Managing investment risk in uncertain times

text: managing investment risk in uncertain times

This year has exposed investors to the end of a bull market and the start of a global recession, all caused by a totally unexpected global pandemic. The outlook for the global economy and investment markets remains uncertain until an effective vaccine is available.

While there is cause for optimism that one of the many vaccines will become available in the not-too-distant future, the road to financial recovery – for nations and many individuals – could be much longer.

Whether you are working towards major financial goals such as buying a home, planning to retire soon, or already retired and looking for reliable income, it’s never been more important to come to terms with uncertainty and manage investment risk.

So how can investors not only survive, but thrive, during this difficult period? Staying the course isn’t easy when you can’t see what lies ahead, but you need to strap yourself in if you want to achieve long-term financial success.

Stay the course

When markets fall sharply, as the sharemarket did earlier this year, it’s tempting to switch to cash investments. All too often, this can mean you lock in your losses at or near the bottom of the market and potentially miss out on the recovery that follows.

After hitting a record high in February, the ASX 200 fell almost 37% by mid-March as the economic impacts of COVID-19 began to sink in. Then against expectations, the market rebounded 35% over the next three months.i

Throughout that period, volatility was high with dips of a few percent one day followed by an equally sharp rise the next. But history has shown that it generally pays to ignore the noise.

There have been many studies about the impact of missing out on the best days for a market over a given period. Missing even a few of these days can have a big impact on your long-term returns.

Looking at the Australian market, a hypothetical $10,000 invested in the ASX 200 Accumulation Index (share prices plus dividends) on 30 October 2003 would have turned into $37,735 by 6 September 2020. Missing the 10 best days would have reduced returns by $15,375, while missing the 20 best days would have reduced returns by $22,930.ii

Manage investment risks

While it’s important to stay invested, that doesn’t mean you should forever sit on your hands and do nothing.

Booming markets can make investors complacent, so a market correction is often a good opportunity to stress test your investments to see if they are appropriate for risk tolerance and personal circumstances.

For example, if you’re in your super fund’s growth option but this year’s roller-coaster markets have kept you awake at night, then perhaps a more conservation option would be more appropriate.

Or if your portfolio has become unbalanced after all the market upheaval, with too much reliance on one asset class or market sector, then you might think about rebalancing your portfolio to plug any gaps.

Investors who are nearing retirement or recently retired may have a greater focus on preserving capital, to provide more certainty that their money won’t run out.

The importance of diversification

Even retirees need to balance their need for capital preservation with capital growth, which is another way of saying they still need to diversify their investments.

By diversifying across and within asset classes, you have the best chance of riding out a big fall in any one asset class. With interest rates close to zero and likely to stay low for some time, investments such as bonds and cash that traditionally provide capital protection with regular income will be hard-pressed to keep pace with inflation.

By including some growth assets such as shares and property in your portfolio, your savings will continue to grow over the long term even as you draw down income to cover your living expenses. Shares and property also provide income in the form of dividends and rent, which retirees can use to diversify their sources of income.

Whatever your age and stage of life, avoiding knee jerk reactions, managing risk and diversification can help you navigate these uncertain times. If you would like to discuss your investment strategy with a financial adviser, please get in touch on 03 5120 1400.

https://www.asx.com.au/prices/charting/index.html
ii https://www.fidelity.com.au/learning-hub/markets/timing-the-market/

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

FASEA Exam

RGM sends our congratulations to our Financial Planning team, all of whom recently passed their FASEA exams. 

The Hayne Royal Commission has completely changed the landscape for providing Financial Advice. Part of this is the requirement that all Financial Planners must pass the FASEA exam. It has caused much angst among professionals in the industry. 

The FASEA exam tests advisers on the latest financial regulatory requirements, advice construction and ethical reasoning. Changes to the study requirements and the exam have seen many advisers leave the profession. 

Here at RGM, we pride ourselves on remaining up to date with our technical expertise so that we can provide the best possible service to our clients. Whilst advisers had until the 1 January 2022 to pass the exam, our advisers were proactive in ensuring their compliance with the latest regulations. 

Our Financial Planning team are committed to providing quality financial advice and wealth management solutions to help you achieve your goals. By choosing RGM, you’ll be working with a professional advisor who can provide you with advice on retirement planning, insurance, self-managed super funds (SMSF) and investments to keep you abreast with the latest developments in the industry.

