First Quarter Review for 2018

Global economic data remained encouraging during Q1, though after a long period of relative calm and upward movement volatility again reared its head in equity markets. While towards the end of the quarter the potential for trade wars heated up. In the US, economic data continued to be supportive. US business confidence reached a multi-decade high in March. GDP for Q4 2017 was revised upwards to show growth of 2.9%, and while industrial activity slowed – as measured by the ISM manufacturing index – it continued to indicate expansion.

The US Federal Reserve raised rates by 25 basis points in March, from 1.5% to 1.75%. It did not, however, alter its overall rate projection of three hikes for 2018. This announcement quelled some concerns, but escalating US-China trade sanctions precipitated a renewed bout of turbulence in March.

In the eurozone, GDP growth for Q4 2017 was confirmed at 0.6% quarter-on-quarter and unemployment stable at 8.6% in January 2018. However, forward-looking surveys painted a picture of slower growth. The composite purchasing managers' index (PMI) hit a 14-month low in March and annual inflation was 1.1% in February, below the European Central Bank's (ECB) target. ECB chairman Mario Draghi noted interest rates would not rise until the end of the quantitative easing program.

While UK economic growth remained sluggish, in its February inflation report the Bank of England nudged up its growth forecast for 2018, from 1.7% to 1.8%. There was further progress with Brexit negotiations, with an initial agreement struck on the terms of a transition period for after the UK formally exits the EU.

The Japanese economy experienced a soft patch in Q1 2018 with many indicators of production and consumption slightly slipping. The most pervasive influence came from the switch in US policy towards increased protectionism. Investors were also taken by surprise by a sudden change in stance of players engaged in discussions on North Korea's nuclear ambitions.
In Australia, the Reserve Bank left its own benchmark cash rate unchanged for a record equalling 18th consecutive meeting at 1.5%, pointing to strengthening economic growth alongside continued low inflation.

The Bloomberg Commodities index turned negative in Q1. Weakness came from industrial metals amid global trade tensions. While copper was particularly weak, down 8.3%, energy again recorded solid gains. Brent crude continued to rally amid confidence OPEC would maintain production cuts throughout 2018.

And The Overview for Australia

Asset Class Returns; the following outlines the returns across the various asset classes to the 31st March 2018.

It was a mixed first quarter for global equity markets in 2018, with an upsurge in volatility from the very low levels of 2017 a major talking point.

US equities began 2018 strongly, buoyed by ongoing strength in economic data, robust earnings and the confirmation of a major tax reform package. However, the latter part of the quarter saw a marked increase in volatility. Investors first digested the destabilising potential of an elevated US inflation reading and the possibility that the Federal Reserve (Fed) may need to become more proactive in raising interest rates in order to keep upward price pressures under control.

Eurozone equities delivered negative returns in the first quarter, with the bulk of the declines coming in March. Markets began the year on a firmer footing but worries about the path of US interest rates and the outlook for global trade led to declines for the period overall. Sentiment towards UK equities was poor as the FTSE All-Share fell 6.9%. Overseas buyers shunned the market amid ongoing political uncertainty and a weak outlook for economic growth.

After a strong start to the year, Japanese equities followed a similar pattern to other global markets and ended the quarter 4.7% lower. The heightened uncertainty resulted in a stronger yen against major currencies. Corporate results to December 2017 showed very positive trends.

Emerging markets equities registered a positive return in the first quarter, despite a rise in market volatility stemming from tensions over global trade. The MSCI Emerging Markets Index recorded a positive return and outperformed the MSCI World and although Chinese equities were volatile towards the end of the quarter, given rising trade tensions with the US, the market recorded a positive return and outperformed.

Australia was dragged down by its heavyweight banking sector as the potential impact of the Banking Royal Commission began to weigh. In sectoral terms, the other big losers on the Australian market were telecommunications stocks, utilities, REITs and energy.

If you would like to understand how any of the recent global activity has impacted you or would like to understand how investing can support you to reach your goals, give the Schuh Group Wealth Managers a call.

With thanks to DFA Australia for charts.
This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor's objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

This week's money in life series focuses on a topic that may bring up thoughts and feelings that we don't like discussing on a day to day basis. We don't like to think of dying but it is going to happen to all of us one day. So, when our time does come what is the legacy we are going to leave? We can look at a legacy in terms of 'something that is part of you, your history, that will remain once you have left this earth' and also in a material sense as 'the money or property that you leave behind when you die'.

