May 2010 was a particularly bad month for shares with stocks around the world losing value. This has caused many people to think whether its time to get out of shares or hang on, particularly if they are close to retirement or scared of further losses.
There are many investment myths. For example, there is an old adage in the share market which says "sell in May and go away". It is based on the idea that May to November (roughly the European and American summer) is not a good time for shares. However, this saying has no basis in fact as the May to November period is neither particularly good nor particularly bad for shares.
But there are some facts that we can rely on and they have been a good guide for a very long time.
The way that I like to look at it is that shares have for centuries followed a fairly stable upwards trend and for the most part it makes sense to have some in your portfolio and hold for them for the long term. This trend is evident in the attached diagram showing Australian share prices from 1980 to 2010.
If we look back (admittedly it's always easier with hindsight) it shows us that shares were above their long-term trend in 1987 and for those who could, it may have made sense to take a little risk off the table and reduce exposure to shares.
Similarly in 2007 the graph shows that shares were a very long way above their long-term trend and greatly overvalued. Like 1987 the lead-up to 2007 was a good time to sell and a bad time to buy.
After the so-called global financial crisis in 2007 share prices fell below their long-term trend suggesting it was a good time to add to your shareholdings.
So where are we now?
Right now, share prices are within their long-term trend indicating that holding shares should result in an acceptable return over the long term.
A general rule of investing is that you buy when prices are low and sell when prices are high. If we accept this advice now is a time to do nothing and just hold your long-term allocation in shares. This is because shares are not cheap enough to suggest adding to portfolios and only just above their average long-term price which does not indicate the sort of danger that would make one run away from the markets.
Of course, this trend is a long-term trend and does not suggest that we won't see some more volatility in the next little while with so much uncertainty in the world.
I must emphasise this is advice from a funds management perspective and is not meant to be taken as personal advice as it does not take into consideration your personal objectives, financial situation or needs. Before making any investment decisions you should consult a financial planner.
Click here for information about the latest returns.
Click here
for commentary on how investment markets performed over the June quarter 2010.
Wayne Swan in the May Federal budget announced a number of measures which concern people who are approaching or who are already in retirement. The following is a summary of the changes that might affect you:
$50,000 concessional contributions cap to continue beyond 2012
The government has proposed to allow individuals age 50 and over with superannuation balances less than $500,000, to make concessional contributions of up to $50,000 per annum (indexed) after 1 July 2012. This will allow people to top up their super as they approach retirement as long as their account balance is under the threshold.
Co-contributions - Matching level frozen at $1,000
Measures announced in the federal budget 2009-10 reduced the maximum Co-contribution payable on eligible Non-Concessional contributions to $1,000 from the previous maximum of $1,500 and the maximum was going to revert to $1,500 in 2014-15. However, the Government has decided to make the current maximum level of $1,000 permanent.
Furthermore, the Government has indicated it will freeze, for the next two financial years, indexation of the income levels at which Co-contribution payments start to reduce ($31,920) and where it cuts out completely ($61,920). In other words, the rules that applied in the last financial year (2009 -10) will apply for the next two financial years (2010 -11 and 2011-2012).
50 per cent tax discount for interest income
Commencing 1 July 2011, the Government has proposed to provide a 50% tax discount on up to $1,000 of interest earned by individuals. This will include interest earned from bank accounts, term deposits, bonds and annuity products. The discount will be available for interest earned directly, or indirectly such as through a trust or managed investment schemes.
This may increase eligibility for some social security entitlements as it can reduce ATI (Adjusted Taxable Income). If you are unsure you should contact Centrelink or your financial planner for assistance.
Reduction in personal income tax rates
The Government has upheld its commitment to honour the previous Government's tax commitments. In the financial year 2010-11:
- The 30 per cent threshold will increase from $35,001 to $37,001; and
- The second top marginal tax rate will be cut from 38 to 37 per cent. The table below provides a comparison between the previous and new tax rates.
| Current rates from 1 July 2009 | Effective rates from 1 July 2010 |
| Taxable income ($) | Rate (%) | Taxable income ($) | Rate (%) |
| 0 - 6,000 | 0 | 0 - 6,000 | 0 |
| 6,001 - 35,000 | 15 | 6,001 - 37,000 | 15 |
| 35,001 - 80,000 | 30 | 37,001 - 80,000 | 30 |
| 80,001 - 180,000 | 38 | 80,001 - 180,000 | 37 |
| 180,001+ | 45 | 180,001+ | 45 |
Note: excludes 1.5% Medicare Levy
Superannuation Guarantee to rise to 12%
The most significant change in the budget was the announcement that the SG rate would rise from 9% to 12%. This 3% increase however will be phased in over a three year period with the first increment starting in July 2013 and the final one in July 2019. The table below outlines the effective dates for each rate increase:
| Financial year | SG Rate (%) |
| 2009/10 to 2012/13 | 9 |
| 2013/14 | 9.25 |
| 2014/15 | 9.5 |
| 2015/16 | 10 |
| 2016/17 | 10.5 |
| 2017/18 | 11 |
| 2018/19 | 11.5 |
| 2019/20 | 12 |
New Government contributions for low income earners
While the Government has reduced the benefits available to low income earners under the Co-contribution scheme it has introduced a new scheme which will refund the 15% contributions tax levied on employer contributions up to a limit of $500.
The new contribution is equal to the contributions tax payable for someone who is earning $37,000 per year. The maximum payment will be $500 and the first payment will occur in 2013/14 based on contributions made in the 2012/13 financial year.
