over 40 years.  When you include the benefits of franking credits to those who can receive a refund thereof, the importance of dividends is paramount.

The level of the share market has no impact

While capital returns are affected by share market movement, dividends are dependent on the underlying earnings of a company, not the fluctuation of the share price.  The amount of dividends paid and ratio of profits paid out as a dividend is decided solely by the company’s Board of Directors.

Since the dividend is a reflection of the company’s profitability and not the current share price, it is important to remember in periods of volatility and negative share price performance, dividends received from quality companies with the right fundamentals should not vary greatly from one period to the next.  The chart below demonstrates the deviation away from the ‘standard’ returns from both sources:

From the above we can clearly see the returns achieved from dividends hardly fluctuated over that 20 year period.  This is further highlighted in the chart below:

The returns from dividends, as evidenced by the orange bar, are not impacted by volatility and fluctuations of the share market.

The safety net effect

Short term share price movements over 6-12 months are generally a reflection of the mood of investors based on predictions of economic growth, interest rates or inflation…or what seems to be more common lately, a tweet from ‘The Donald’!

With the benefit of hindsight however, more often than not these events which have created the mood swings that led to large declines in share markets have turned out to be not as bad for markets as we thought at the time.  Take the war with Iraq as an example.  At the time, there were many predictions of ‘doom-and-gloom’ and an impending global recession which caused panic selling even by companies demonstrating the strongest of fundamentals.

Once panic subsides and some normalcy is restored after such an event, the companies with a reliable and predictable growing earnings and dividend stream experience the quickest rebound in their share price.  This is because rational long-term investors are attracted to quality companies at the right price.

Conclusion

Never underestimate the part dividends play in the performance of your investments.

Here’s hoping the last 2 Tests of the current Ashes series provide the Aussie Test team with a healthy dividend.  After Headingly, one suspects they’re up against it…

We’ve seen global markets correct as global growth wanes under pressure of protectionist political policies and an escalating trade war with China and the United States. The fear of a global recession pushed our Australian stock market lower.

Has this market volatility scared you?

Rewind a few weeks and the Standard and Poor’s (S&P) Australian Stock Exchange (ASX) 200 closed at a fresh record high surpassing the closing price reached on 1 November, 2007. Our asset allocation strategy provides our clients with the comfort of knowing that a vast majority of their investments are not exposed to the Australian stock market.

Firstly, we assess our clients’ risk tolerance and understanding of the risks associated with investing, then allocate a risk profile (such as Balanced) based on this assessment. Each risk profile divides our clients’ money up between defensive and growth asset classes to produce a diversified portfolio. Defensive investments include cash, term deposits and fixed interest investments (government and corporate bonds). Growth investments include Australian shares, international shares, property and infrastructure.

Effective asset allocation not only provides protection when markets correct but also offers opportunity to maximise returns. I often say to my clients that defensive investments can be compared to shock absorbers of a car as they smooth out the bumps in the road.

As a financial adviser I have yet to come across anyone who actually wants to move into aged care.

The prospect of moving out of the family home and leaving behind the comfort and familiarity of one’s home is truly daunting. It’s always a step closer to ‘the end’ as no one ever moves from aged care back to home. As a result, many people simply do not wish to discuss the subject…until they have to.

Many of the conversations I have had regarding the finances of an elder family member follow an ‘incident’, such as ‘Dad falling over in the bathroom’. It then becomes glaringly obvious that the individual simply cannot remain in the family home.

In such a scenario, planning how to fund the upfront and ongoing costs associated with moving into aged care is often ‘done on the run’, which is unfortunate because it’s a ‘financial labyrinth’.

Typically, people tend to only plan for upfront costs (which usually range anywhere between $300,000 to $1,000,000). However, there is a myriad of ongoing costs that can run into the tens of thousands of dollars per year as well as the ever-increasing costs associated with moving into aged care.

As you may be aware, a Royal Commission into Aged Care was commissioned in October last year and is currently hearing submissions. Some of these are truly heartbreaking. The Commission is due to hand down its recommendations early in 2020 and if the recent Hayne Commission into financial planning is any guide, regulation and compliance in the sector will increase, followed closely by expenses.

I’d encourage people to have the conversations about aged care and if necessary, speak to your Investment Collective adviser. We can help.

When should I seek a financial planner?

Who should see a financial planner?

• “I don’t have any money to invest so there is no point in my seeing a financial adviser.”
• “We manage our own finances so we don’t need to see a financial planner.”
• “We struggle to make ends meet so we haven’t got any spare income to do anything else so we won’t be seeing a financial adviser.”
• “I’m only in my 20s, 30s, I don’t need to see a financial adviser.”
• “It’s too late for me to see a financial adviser as I’m retiring in 6 months’ time.”

All of these thoughts are far from the truth.

When should I seek financial advice?

There is a general perception that financial planning is only for people who have money to invest. That if I don’t have any spare cash and I’m having difficulty in making ends meet, financial planning is not for me. Having a personally tailored financial plan will assist you in every facet of your financial lives regardless of your current financial situation.  In fact, your financial plan will help you achieve other personal goals simply because these goals are planned for.

Your financial adviser will fully assess your current financial situation. This means that the adviser will be obtaining information on your earnings, what it costs you to live, the value of all your assets including superannuation, and of course, what you owe.  The adviser will also assist you in identifying what you want to achieve, both now and into the future.  We consider your life risk requirements so that your family and wealth are protected in the case of death, serious injury or illness.

Once the data has been collected and analysed, the adviser will write your financial plan.  The plan will include a summary of the current situation and this in itself can be an eye-opener for the client because many of us do not take stock of our overall financial picture.  Taking into account your goals and objectives and the things that have been identified during the collection and analysis step, the adviser will make recommendations to improve your situation and to help you to meet the goals you have identified.

Sometimes the recommended strategies can be confronting, but always valuable.  For example, if cashflow is a problem for you, the plan will include budgeting advice and strategies.  If you have surplus funds for investment, the plan will include recommendations as to how those funds should be invested.  If you are nearing retirement, the plan will address streamlining and consolidating your financial affairs ahead of retirement and strategies to maximise potential Centrelink payments.

If your superannuation investment option does not match the risk profile identified during discussions, there will be recommendations to adjust the investment option. If you have debt, there will be advice as to how best to manage that debt and if a restructure is required, the plan will address that point.  If your life risk protection is inadequate, we will include recommendations to bring this protection to the correct level.

Your financial plan will also contain information on any ongoing costs you may incur if you accept the proposals, and there will be comparisons and projections between the current situation and the recommended strategies, including current and future costs.

To answer the question posed above as to when you should see a financial adviser – the answer is – as soon as possible!

For young people, a tailored financial plan will set them on a path to growing their wealth, perhaps via a savings plan.  For pre-retirees, it is essential that you consult with a planner to ensure that what you have worked a lifetime for will support you in the way you want during retirement.  Centrelink payments and health care cards are very important and this is a major part of the planning for those either in or nearing retirement.

If our recommendations are accepted and you proceed with the plan, we manage the implementation of the plan and if there is an ongoing component, this activates. Centrelink management is part of the ongoing work and it can be invaluable to retiree clients to have this onerous task managed.

Beginning the process of seeking financial advice is very simple.  It is a matter of contacting either our Rockhampton or Melbourne offices with a request to see an adviser.  Your meeting confirmation includes a list of things to bring with you to your meeting and from there the adviser will lead and guide you through the process.

What are you waiting for?