Last week we spoke about the importance of how you spend your retirement and this in a way is going to contribute to the legacy of your history that you leave behind. Other things that will contribute to the legacy you leave will be how you made a contribution during your career, with family and friends and just in how you lived your life in general. Yes, this is a long topic for contemplation and maybe too in depth to cover off here. However, what we can look at – which is a touch easier – is the financial part of the legacy equation and the assets that you leave behind.

After you have spent a lifetime of work accruing your assets, you owe it to yourself to make sure that when they pass to the next generation you are doing it in a way that won't deplete all that hard work you have done and also to make sure that your assets go to the people that you want them to go to. Estate planning is an area that we feel is as important as any other aspect of our role here at Schuh Group.

We encourage all of our clients no matter what age to have current wills and enduring powers of attorney in place and we work with them to ensure that the contents of their will reflect what they wish to occur in the event of something happening. Outside of establishing your Will, the other area that we work with our clients on is how their Estate passes to the next generation. Depending on how your assets are structured there can be tax implications that can greatly reduce the overall value of the legacy that you leave behind. It is important to start looking at this pre-retirement so that you can put the best strategies in place to reduce any tax liability that may occur when your estate is distributed.

If you would like to discuss your current Will, Estate or any Retirement planning we are only an email or phone call away 07 5482 2855 .

Most of the information we are given about retirement is about our finances – will we have enough? What's the best investment strategy? What sized pension will we get? All of this is important, but it's only part of the real story. If you are nearing retirement or you are retired, you have been around long enough to realise that there's more to happiness than the size of your bank account. We realise that retirement, like most things in life, has both positives and negatives. These can be some of the best years of your life when you have the freedom to do what you want when you want and they can also be boring, frustrating and lonely.

Retirement is a big step for most of us. It may be a step taken after much thought and planning or an optimistic leap into the unknown. Given that the number of Australians transitioning into retirement will increase in coming years, it is important to understand about preparing for the transition, and what strategies are successful to ensure a good quality of life when you get there. While most of us plan pre-retirement, research findings also suggest that you should continue planning during retirement in order to promote your well-being and live a full and active life. Planning and reflection on what you want can help you work out whether you have the resources for a successful retirement. Even if you are already retired, continual planning can kick-start a conversation about setting new goals, trying new approaches or seeking help in particular areas that may have been overlooked. Here are our top tips for a terrific retirement:

1. Having a positive attitude towards your future

Your ability to 'roll with the punches' will dictate how you approach most areas of your future life. There are life changes that you can expect in retirement; both positive and challenging. In fact, sociologists have identified at least six separate "life transitions" that will affect most people as they move through their retirement life (which is why we say that retirement isn't one long life phase). Perhaps the greatest transition of all is the one that you see each time you look in a mirror and see yourself change. It is easy to forget that "getting older" is a physical issue, not a mental one. As Satchel Page once asked, "How old would you be…if you didn't know how old you are?"

2. A clear vision of the kind of life that you want.

When you think of the word 'retirement', what vision comes to mind? Is retirement a work issue for you, or maybe a financial and investment plan? Far too many pre-retirees make the mistake of thinking that the financial plan and the retirement plan are the same things. They think that the "life and living" part of retirement will take care of itself. This stage of your life deserves a more holistic look and plan than simply assuming that you are beginning a thirty-year-long weekend. What do you want your life to look like? What changes do you anticipate along the way? How will you get the most out of each and every day? Those are important questions as you contemplate your move into this next phase of your life.

3. A healthy approach to mental and physical ageing.

It is one thing to say that you want to be positive about the future. If that is true for you, then healthy ageing will be a major part of your retirement plans and lifestyle. While the ageing process is normal and affects us all in different ways, there are some things that we can all do to ensure that we "put time on our side" by looking after ourselves. Most people think that being healthy physically is the key to healthy ageing. In retirement, healthy mental ageing is just as important (and some would say even more so.) How much do you understand the basic principles of healthy physical and mental ageing? Are you doing something each and every day to nourish your need to use and expand your mind or to honour your body and do what you can to maintain your physical health?

