The ‘Concessional Catch-up Rule’ (catch-up rule) was introduced by the government a couple of years ago and provides individuals with superannuation balances less than $500,000 greater flexibility when making concessional contributions. From 1 July 2018, individuals have been able to accumulate unused concessional caps and utilise the difference in future financial years.

Concessional contributions are a valuable retirement planning tool that can enable Australian’s to build a retirement nest egg whilst also receiving valuable tax concessions in the process.

Why make concessional contributions?

Concessional contributions are a great way to reduce tax, as these contributions are those which are either sourced from pre-tax monies (before tax is paid at your marginal tax rate (MTR)), or voluntary contributions for which you intend to make a tax deduction claim. In both situations, the result is that rather than being taxed at your MTR, which could be up to 47% including Medicare levy, you are instead taxed at either 15% or 30% for high income earners. This means that so long as your MTR is lower than the applicable superannuation tax rate, there is a tax benefit to be had.

The introduction of the catch-up rule is great news for those with low superannuation balances with plans to boost their savings in preparation for retirement. However, there is also room for creativity in its use, where strategies can be devised to assist in the minimisation of large tax bills in future years.

In order to be eligible to utilise the Concessional Catch-up Rule, you must satisfy the following criteria

• Be eligible to make concessional contributions: it is a requirement that you be eligible to contribute to superannuation in order to utilize this rule.
• Have a Total Super Balance (TSB) of less than $500,000 at the end of the preceding financial year: in order to be eligible, you must have a TSB less than $500,000 as of 30 June of the previous financial year. Your TSB is the total sum of all funds held within the superannuation environment and includes those held in accumulation, pension, defined benefit and those funds in transit due to a rollover between funds.
• Have unused concessional caps from the past 5 financial years: it is unlikely for anyone to meet this criterion at this moment, as due to the recent nature of this legislation you have only been able to accumulate unused caps from 1 July 2018 onwards. This means that at the time of writing, only 2 financial years are readily available to be brought forward.

The following table illustrates how the accumulation of unused caps can play out going into the future:

Tax planning strategies utilising the catch-up rule

The introduction of the carry forward rule has opened the doors to some creative tax planning strategies, as eligible individuals can take advantage of unused concessional caps to reduce tax payable. We can see this being exceptionally valuable going forward for those with an investment property, business asset sale or share portfolio with a large unrealised capital gain tax (CGT) liability. Essentially, if an investor knows that they will generate a large capital gain and consequently incur a large tax bill, the catch-up rule could be used to their advantage.

If you would like to discuss how this could be applicable to you or if you are interested in discussing your broader financial goals & objectives, please contact one of our advisers for a no obligation discussion.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

The Investment Collective is pleased to announce expansion into Gladstone, Queensland effective 1 November 2020.  The Gladstone acquisition is an existing business with two staff, who currently tend to the personal financial needs of 50 clients.

“The new office location will give us an opportunity to interact with a different set of clients and allow us to continue towards our goal of becoming known as a leading and progressive financial services provider across the east coast of Australia,” says David French, Managing Director of The Investment Collective.

Part of The Investment Collective’s business growth plan involves finding complementary acquisitions. It is important however, to ensure that any acquisitions will fit with our ethos and allow us to continue providing our clients with the quality service they have come to expect.

Some important information regarding the Gladstone office:

• Situated just south of the Tropic of Capricorn, Gladstone is a progressive city with a population of about 60,000 and an economic base focused on heavy industry and shipping.
• Formerly Godfrey Pembroke, operations under The Investment Collective will begin on 1 November 2020, with the business operating from 2/136 Goondoon Street, Gladstone.
• The acquisition comes with two staff, one a financial adviser the other an experienced administrator. Both staff are key to ongoing operations

“Gladstone is an incredibly important industrial hub and recent investment in new social infrastructure really highlights the attraction of the city.  We’re very excited to now have a proper base there, staffed by competent locals” says David French.

If you have any queries regarding operations or business continuity at the Gladstone office please call 1800 679 000 or email us at enquiries@investmentcollective.com.au.

In what seems to be the ever-changing world of superannuation, the Commonwealth Government has amended the regulations that result in closer alignment to the age pension age, which is a good thing.