Concerned about your superannuation and retirement plans? Speak to one of our Financial Advisers about how we can help you meet your financial goals on 03 5120 1400.

Ins and outs of SMSF property investing

With a property market recovery underway, most notably in Sydney and Melbourne, Australian investors are once again pursuing their love affair with property investing.

For many investors, a popular way to invest directly in residential or commercial property is through their self-managed super fund (SMSF). In fact, ATO statistics show property is the “third most popular” asset class in SMSF portfolios.

Part of the attraction of holding investment property within your SMSF is the concessional tax rates applying in the super system, with rental income taxed at only 15 per cent – or nil if fund members are in pension phase. As with property investments outside super, rental property expenses are tax-deductible and if the property is owned for more than 12 months any capital gain is taxed at a discount rate.

Keep an eye on the super rules

But before you rush off to buy a property through your SMSF, there are some key rules you need to keep in mind if you want to stay on the right side of the tax man and superannuation law.

The key one is that the property must meet the “sole purpose test“, which requires any SMSF investment to solely provide retirement benefits to the fund’s members.

This means you can’t buy a residential property through your SMSF for you or a family member to live in – even temporarily.

A property owned by your SMSF can be rented, but it must be at normal market rates. The tenant must not be a “person or entity related to a fund member” if the property’s market value “exceeds 5 per cent” of the total value of the SMSF’s assets.

Buying a commercial property

SMSFs are unable to buy a residential property from a “related party“, but if you purchase business real property – such as your business premises – and pay rent at the market rate, it’s not considered a related party transaction.

The property must be used exclusively in a business and the price must be normal market value.

If your SMSF rents out the property to your business, it must be at commercially competitive rates and you must not gain a financial advantage.

Regular rental payments must be made as with a normal lease.

Borrowing to buy an SMSF investment

In general, SMSFs “can’t borrow” to buy an investment asset, but there is an exemption if the fund enters into a special loan structure called a limited recourse borrowing arrangement (LRBA) to purchase a property.

With an LRBA, if the loan defaults the lender only has recourse to the property – not the SMSF’s other assets.

LRBAs are complex borrowing arrangements with different loan conditions to a normal mortgage. If they are structured incorrectly, the borrowing exemption lapses and the SMSF will have breached the super rules.

Repair and maintenance of the property

Another important rule to remember is if your SMSF owns the property outright, it can be renovated or improved as desired.

If the fund has used an LRBA to buy the property and the loan is still in place, however, you need to be careful how you pay for renovations.

Under super and tax law, repairs and maintenance on a property purchased through an LRBA can be paid from the loan, but?improvements to the property?must be financed by existing money in the SMSF, not borrowings.

Repairs and maintenance are work done to prevent defects, damage or deterioration of the asset. Improvements on the other hand, significantly alter for the better the state or function of the property, unless they are “minor” improvements.

Consider the investment issues

If you are thinking about buying a property for your SMSF, you need to consider the investment issues involved. It’s essential the SMSF’s trust deed permits such a purchase and it must also be in line with the fund’s “investment strategy.”

Acquiring a property asset may mean the fund’s investment portfolio is not appropriately diversified, which is something the ATO has been “contacting SMSF trustees about.”

If you would like to know more about investing in property through your SMSF, contact a financial adviser on 03 5120 1400.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.


Expand your horizons with ETFs and LICs

One of the golden rules of investing is diversification, but that can be difficult to achieve when you are just starting out or have limited funds to tap into a world of opportunities. Which is why investors have been flocking to exchange-traded funds (ETFs) and listed investment companies (LICs).

ETFs and LICs are like managed funds in that your money is pooled with other investors to create a large portfolio of assets which is professionally managed. Not only do they provide diversification, but they can be bought and sold on the Australian Securities Exchange (ASX) as easily as shares and have lower fees than traditional managed funds.

In the six years to July, the market value of LICs has more than doubled from $16 billion to almost $34 billion. In the past year alone there have been 11 new listings, taking the total to 101.i ETFs have also grown strongly. There are now 212 exchange traded products (ETPs) on the ASX, including ETFs. From a standing start 15 years ago, ETFs have a market value today of about $31 billion.ii

Yet despite their popularity, there is confusion about the technical differences between these products.

What are LICs and ETFs?