The contribution for those who earn less than $37,000 per year will be on a pro rata basis. For example, if a member earns $24,000 per year, the employer would normally pay $2,160 in SG which would attract contributions tax (15%) of $324. This member would therefore receive a refund of $324, assuming that they were otherwise eligible.
Eligibility is determined when the member completes their tax return and the Scheme reports contributions to the ATO.
Volatility is a term frequently used in financial and investment publications and it usually has a negative connotation but is it always a bad thing?
Volatility in investing refers to the extent to which the value of an investment might fluctuate and the timeframe over which those movements occur. For example, an investment whose value falls by 5% and then rises by 10% during the course of a day could be described as highly volatile while an investment whose value increases steadily by 5% during the course of a year is a very stable one.
So are stable investments generally better than volatile ones and why might an investor choose an investment which was likely to be volatile?
The answer to that depends on four things:
- the expected return on your investment
- the investment timeframe
- your general financial position, and
- your risk profile.
Expected return
For those who prefer stable investments there is traditionally an unwelcome correlation between increased volatility and increased returns over the longer term. While in the short term volatile investments, such as shares, can perform very poorly in the longer term they tend to outperform more stable investments such as fixed interest and bond investments. The old adage, the greater the risk the greater the return, tends to hold true if you replace the word risk with the word volatility, at least in the longer term.
Investment timeframe
However, even if you accepted this when making your investment decision, a volatile investment might still not be the best for you. If your investment timeframe was short, for example six months before you needed to convert it for a house deposit, then a volatile investment might not be appropriate as its value could drop significantly just before you had to cash it in.
General financial position
Another consideration is your broader investment portfolio or financial situation. If you have a broadly stable range of investments, such as bonds, cash or other fixed interest securities, a new volatile investment would only form a part, perhaps a small part, of your broader portfolio. It would also diversify that position which in itself is usually regarded as a desirable thing. On the other hand if all your investments were volatile then an additional investment could add further unnecessary risk to your portfolio.
Risk profile
Finally, even if you ticked all the boxes above you still might want to avoid volatile investments because of your risk profile, in other word your willingness to handle the risks of investing. Some investors can cope with considerable daily fluctuations in the value of their investments while others are made anxious by it. It's often called the sleep test - if you cannot sleep at night because of the ups and downs of your investments even though during the day you know that it is the sensible thing to do then you probably shouldn't adopt that style of investing. A successful but risky investment that distresses you is much less valuable than a stable investment that may not earn so much but lets you sleep at night.
Whether volatility is good or bad depends on the investor's circumstances. As it's an inevitable part of making investments, the best strategy is to make sure you're aware of it and that your investment style matches your tolerance for it.
If you would like to discuss the best approach to investing for you with one of our financial planners, please contact us by calling 1300 883 788.
Buying a home for the first time, moving to a larger home or buying an investment property is an expensive business. Given all the other costs you don't want to spend more on your home loan than you have to.
So why not take advantage of the 5 Star Chifley Home Loan? It is rated 5 Star by CANNEX, the independent financial services monitoring agency. This means our mortgage loan offers "superior value", giving you the reassurance that you are making the best possible choice!
Products awarded 5 stars by CANNEX are the best 5% of similar products available in Australia. So when you consider that there are literally hundreds of similar products around, the awards give you the reassurance of knowing that a Chifley Home Loan is a competitive solution.
There are no mortgage application fees and no monthly account keeping fees. You can make extra and lump sum repayments without any restrictions which allows you to use any extra funds to reduce interest and pay out your loan faster*.
For more information on these or any of our other competitive loans, either call us on 1800 800 002 or visit our website www.chifley.com.
*Limitations apply to Fixed Rate products. Terms and conditions apply. The credit provider is Select Credit Union Ltd. Fees, charges and all loan details will be disclosed in the loan contract. Some charges such as valuation fees and costs charged by the lender's solicitors are payable. These charges are non-refundable should they be incurred and the loan is not proceeded with. An early repayment fee may be payable. Chifley Financial Services Limited (ABN 75 053 704 706, AFSL 231148) provides services through an agreement with Select Credit Union Ltd (ABN 20 058 538 140, AFSL 238257). Chifley Financial Services does not guarantee the obligations of Select Credit Union Ltd.
Fair Go
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Visit eisuper.com.au for more information, quotes and to purchase your insurance online.
*Terms & Conditions apply.
Would you like to know more about investment options and risk and return? Are you wondering whether you will have enough money to retire on?
You could get the answers to these questions, and more, by attending one of the free pre-retirement planning seminars we are running at a venue close to you. To find out more, click here or contact Member Services on 1300 369 901.
Contact us
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Sydney NSW 2000
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Grosvenor Place
Sydney 1220
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Sydney
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Financial Planning
T: 1300 883 788
This document was prepared for the exclusive use of members of the Energy Industries Superannuation Scheme. Please note that the information contained in this document is of a general nature only and does not constitute personal advice as it does not take into account your personal objectives, financial situation or needs. Any advice in this document is provided by FuturePlus Financial Services Pty Ltd (ABN 90 080 972 630) as an Australian Financial Services Licensee (AFSL 238445) on behalf of the Trustee of the Energy Industries Superannuation Scheme, Energy Industries Superannuation Scheme Pty Ltd (ABN 72 077 947 285). Energy Industries Superannuation Scheme Pty Ltd is an APRA Registrable Superannuation Entity Licensee (ABN Pool A - 22 277 243 559 and ABN Pool B - 64 322 090 181).
Members should not rely solely on this information and should consider their own personal objectives, financial situation and needs before acting on this information. Prior to making any investment decision you should obtain and consider the relevant Product Disclosure Statement (PDS) pertaining to your Scheme membership and seek professional investment advice.
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Michael Block