The eligibility for the government age pension was increased from 65 in line with the following table:

Soon enough, the eligibility for the age pension will be upon turning 67, however, this is out of whack with the superannuation rules, which principally revolve around turning 65.

Under the current superannuation rules, once you turn 65 the only way you can make a voluntary contribution into super is if you satisfy the work test. This involves working at least 40 hours in a consecutive 30-day period in the financial year the contribution is made.

The current system disadvantages those retirees who have turned 65 as they are not yet eligible to apply for the age pension, however, unless they work, they are restricted from being able to make a voluntary contribution into super.  If an asset was realised or they acquire the winning lottery ticket a voluntary contribution into super is not an option.

It’s highly undesirable to expect a retiree to have to go back to work in order to be able to make a contribution into super hence, quite rightly, this mismatch in the system has been removed.

From the 2020/21 financial year people aged 65 and 66 will be permitted to make a voluntary contribution into super without having to satisfy the work test.  This will permit a ‘non-concessional’ contribution to be made up to the $100K maximum limit.

Similarly, the age at which the ‘bring-forward’ rule for non-concessional contributions is before parliament to be increased from 65 to 67.  The bring-forward rule permits two future years of non-concessional contributions to be brought-forward resulting in a maximum of $300K that can be voluntarily contributed into super instead of $100K.

These are positive steps to alleviate gaps in the retirement system that make it fairer for everyone.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

Well…who saw that coming!!

Just when you think you’ve seen it all, how quickly things can turn from chocolates to boiled lollies…

For the golfers out there, spring in the northern hemisphere gets us fired up for the 1^st major of the year, the Masters Tournament played at the mighty Augusta National Golf Club in Georgia. Sadly, the Masters won’t be played in April…it may get a run later in the year, however, it won’t be the same.

The speed at which equity markets dropped from peak to trough in about 4 weeks brings to mind how quickly damage has been inflicted over the years to some of the finest golfers in the world on the 140 metre, par 3, 12th hole at Augusta National, known as “Golden Bell”…the middle of “Amen Corner”.

Many have arrived at “Golden Bell” on the final round on Sunday appearing to be in total command of their game and on path to secure that highly sought after ‘green jacket’ when from nowhere, Raes Creek comes to life and mysteriously drowns those green jacket aspirations before the poor sod can catch his breath and ask his caddie; “what happened there?”

This year, COVID-19 has done to the world what Raes Creek would surely have been doing to some unsuspecting golfer or two had the Masters been on track.  Just as those golfers must dust themselves off and ‘get back on the horse’, we must play the hand of cards COVID-19 has dealt us whether we like it or not.

In relation to superannuation, COVID-19 has necessitated the following changes to assist with the financial consequences it has brought.

Early release of superannuation

Individuals in ‘financial stress’ can access their superannuation savings (i.e.; accumulation mode accounts) up to a cap of $10K in 2019-20 and again in 2020-21, from 1 July 2020 to 24 September 2020.

To qualify for this:

• You must be unemployed.
• You must be eligible to receive a jobseeker payment, youth allowance for jobseekers, parenting payment, special benefit or the farm household allowance.
• On or after 1 January you were; made redundant, or your working hours were reduced by at least 20% or if you were a sole trader, your business was suspended or turnover reduced by 20%.

If someone is considering this option, attention needs to be given to how the withdrawal might impact personal risk protection insurance held inside their super such as; income protection, life, and total permanent disability cover.

Reducing the minimum amount required to be withdrawn in pension mode

The government has announced a temporary 50% reduction in the amount a superannuant is required to withdraw from account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities for the 2019-20 and 2020-21 financial years.

This initiative is designed to avoid investments being sold down at the worst possible time to meet annual minimum withdrawal requirements and thus increasing longevity risk i.e.; the risk of running out of money.

To promote the longevity of your retirement savings, revisit or complete a budget for your living costs.  The amount you need to pull out of super to fund your lifestyle will drop out naturally which can then form the base for your pension withdrawal.  Additional or ‘one-off’ withdrawals can always be taken as and if needed.

If there’s a positive out of this we should be spending less because we can’t damn well do anything or go anywhere and the minimum required to be withdrawn in 2020-21 should be reset lower due to depressed asset prices.