LICs are the great grandfathers of the listed managed investment scene, with a history going back almost 100 years. Trailblazers such as the Australian Foundation Investment Company (AFIC) and Argo Investments have provided investors with steady returns for decades, mostly from a portfolio of Australian shares selected by the fund manager.

While Australian shares still account for 83 per cent of total LIC assets, these days 16 per cent are in global equites through well-known fund managers such as Platinum. Newer LICs also offer exposure to micro-caps, infrastructure, private equity and absolute return funds.

By contrast, ETFs invest in a basket of shares or other investments that generally track the performance of a market index. You can buy an ETF to give you exposure to an entire market, region or market sector such as global health or technology stocks. They also offer investments in a wider range of asset classes, from local and international shares to bonds, commodities, currency, listed property and cash.

Structure and tax

As the name suggests, LICs use a company structure while ETFs are unit trusts.

Like other companies, LICs are governed by the Corporations Act. They pay company tax on their income and realised capital gains which they can hold onto or pay out as dividends plus any franking credits. Investors are then liable for tax at their marginal rate.

ETFs pass on all tax obligations to investors. Despite these differences, the after-tax position for investors is similar to LICs.

Another key difference is that LICs are closed-ended investments, which means they have a fixed number of shares on issue. This structure means they tend to trade at a premium or discount to the value of their net tangible assets (NTA) because the market determines the share price, not the value of the company’s underlying assets.

ETFs are open-ended which means units in the fund can be created or redeemed according to investor demand without the share price being affected. As a result, ETFs trade close to their NTA.

Why now?

The growing interest in LICs and ETFs can be traced back to the growth in self-managed super funds (SMSFs). SMSF investors are keen to keep investment costs down and constantly on the lookout for simple, effective ways to create a diversified portfolio tailored to their personal needs.

LICs were also given a shot in the arm following a change in the Corporations Act in 2010 that allowed them to pay regular franked dividends.

It’s important to understand how different investment vehicles work and whether they are appropriate for your personal circumstances and appetite for risk. If you would like to discuss your investment strategy, give us a call on 03 5120 1400 and speak to a Financial Adviser.

i ASX Investment Products Monthly Update August 2017

ii BetaShares Australian ETF Review August 2017

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.




Summer 2020 Edition of Insights and Investment Solutions

This edition contains the following articles:

  • Market update
  • Having the money talk with your partner
  • Downsizing – do you want fries with that?

If you wish to discuss any financial matters, please don’t hesitate to contact us on 03 5120 1400 to make an appointment and speak to an adviser.

Please feel free to share the Summer edition with your connections on social media – see Share This Article.

Click here to download the Summer 2020 edition

RGM Financial Planners Pty Ltd (AFSL 229471)

Steering through choppy seas

Like it or not, we live in interesting times. More than a decade after the Global Financial Crisis, the global economy is facing fresh headwinds creating uncertainty for policy makers and investors alike.

This time around it’s not a debt crisis, although debt levels are extremely high, but geopolitical instability.

The ongoing US-China trade war and Brexit confusion in Europe have increased market uncertainty and volatility and put a spoke in the wheel of global growth. The Organisation for Economic Co-operation and Development (OECD) forecasts global economic growth to ease to 3.3 per cent over 2019. It expects Australia to grow at 2.7 per cent.i

Against this backdrop, there has even been speculation that the Reserve Bank may need to resort to “unconventional measures” such as negative interest rates and quantitative easing to boost growth. These measures have been widely used overseas but are foreign concepts to most Australians. So what are they?

Why negative rates?

Negative interest rates have been a feature of the global financial landscape since the GFC, in Japan and in Europe. European central banks charged banks to hold their deposits, encouraging them to lend out cash instead to kick start economic activity.

So far, the Reserve Bank hasn’t followed suit, but we are edging closer. The cash rate is at a record low of 0.75 per cent with further cuts expected.

Most economists think the Reserve Bank is unlikely to take rates below zero. Taking interest rates too low could run the risk of igniting another property boom.

If negative rates are off the table, another way to bankroll economic growth is quantitative easing.

What is quantitative easing?

In the aftermath of the GFC, central banks in the US, Japan and Europe printed money to buy government bonds and other assets. By pumping cash into the system they hoped to boost economic activity.