4. A positive definition of 'Work'

Your work is the thing that you do to contribute your skills, experience, labour or knowledge to society in some way. It is also a way for you to "self-actualise" and create positive stress in your life. Even when you leave the traditional workplace, you will still have a need to share your workplace strengths and transferable skills. If you have a positive attitude towards the workplace, then the desire to have a retirement free from any kind of work becomes irrelevant. A wise person once said, "If you love what you do, you never have to work again!" By the way, work doesn't have to be full-time, it doesn't have to be something you don't like to do, and it doesn't even have to be for pay! Many retirees use volunteering as a way to replace the things that they miss most about their previous work.

5. Nurturing family and personal relationships

Our close personal relationships define us, give us a purpose for living our lives and encourage us to create life goals. We all have a basic need to share our lives, experiences and life journey with those closest to us. In retirement, our friendships and close relationships may offer us the validation that we may have received in the workplace. Those relationships give us the opportunity to "connect" on many levels with someone close and to share ourselves. Psychologists have identified our desire to share ourselves as a basic human need. This need is often satisfied in the activities that we enjoy with our spouse or partner, friends and family. Researchers have found that people in satisfying personal relationships have fewer illnesses and higher levels of good overall health. That's the clinical rationale. In real life terms, having people close to you who will share your life and be there for you will not only add to your overall life enjoyment but will also add years on to your life!

6. An active social network

As you get older, your social support network becomes increasingly important. You draw your social support network from a much broader social and friendship network. Successful retirees generally have robust social networks that provide them with friendship, fulfilling activities and life structure. As part of your retirement plan, you might want to think about the quality of the social network that you have today and your plans to build it. One of the lessons that we can learn about the ageing process is that our social networks begin to shrink–if we aren't continually adding to them. You can join clubs, meet new people and get out of the house to do new things. In retirement, you are going to want a lot of people who you can count on and it makes good sense to continue to seek out new opportunities to socialise.

7. A balanced approach to leisure

Leisure is a fundamental human need. We use it to recharge our batteries, to act as a diversion in our lives, to create excitement, anticipation or simply to rest and contemplate. Things change, however, when leisure becomes the central focus of our lives. Leisure, by its very nature, loses its lustre when it is the norm in our life rather than the diversion. For many retirees, the idea of leisure is associated with "not having to do anything". In the end, a lack of stimulation affects our mental and emotional state and then ultimately our physical well being. There is a big difference between "time-filling" activities and "fulfilling" activities that we look forward to. In retirement, leisure activities often replace workplace functions to meet the basic needs that we have. Successful retirees balance their leisure over many different activities and take the opportunity to do new things and not get into a rut.

8. Maintaining 'financial comfort'

Some retirees feel that a happy retirement is guaranteed by financial security. However, there is no price tag on successful retirement. As someone once said, "having a million dollars is NOT a retirement plan!" Financial comfort refers to being able to manage your life in a satisfying and fulfilling way using the financial resources that you have. If financial discomfort contributes to retirement stress, then your financial plan becomes a negative rather than a positive. The keys to achieving financial comfort are to have a clear understanding of the financial resources you have and the demands on your money that will come from the life you lead (both now and in the future). One good way to look at your financial situation in this next life phase is to think about the three "buckets" that you will have to keep filled in order to achieve financial comfort:

  • Your "essentials" bucket, which will pay for all of your basic needs
  • Your "lifestyle" bucket, which will fund those fun things that you dream of doing in retirement
  • Your "nest egg" bucket, which will fund any emergencies that may arise, provide you with a sense of security through good and challenging times and ultimately will form part of your legacy

  • A wise person once said "While there are lots of books available on retirement, the only book that really matters is the one that you write yourself!"

How to Help Your Kids Get Out on Their Own

A lot has changed since the baby boomers and older Gen X'ers were their children's age. Generally, back in their "younger years", they would not have found themselves living at home with Mum and Dad into their late 20's and possibly their early 30's. This trend to "stay home as long as possible" which is increasingly prevalent with many Gen Y'ers & Z'ers either choosing to stay at home or having to stay at home because of costs. Statistics cite that nearly 25 per cent of people aged 20 to 34 continues to live in the parental home in 2018 and that the trend is only going to increase.

So How Can You Help?