Isolation might be a good time to dust of the playing cards for a good old-fashioned game of ‘patience’…or perhaps 500, which would be my preference…but restricted to a group of 4 of course.

Stay COVID-19 free out there and see you on the other side of COVID-19.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

And we’re not even halfway through it…

It’s certainly been an interesting few months, with the threat of potential changes to the financial planning landscape that would probably have occurred if the federal election result had gone the other way.

As the great Ronald Dale Barrassi once said, “The only constant in life is change.” It’s fair to say everyone in our industry; from clients to those earning a living in it, are looking forward to some stability for the time being.

With the election now a thing of the past and the end of the financial year upon us, it’s time to review some of the strategies that assist with our wealth accumulation objectives.

1. Give your super a free kick

Now is a good time of the year to make additional contributions into super, especially if you intend to claim those contributions as a tax deduction.

Any surplus cash you have sitting in a bank account earning the current abysmal rate of interest can be contributed into super before June 30 as a ‘personal’ contribution and claimed as a tax deduction.

Providing you haven’t exhausted your $25K concessional contribution cap, that increased tax deduction will most likely result in you obtaining an increased refund from the ATO.

The benefits are twofold; you get an increased tax refund which can be directed however you wish whilst also increasing the wealth you have accumulating in super.

2. Utilising unused concessional contributions

From 1 July 2018, if you have a total superannuation balance of less than $500K as at 30 June the previous financial year, you will be able to contribute more than the general $25K concessional contributions cap for that year by topping up the contribution with the ‘unused’ concessional cap from prior years.

Here’s how it will work:

In the table above, this individual in the 2019-20 year could potentially make a concessional contribution of up to $47K because they had used $3K in the prior year thereby having an ‘unused’ balance of $22K that can be carried forward into the next year.

In the 2020-21 year, because the balance of their super was above $500K on 30 June 2020, the concessional contributions cap is limited to the yearly amount of $25K.  In the subsequent year, 2021-22, the ball game has really opened up due to the super balance dropping below $500K at 30 June 2021 which has provided an opportunity to contribute up to $94K in that year.

This potentially allows for realised capital gains to be ‘transferred’ into super and be taxed at the 15% contribution rate, as opposed to a higher marginal tax rate because the concessional contribution can be claimed as a tax deduction.

This is a strategy to keep in mind over the coming years especially if you’re approaching retirement and have a sizeable amount invested outside the super environment that has significant unrealised capital gains.

3. Check in on your goals

It’s a good time of the year to check in on your life and financial goals to see if you’re on target to making your dreams become a reality.  Similarly, expectations may need to be revised to take account of changes to your circumstances over the last 12 months that have impacted on your wealth accumulation strategies.

At the end of the day, your super is your money and you are ultimately responsible for how it performs and grows.  You need to ensure it is being invested wisely and in line with the timeframe you intend to access it.

Here’s hoping for more stability and certainty on the financial planning front over the next 12 months, at least!

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial or superannuation advice, please contact us today. One of our advisers would be delighted to speak with you.

One of the hot button topics for a lot of businesses this year has been superannuation compliance.  We have seen headline after headline about business not paying super and then declaring bankruptcy leaving employees owed thousands.  It is important that employers are aware of their obligations regarding super payments and ensure they strictly adhered to.  It is also vitally important that employers ensure they are paying their staff the appropriate wage for the position they are performing.  Again, we have seen a number of high-profile large businesses being found guilty of not paying staff accordingly and this can have a detrimental effect on the business not just in penalties and the back pay but also the damage it does to the reputation of the business.

For the majority of businesses, superannuation must be paid at least quarterly and this is what most businesses will stick to.  For many small and medium enterprises quarterly is a big hit to the cashflow.  Its recommended businesses transfer the superannuation amounts weekly or fortnightly when the payroll is done to another account making it easier for cashflow.  With the majority of accounting packages offering direct superannuation payments to funds with a simple click of a button the process to pay the superannuation weekly or monthly rather than wait for the end of the quarter has become much easier.