There has been much debate about whether quantitative easing worked as intended. What it did do was push investors into higher-risk assets such as shares and property in pursuit of better returns.

It has also increased global public and private debt to $200 trillion, or 225 per cent of global GDP. Until now, high debt levels have been supported by high asset prices. But when coupled with geopolitical and trade tensions, debt adds to the downward pressure on growth.ii

The slowdown in economic growth in Australia and elsewhere is reflected in falling bond rates. In recent times more than 10 European governments have issued bonds with negative interest rates.ii

In recent months, yields on Australian government 3-year and 10-year bonds have dipped below 1 per cent, an indication that the market expects growth to slow over the next decade.

What does this mean for me?

It seems more than likely that bank deposit rates will stay low for some time. That means investors seeking yield will continue to look to property and shares with sustainable dividends. But it may not be plain sailing.

Trade wars, Brexit, high asset prices and slowing economic growth are creating a great deal of uncertainty. Each new twist and turn in trade talks sends markets up in relief or down in disappointment.

After a decade of positive returns, and average annual returns of 7 per cent from their superannuation funds, investors may need to trim their expectations.

Time to plan ahead

If retirement is still a long way off, you can afford to ride out short-term market fluctuations. Even so, it’s important to make sure you are comfortable with the level of risk in your portfolio.

If you are close to retirement or already there, you need to have enough cash to fund your pension needs without having to sell assets during a period of market weakness. For the balance of your portfolio, you need a mix of investments that will allow you to sleep at night but still provide growth for the decades ahead. When markets recover, you want to catch the upswing.

Successful investing requires patience but also adaptability. If you would like to discuss your overall portfolio in the light of market developments, give us a call on 03 5120 1400.

i https://www.imf.org/en/Publications/WEO/Issues/2019/10/01/world-economic-outlook-october-2019

ii https://www.smh.com.au/politics/federal/200-trillion-in-global-debt-at-risk-if-trust-falters-oecd-20190909-p52pdr.html

iii https://www.ricewarner.com/can-super-funds-continue-to-meet-their-investment-targets/

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Building wealth through diversity

What a difference a year makes. In recent months, Australian shares hit a record high, the Aussie dollar dipped to levels not seen since the GFC and interest rates were cut to historic lows. 

Towards the end of 2018, shares were in the doldrums and while experts agreed the Aussie dollar would go lower most tipped the next move in interest rates would be up. 

All of which goes to show that when it comes to predicting financial markets, the only sure thing is uncertainty. There’s no avoiding market risk, but it does need to be managed if you want to build enough wealth to live comfortably in retirement and achieve other life goals along the way. 

Thankfully, there is a way to reduce the impact of market volatility on your overall investment portfolio. Hint: it’s not by putting all your money in the bank. 

Mix it up

The best way to reduce the risk of one bad investment or a downturn in one market decimating your returns is to hold a mix of investments. This is what is referred to as diversification or not putting all your eggs in one basket. 

To smooth your returns from year to year and avoid the risks of short-term market volatility, you need a mix of investments from different asset classes. 

The difficulty of predicting the market in the short-term was certainly in evidence in the year to June 2019. 

Investors who panicked at the end of 2018 and sold their shares would have missed out on the unexpected rebound in global shares. 

A year of surprises

Australian shares returned 11 per cent in the year to June 30. Global shares returned 11.9 per cent while US shares returned 16.3 per cent, partly reflecting the fall in the Aussie dollar from US74c to US70c.i

The worst performing asset class in the year to 30 June was Australian residential property, down 6.9 per cent.ii But while the housing market downturn was constantly in the news, good news in other sectors of the property market went largely unnoticed. 

The best performing asset class by far in the year to June was Australian listed property, up 19.3 per cent. 

The gap in performance between direct residential property and listed property highlight another important aspect of diversification. You also need to diversify within asset classes. 

Look beyond your backyard

Where property is concerned, that means investing across a range of property types and geographic locations. By diversifying your property investments, you reduce the risk of short-term price fluctuations in one location which can result in a big loss if you are forced to sell at the bottom of the market. 

The same holds true for shares. Many Australians have a share portfolio dominated by the big banks and miners, attracted by their fully franked dividends. 

The danger is that investors with a portfolio heavily weighted towards local stocks are not only exposed to a downturn in the bank and resources sectors but also the opportunity cost of not being invested in some of the world’s most dynamic companies. 