Well for many Gen X'ers and baby boomers with kids still at home (that maybe should have moved on a few years ago), it is really about helping your kids to "fly the coup" while also protecting them at the same time. So, let's look at some of the main reasons as to why children haven't left home and some tips on how you can best help them out of the nest and into their own place.

 Housing Affordability:
One of the biggest causes of "kids staying longer" is housing affordability – both renting or saving for a house deposit seem to be harder each year. We have seen property prices and rents escalate dramatically in some areas without the growth in wages to match. With this in mind, your goal needs to be to teach your children good savings habits from as young as possible. Living at home can create a sense in your children that they have a large disposable income, so money may be spent on non-essentials and entertainment. This is then a habit that continues through later life. Start by helping them create a budget with a savings plan included and support them to understand how to prioritise their spending and forgo (sacrifice) those items that are not necessary. It will be important for them to know that the accumulative effect that their daily coffee or weekend outing costs. If they're working, encourage them to save at least 20% of their weekly income into an account they can't easily touch.

University Fees and Living Costs:
University fees and the cost of living whilst at Uni is also another reason why children are staying in the nest longer. Hopefully, if you do have an adult child living at home they are doing a little bit of work to help supplement their living expenses. If they aren't it may be wise to give them a push in that direction. As much as it may pain you to talk about it, now is a good time to start educating your children on personal finances. We suggest that you talk to them about the monthly expenses you are paying on their behalf and the student loan that they are accruing. Talk to them about reducing any debt they've accumulated and discussed interest rates with them, pointing out they should be paying off the highest interest debts first. Whilst they may not want to pay much attention at this time in their lives, the goal is that when they finish university they will find a job and be faced with managing their own finances so by ensuring they are in the know you are going to help give them a flying start when they're off on their own.

Job Security:
Lastly, job security also plays a strong role in why kids are staying longer. From not being able to find a job after university to becoming unemployed through restructuring or redundancy, loss of income is not just an emotional time for those involved it also creates socio-economic limitations. The important key to helping your kids if they are out of work and struggling is to remind them that periods of unemployment happen, but they need to "bounce" quickly and get back out there. And be sure to not sacrifice too much yourself. You are also at a stage in life where you should be creating wealth for retirement, meaning your support for them must be balanced with your own goals at this time. If they are making a little money, ask them to pay some rent and then agree on some responsibilities such as cooking dinner, cleaning and washing that they can do to help out. You are not a hotel, and the responsibility will also help them to stay on track and get back to work faster. Give them a timeframe on how long they can stay back at home, make this realistic but not too long. We have all had dreams of becoming rock stars or the next Warren Buffet but sometimes career expectations need to be managed. Giving your kids a timeframe on how long they can stay will put boundaries in place and give them an understanding of what is needed right now. With work, it is generally easier to get a new job when you already have one.

Across all circumstances, it is important to share the responsibility of living with your children – financially, emotionally and practically. Be transparent and honest with them and support them to understand money so that they can make better decisions.

We hope you have found some useful tips in this week's "Money in Life" series. Remember we are only an email or phone call away if you would like to seek advice on how to help plan your family's wealth now and into the future.


Tax Tips to Save You More

Are you wondering whether you'll be paying too much tax this financial year? Minimising your tax where legally possible is a big part of your current and future wealth creation, not to mention that it's a smart thing to do.

If you're unsure about how you're traveling this year, don't leave your tax planning to the last minute. Consider getting a set of interim reports prepared by our office, which will show you exactly how your profit and income levels are tracking. If it's looking like you'll have a handsome tax bill after June 30, then now is the perfect time to arm yourself with information and do something about it. A set of interim accounts can be prepared to the end of March 2018, which then gives you a further three months before June 30 to get organised to make any changes necessary. We sometimes hear that the cost of the interims puts people off having them prepared, but in many cases, the cost is a minor expense if we can save you thousands in money you would otherwise be giving to the ATO.