Employers also need to be aware that a modern award can specify when superannuation should be paid and also to what fund it needs to be paid.  There are also certain industry funds that will have their own rules on how often payments need to be made.  Failing to meet these deadlines has serious consequences.  If the superannuation is not paid within the quarter the employer is then liable for and SGC Charge as well as interest and administration fees.  When calculating the SGC Charge it is necessary to include all wages paid to the employee during the period, not just ordinary time earnings which can add a significant amount to the amount owed to employees.

Making sure as an employer that you are aware of what award your employees are covered by in this current climate is vital.  Regularly reviewing the award and ensuring that your employees are being paid correct entitlements is part of the obligation of being an employer.  Most Awards are reviewed once a year for wage increases but there are awards that allow for that wage increase to be staggered over two increases throughout the year.  It is also important to understand the different levels contained within an award and also any allowances that may be applicable.  If you are unsure it is extremely important to have expert help.  The excuse of ‘I didn’t understand’ will not be accepted if Fair Work Australia start an investigation.

As a business owner, compliance with both of these issues is vitally important and something that your bookkeeper should be able to help you with or point you to an expert that will be able to help.  These are the types of issues that can stop you from being able to work on your business rather than in your business.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored financial, bookkeeping or business consulting advice, please contact us today.

“I’ve just received a letter from XYZ Superannuation Fund saying I have an account with them. What does this mean and how did I get any money in the account?”

This is the annual benefits statement provided each year by all superannuation funds.  It is a report to members of the fund that tells the member:

• How much their employer has paid into the fund during the last financial year
• How much was paid to the fund for the administration of your benefit
• What insurance is held through the fund
• How the investments performed during the year
• What investment option your benefits are invested in
• Your total balance
• Whether you have made a beneficiary nomination

“I can see all of that stuff but I don’t know what it means. Can I draw this money out for a holiday?”

No, superannuation is accumulated through compulsory contributions made by your employer during your working life, and you can’t draw from it until you reach at least 60 years of age.

“Wow that’s a long time, and a bit of a waste of time if you ask me.”

Yes, it is a long time but it is not a waste of effort.  Your employer must pay 9.5% of your salary every year into the fund of your choice – imagine how much that might be in 40 years’ time!  Let’s say that your salary is $55,000 per year now – that means your employer has to add at least $5,225 to your fund every year, and the contributed amount will increase every time you get a pay rise. Some of the amount contributed is paid out in tax, and the rest is invested with the object of growing over time. How much it grows will depend on the investment option or asset allocation that you choose.

The Fund must advise you how much you have paid to them in administrative fees during the year. This section is important.  Take some time to compare the fees you have paid in your account with fees in other funds. If your fund is very expensive compared with others, then consider switching funds.

You must compare ‘apples with apples’ – don’t look at a High Growth fund and compare that with a Moderately Conservative fund. The rate of growth may be significantly different and the fees may also be different.

Has your fund performed as well as or better than the fund you compare it with? For example, if your Balanced fund has returned 7.8% in the last financial year and other Balanced funds you have checked are returning 10% for the year, it may be prudent to look a little closer at your own fund and potentially consider a switch.

Check performance over a longer timeframe – 1 year out-performance is good, but has your fund outperformed over 5 years or more?  If not, you may want to look more closely and potentially find a fund that has a better longer-term performance.

Switching decisions should be based on long term performance coupled with the rate of fees you pay each year. Remember that switches come with a cost so you need to have good reason to do so.

“How did I get all of these super funds?”

When you begin a job, you should advise your employer where you want your contributions paid. If you don’t do this, then the employer will send your contributions to the fund it uses by default and that creates a new super account. If you have had a number of jobs and you now have more than one account, you should research all the funds to discover the better performing or lower cost fund, and consolidate (rollover) your benefits into the one account. Make sure you advise your employer if this account is not the one where they are currently paying your contributions.

Here’s an example comparison between 3 funds, made on these assumptions:

• Salary $55,000
• Starting balance $10,000
• Life, TPD & Income Protection insurance in each fund

You can see a big difference in the ending balance between the 3 funds because of the rate of fees, the 1-year performance and the insurance premium paid. If you are invested in Fund C, should you be rolling over to Fund A? You must do the homework to ensure that the long-term performance of Fund A is consistently good. You want to have your benefit invested in a fund that can give you a good and consistent return over a longer period than 1 year.