Time is your friend

Over the last 30 years the top performing asset class was US shares with an average annual return of 10.3 per cent. Australian shares (9.4 per cent) and listed property (9.2 per cent) were not far behind.iii 

And then there was cash. In a time of record low interest rates cash in the bank returned 2 per cent in the year to June 30, barely ahead of inflation of 1.6 per cent. The return was better over 30 years (5.6 per cent), but still well behind the pack. 

While it’s important to have enough cash on hand for daily living expenses and emergencies, it won’t build long-term wealth. 

There’s no telling what the best performing investments will be in the next 12 months, as past performance is not an indicator of future performance. What we can be confident about is that a portfolio containing a mix of investments across and within asset classes will stand the test of time. 

If you would like to discuss your overall investment strategy, please give us a call on 03 5120 1400 and speak to one of our advisers.

i https://static.vgcontent.info/crp/intl/auw/docs/resources/2019_index_chart.pdf?20190730%7C193023?

ii https://www.corelogic.com.au/sites/default/files/2019-07/CoreLogic%20home%20value%20index%20JULY%202019%20FINAL.pdf

iii https://www.vanguardinvestments.com.au/au/portal/articles/insights/mediacentre/stay-the-course.jsp

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Positives and negatives of gearing

Negatively gearing an investment property is viewed by many Australians as a tax effective way to get ahead.

According to Treasury, more than 1.9 million people earned rental income in 2012-13 and of those about 1.3 million reported a net rental loss.

So it was no surprise that many people were worried about how they would be affected if Labor had won the May 2019 federal election and negative gearing was phased out as they had proposed. With the Coalition victory, it appears negative gearing is here to stay.

While that may have brought a sigh of relief for many, negative gearing is not always the best investment strategy. Your individual circumstances will determine whether negative gearing is advisable. For many, it may pay to positively gear.

So, what is gearing?

Basically, it’s when you borrow money to make an investment. That goes for any investment, but property is where the strategy is most commonly used.

If the rental returns from an investment property are less than the amount you pay in interest and outgoings you can offset this loss against your other assessable income. This is what’s called negative gearing.

In contrast, positive gearing is when the income from your investment is greater than the outgoings and you make a profit. When this occurs, you may be liable for tax on the net income you receive but you could still end up ahead.

While negative gearing may prove tax effective, it’s dependent on the after-tax capital gain ultimately outstripping your accumulated losses.

The importance of capital gains

If your investment falls in value or doesn’t appreciate, then you will be out of pocket. Not only will you have lost money on the way through, but you won’t have made up that loss through a capital gain when you sell.

That’s the key reason why you should never buy an investment property solely for tax breaks.

But if the investment does indeed grow in value, then as long as you have owned it for more than 12 months you will only be taxed on 50 per cent of any increase in value.

When it pays to think positive

If you are retired and have most of your money in superannuation, negative gearing may not be so attractive. This is because all monies in your super are tax-free on withdrawal. And thanks to the Seniors and Pensioners Tax Offset (SAPTO), you may also earn up to $32,279 as a single or $57,948 as a couple outside super before being subject to tax.

It makes more sense to negatively gear during your working years with the aim of being in positive territory by the time you retire so you can live off the income from your investment.

While buying the right property at a time of your life when you are working and paying reasonable amounts in tax may make negative gearing a good option, sometimes positive gearing may still be a better strategy.

Case study

ASIC’s “MoneySmartwebsite compares two people each on an income of $70,000 a year. They each buy an investment property worth $400,000, paying 6 per cent interest. Additional expenses are $5000 a year while the rental income is $500 a week.

Rod negatively gears, borrowing the full purchase price; Karen is positively geared with a loan of $100,000. In terms of annual net income, Rod who negatively geared is worse off than if he had not invested in a property at all, with net income of $52,868.

Positively geared Karen ended up $10,000 ahead, with net income for the year of $64,433.

Of course, if his property grows in value over time, Rod should ultimately recoup some or all these extra payments.

Claiming expenses

If you do negatively gear, then it’s important that you claim everything that’s allowed and keep accurate records.

For investment property, this includes advertising for tenants, body corporate fees, gardening and lawn moving, pest control and insurance along with your interest payments.

If you want to know whether negative gearing is the right strategy for you, then call us to discuss on 03 5120 1400.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Where is the best place to stash your cash?