“Why am I paying for insurance?”

Have a look at the insurance section on your statement so that you know what insurance coverage you have.  You may have a default amount of life and/or total and permanent disablement (TPD) cover.  Life insurance pays a benefit to your family in the event of your death, but TPD will pay a benefit that you can draw on if you are totally and permanently disabled. Be aware that the sum for which you are insured is likely to decrease as you age. This is important, as you may be grossly underinsured at a time where it is most needed.

The other type of insurance you may have is income protection – this one replaces part of your salary if you are unable to work through illness or injury.  Check the premium on your insurances, and check waiting and benefit periods on the income protection policy.

If you consolidate funds, you will lose insurance benefits in any of the funds you roll out of so be aware you may then not have sufficient, or any, insurance. You should consult a qualified professional for insurance advice.

Nominating a beneficiary to receive your benefit upon your death, and keeping this nomination current, is important. Many nominations lapse in 3 years from when they were made, so you should regularly check your nomination remains current. Another thing to look out for is a nomination made to an ex-spouse. If you separate from your partner, you should make a new nomination. If you don’t, then your benefit is going to be paid to that ex-spouse, even if you have entered another marriage.

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial or superannuation advice, please contact us today. One of our advisers would be delighted to speak with you.

Most funds have either an online application form or a PDF application form (this is usually found in the Product Disclosure Statement for the chosen fund) that you can complete. There are some things you need to have, or to have decided, before you submit your form:

• Your Tax File Number
• ABN for the employer
• Choice of Risk Profile, or Investment option
• Life and TPD Insurance requirements
• Income Protection Insurance needs
• Beneficiary nomination

In completing the application, whether by a PDF or online, after entering all of your basic personal details including Tax File Number, you will then need to make choices in regard to your super account.

Beneficiary Nomination

This is the person or people you wish to receive your benefit upon your death. Nominations can be binding or non-binding and most funds offer both options. A non-binding nomination means that the trustee of your super fund is not bound to pay your benefit to the person/people nominated, but will be guided by your direction, whereas a binding nomination means that the fund must pay to your nominated beneficiaries.

It is worth remembering that most beneficiary nominations lapse after 3 years, so you need to review regularly to ensure it remains current and still reflects your wishes.

Insurance

Insurance is optional, but most funds offer a default amount of life, TPD and income protection insurance. If you do not require insurance you should opt out, but make sure that you have proper advice from a qualified professional that you do not need insurance.

Most industry funds offer insurance on a unitised basis, where the sum insured will decrease as you age, while the premium remains reasonably level. There is usually also an option to take out insurance for a fixed sum.  This is likely to incur a higher premium but may be a better option to ensure you have an adequate amount of cover.

For income protection insurance of more than the default amount, you will need to provide your annual salary and details of your occupation. The occupation has a bearing on the premium you will pay if you opt for other than default income protection insurance. You can choose a preferred waiting period i.e. the period to expire before your benefit begins to be paid. A shorter waiting period will result in a higher premium.

If you seek more than the default amount of insurance, you may need to complete health questions so that the fund can calculate your premium based on any health or occupation risks.

Investment Option

Funds offer a range of investment options from an automatic premix of asset types to a more customisable mix of asset types. Unless you really know what you are doing, you may be best to stick to premixed options. The basic premixed option is available for all risk profiles, which generally fall into about 5 main categories, with a multitude of variations between funds:

• Conservative
• Moderately Conservative
• Balanced
• Growth
• High Growth

Asset allocation refers to the mix of what is called ‘growth assets’ and ‘defensive assets’.  Growth assets are assets that can grow in value, such as shares or property – they are generally higher risk but have a higher return potential.  Defensive assets are lower risk, with potentially lower returns and usually relate to assets like cash, term deposits and other fixed interest investments like bonds.

The 5 investment options shown above have a different mix of growth and defensive assets, moving from low risk (Conservative) to high risk (High Growth). A Balanced portfolio, is typically middle-of-the-road in terms of asset allocation and may consist of 60% Growth assets and 40% Defensive assets, while a High Growth portfolio may have only 5% or so in Defensive assets and 95% more or less, in Growth assets.

Asset allocation with a higher proportion of Growth assets has the potential for higher growth, but there is a greater risk of negative returns and an increased level of volatility, or value fluctuation. An asset allocation skewed towards Defensive assets reduces the risk of negative returns but also protects against extreme volatility (price fluctuation), and returns over the longer term are likely to be lower.

Choice of investment option should be based on your attitude to risk, your investment timeframe, financial circumstances and your retirement goals.  What is your attitude towards risk? Can you accept some shorter-term losses in order for higher returns over the longer term, or would you rather play safe so that the value of your account doesn’t decrease?

What is your investment timeframe? This is the period between the present and when you retire. If you have a long time until retirement, are you willing to accept some additional risk in order for a better long-term return that will provide you with a bigger balance at retirement, or would you prefer to have a smoother ride knowing that at retirement you will have a smaller retirement sum?  If you only have a short time until you retire, do you want to risk what you have already accumulated by using a risky asset allocation in the hope that you will quickly accumulate a larger balance?

The selection of investment option is one of your most important decisions so far as your superannuation funds are concerned. Don’t take it lightly and do seek qualified professional advice to assist you to build your super balance so that you can achieve your retirement dreams.

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial or superannuation advice, please contact us today. One of our advisers would be delighted to speak with you.

If I had a dollar for every time someone told me, “Yes, I have insurance, it’s in my super fund”, I’d be one rich lady! Whilst I’m not disagreeing that you may indeed have cover, my problem lies with the quality of cover.

Industry and retail funds are required by law to offer default insurance within your superannuation account. However, there are no rules around the benefits they offer within these policies and what most people don’t realise is they may not be covered at all.

Here are a few fun facts you should know about insurance held inside your super:

Policy indexation

Most policies within these funds decrease as you get older. They usually start tapering off at around age 40. This is usually the time when you need cover most because you have a mortgage to repay and kids to put through school. Policy indexation is important to ensure cover keeps in line with the time value of money.

Guaranteed renewability

Industry and retail fund policies are not guaranteed to renew. Most policies have a hidden clause which states that the cover can be cancelled at the decision of the trustees for any reason at any time. You could think you’re fully protected, then the unthinkable happens and you find out you weren’t protected.

Tax on benefits

Regardless of the superannuation fund, you will always pay tax on Total & Permanent Disablement (TPD) benefits. The implication of this means you may think you’re going to receive a $500,000 benefit but what you actually receive will be far less.

Underwriting on claim

When you opened your superannuation account, you are offered default cover, meaning you never have to answer a long list of personal medical questions. You may not realise there are serious implications to not doing this. Say for instance you’re diagnosed with diabetes at age 25. Then two years later you change superannuation providers and you’re offered default cover within that fund. Fast forward to another two years and you’ve had to take an extended time off work due to complications of your diabetes. You try to claim on your income protection/salary continuance only to be denied the claim. This is because two years prior to you taking out this new policy, you had already been diagnosed and this is technically a “pre-existing condition” in the eyes of the claims assessor.

There are many more reasons why you shouldn’t rely on default cover within your superannuation. To be certain you know what you’re covered for, be sure to come and see us for a full insurance review. We’ll prepare a detailed analysis of your current cover compared to other policies on the market you’ll know exactly what you’re covered for.

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today, one of our advisers would be delighted to speak with you.

Generally speaking, there are two ways to make more money in life: by working day in, day out, or by letting your money and assets work for you.  Now I can only speak for myself, but letting my assets work for me sounds much better than grinding away at the office for the rest of my life (not that I don’t love my job!).

It may sound like prudent practice, but leaving your entire life savings under a mattress will not give you any return or increase in capital (in fact, after inflation your buying power has actually decreased).  Even leaving your money in a bank account will only generate a minimal return.  On the other hand, investors can earn additional money through dividends and distributions from their investments or by purchasing assets that increase in value.

The purpose of this article is to introduce you to the world of investing and provide clarity on key concepts that we are often asked about by our clients.

When should I start investing?