If like many Australians you’re looking for ways to put some cash away for a rainy day, a holiday or to earn extra income, the job has just become a bit harder. It’s also become more urgent if you are expecting a handy tax return. 

In early July, the Reserve Bank cut rates to 1 per cent. Soon after, the Morrison Government got its tax package passed. As a result, those on incomes from $25,000-$120,000 got an immediate tax cut of up to $1080. 

So, whether you are looking to make the most of your tax cut or other savings, here are some suggestions. 

1.Throw it on the mortgage

For those who have a mortgage, tipping in a bit extra, especially in the early years, can save you substantial amounts. It can also shave years off the life of the loan, meaning you’ll enjoy the priceless peace of mind that comes with paying off your home sooner. 

Banks charge more for the money you’ve borrowed from them than the interest they pay on money you deposit with them. So, it may not make much sense to put money in a savings account paying 1.5 per cent interest when you’re paying 3.5 per cent interest on your home loan. 

Say you have a $400,000 loan at 4 per cent with 20 years to run. Using ASIC’s MoneySmart mortgage calculator, by increasing your monthly payments by just $50, you could save $6,146 in interest and shave 7 months off the term of the loan.i 

2. Up your super contributions

It’s hard to go past super as a tax-effective investment option if you are happy to lock your money away until you retire. 

Over the last seven years, while interest rates and inflation have been low, growth funds (where most Australians have their savings) achieved returns of 9.3 per cent a year after tax and fees, on average. ii 

You can make tax-deductible contributions of up to $25,000 a year into super, this includes your employer’s payments, salary sacrifice and any voluntary contributions you make. Once your money is in super it’s taxed at concessional rates. New rules also allow you to “carry forward” unused concessional contributions from previous years. Conditions apply so call us to see if you are eligible. 

Most Australians pay little attention to super until they are approaching retirement. That means they fail to harness the power of compounding interest to the extent they could have. If you’re a decade or two away from leaving the workforce with cash to spare, it’s difficult to find a better pay-off than the one you’ll (eventually) receive from channelling savings into super. 

3. Invest in shares

For longer-term savings, it’s tough to beat the returns generated by a share portfolio. Over 30 years to 2018, which included many ups and downs including the GFC, the average annual return from Australian shares was 9.8 per cent.iii Last financial year the total return from capital gains and dividends was 11 per cent.iv 

Whether you are just starting out or wanting to expand an existing portfolio, we can help you align your investments with your goals. 

If you would like to direct some extra cash into shares, there are now even “micro-investment” apps such as Raiz and Spaceship Voyager, which you can access via your mobile phone. 

4. Put it in the bank

Australia’s current inflation rate is 1.3 per cent. If your bank is paying you less than 1.3 per cent you are losing money. 

If you have a so-called high interest savings account paying you a standard variable rate of between 1.5-2 per cent, you’re getting a near negligible return.v Also be aware of high introductory rates that revert to the standard base rate once the honeymoon ends. 

Term deposits are currently paying around 2-2.25 per cent which is a bit better but not much.vi 

Despite these low rates, it’s wise to have some money parked in a savings account or in your mortgage offset or redraw account so that it’s available in case of an unforeseen expense. 

If you would like to discuss your savings and investment goals and how to achieve them, give us a call. 

https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mortgage-calculator#!how-can-i-repay-my-loan-sooner 

ii https://www.chantwest.com.au/resources/super-funds-on-the-brink-of-a-record-breaking-run 

iii https://static.vgcontent.info/crp/intl/auw/docs/resources/2018-index-chart-brochure.pdf?20180806%7C220825 (p4) 

iv ‘Year in Review’, CommSec Economic Insights, 1 July 2019 

https://www.finder.com.au/savings-accounts/high-interest-savings-accounts?futm_medium=cpc&futm_source=google_ppc~1659806132~61996044697~kwd-1281462095~saving%20accounts%20interest%20rates~e~c~g~1t2~~EAIaIQobChMIqpag-O-a4wIVjw4rCh18wwQrEAAYAiAAEgIMwPD_BwE&gclid=EAIaIQobChMIqpag-O-a4wIVjw4rCh18wwQrEAAYAiAAEgIMwPD_BwE 

vi https://www.finder.com.au/term-deposits

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