If we ignore transaction costs and the cyclicality (ups and downs) of markets, the answer to this question would be an easy one: RIGHT NOW! The power of compounding interest means that you are better off investing as soon as possible so your future returns are off a higher base.  This concept is best conveyed in the chart below.  Chart 1 shows that an individual who invests $100,000 today (Blue) for 20 years at an 8% return will earn $96,000 more than an individual that invests the same amount, earning the same return, only 3 years later (Orange).  In the fourth year, Blue would earn 8% on $126,000 ($10,000) whereas Orange would earn 8% on the initial $100,000 ($8,000).  Therefore, it seems the early bird gets the worm after all!

How much should I start investing with?

Unfortunately, for us investors, we do live in a world with transaction costs such as brokerage so it can be unwise to invest small amounts of money where your returns will be “eaten up” by these costs.  A common brokerage fee structure for a number of retail stockbroking firms (including our own) is:

• $55.00 for trades up to $10,000
• 55% for trades over $10,000

As an example, if I buy $15,000 worth of shares and sell them a year later for $16,500, I would earn $1,500 in capital gains minus $173 in brokerage (buying and selling) to have a net capital gain of $1,327.   This example shows that a reasonable capital return of 10% has been reduced to 8.8% after fees.  Now, imagine if I only invested $1,000 and sold my shares for $1,100.  My $100 (10%) capital return would reduce by $110, leaving me with a measly -1% return – which isn’t very sexy at all.

So, what does this all mean? If you are an individual that wishes to purchase some Australian shares, I would recommend building up cash to a level that minimises the ratio between brokerage/investment.  If you are interested in creating a portfolio with a number of assets, I would recommend coming into one of our offices for a consultation (if you are good at something, you don’t do it for free).

How much risk should I take?

This is an extremely important question and one that can be the difference between living comfortably in retirement or couch surfing at your grandkid’s place.  The amount of risk you take on is also dependent on your investment goals.  For example, an 85 year old trying to provide for their retirement would have a much more conservative approach to investing than a 28 year old who is trying to build wealth to purchase their first home.

In addition to understanding your goals, at our firm, and in the advising community as a whole, we require our clients to complete a risk profile questionnaire, which provides a clearer picture of exactly how to risk averse they are.  The results of this questionnaire then distinguishes which risk profile our clients fall into and how their money should be invested.  The financial advisory industry uses five risk profiles:

1. Conservative
2. Moderately conservative
3. Balanced
4. Growth
5. High growth

What should I invest in?

The answer to this question is a direct result of what risk profile you are aligned with.  There are five main asset classes that we invest in at our firm.  They are, in ascending order of riskiness:

• Cash
• Fixed interest: corporate, government or semi-government debt
• Property and infrastructure: shares or holdings in property and infrastructure assets
• Australian shares: shares listed on the ASX
• International shares: shares listed on foreign stock exchanges

The proportion of your wealth that you should invest in each asset class is dependent on your risk profile.  For example, a balanced portfolio at our firm invests 5% in cash, 35% in fixed interest, 20% property, 30% Australian shares and 10% international shares.  The holdings in cash and fixed interest will ensure that 40% of your portfolio is invested in assets that will preserve your capital while paying some income.  The 20% of property holdings provides investors with the potential for capital gains while maintaining some level of capital preservation and income.  The 40% held in Australian and international shares provides exposure to riskier assets that can provide greater capital gains and income in the form of dividends.

Another benefit of investing in different asset classes is to diversify your portfolio and take advantage of the low, or even negative, correlation between some investments.  Correlation is a mutual relationship between two variables (assets).  By way of example, Chart 2 shows how the defensive fixed interest asset class increased by 2% from October to December 2018 as investors fled the riskier Australian shares asset class that decreased by 8% over the same period.  If you were invested entirely in Australian shares, you would have lost 8% of your capital whereas you have only lost 3% if you were invested 50/50 across the asset classes.

If you have been going to sleep on a mattress full of your life savings every night, or if you are interested in learning more about investing, please feel free to come into one of our offices to have a chat.  Our investment team relishes any opportunity to educate people on the benefits and techniques of investing and there is nothing more satisfying than helping others unlock the power of sitting back, and letting your money work for you.

Please note, this article provides general advice and information only. It has not taken your personal or financial circumstances into consideration. If you would like more tailored investment or financial advice, please contact us today.

Read more articles in our Financial Literacy series.