The main tips to consider in the lead up to tax time are:
1. Consider superannuation contributions as a great tax deduction. For those under 75 and still working, a concessional contribution of $25,000 is available, and you'll only pay 15% tax on that amount of money, compared to your potentially higher personal tax rate.
2. Is your depreciation schedule up to date? If you've got business assets you can be claiming depreciation on, make sure these are listed and all up to date in order for your accountant to maximise any claims.
3. Prepay interest. If you've got borrowings, you may be able to pre-pay an amount of the interest, thus claiming that expense in the current financial year.
4. Consider making a charitable donation. Not only will you be able to claim the expense against your income, you'll also be making a difference for others.
5. The $20,000 instant write off is still with us, but not for long. If you buy an asset and it costs less than $20,000, you can immediately deduct the business portion in your tax return. The $20,000 threshold applied from 12 May 2015 and will reduce to $1,000 from 1 July 2018, so get in quick if you're thinking of buying something.
6. Look to write off bad debts if you won't be getting them back in the current financial year.
7. Pay your staff super on time if you'd like to claim the deduction for this. If you happen to leave the last quarter's payment until the next financial year, you won't be able to claim it.

So put some planning in place this year and get in early. We're here to help with all of your tax planning needs, and we'd love to help you where we can. To minimise your tax bill this year, give us a call today.

Franking Credits; What You Need to Know

You may have read in the media over the last week that Labor has announced that it would abolish imputation credit cash rebates for shareholders under Federal Labor's latest tax policy were it to be elected at the next Federal election.

Franking and Refunds Explained
Dividend imputation was introduced by the Hawke-Keating Labor government in 1987, to prevent so-called double taxation of company profits. This meant that shareholders did not need to pay tax on their dividends, for which the company had already paid tax.

But there was a shift in 2000, when the Howard-Costello Coalition government amended the policy, making it more generous for SMSFs and self-funded retirees - a policy which still exists today.

The effect of this change is that shareholders who pay no tax - or pay a lower rate of tax than the company (30 per cent) - can convert excess franking credits into cash refunds from the Australian Taxation Office. When companies pay dividends, they can include franking credits (or imputation credits) for shareholders who can then use it to offset their personal tax. Without franking credits, companies would be taxed on their profits, and individual shareholders would then be taxed on those same profits. If it is introduced in July next year, as Opposition Leader Bill Shorten hopes, it will be a massive change to the dividend franking system that was introduced by Paul Keating in the late 1980s and extended to include refunds for low rate taxpayers by John Howard nearly 20 years ago.

What Would This Mean For You?

The people most affected by Mr. Shorten's proposals will be individuals who pay little or no tax, given that the ability to use franking credits to offset taxable income will remain intact. Anyone whose tax liability is greater than the franking credits to which they would be entitled will not be affected. This includes members of large superannuation funds. Pooled, or traditional, super funds pay tax at the entity level and have sufficient tax liabilities across the fund, such as contributions and capital gains tax, against which the franking credits can be offset. This is the case regardless of whether the saver is still adding to their super in the accumulation phase or drawing a private pension.

And yes it does mean that fund members with pension accounts are effectively subsidising members with accumulation accounts.
The problem that self-managed super fund trustees find themselves in is that if they have a pension account – which by definition was commenced with less than $1.6 million of assets – they have no taxable income that can be used to offset the franking credits. Individuals who have reached the age pension age and are able to earn up to $29,000 tax-free under the seniors and pensioners tax offset (SAPTO) rules will also be affected.

Under the current system, of course, if these groups of investors own fully franked shares, they are able to claim a refund from the Tax Office for a sum that is equal to the amount of tax paid by the company. This can add between 10 per cent and 20 per cent to the amount of income derived from a share portfolio. Some commentators are saying that these changes if introduced would follow rather too quickly from the January 2017 changes to the means testing of the age pension. Those changes cut 100,000 retirees off from the age pension altogether and reduced the amount of age pension 300,000 more individuals were entitled to. The political argument about the policy centres on who would be most affected and how well off they are. Labor's policy said it would be wealthier retirees who are most likely to claim cash refunds because share ownership is highly concentrated amongst wealthier households. Opposition Leader Bill Shorten said half the benefits of the total benefits of the cash refund scheme go to the biggest 10 per cent of super funds which have balances above $2.4 million.

Finance Minister Mathias Cormann said Labor could not claim no-one would pay more tax when the policy raises $59 billion over 10 years. Senator Cormann called it a $59 billion tax hike. "More than a million retirees, many of them pensioners or part-pensioners, will pay more tax under this proposal," Senator Cormann said. The Opposition said its policy had been costed by the independent Parliamentary Budget Office (PBO). The ALP would not release the costing, but said the PBO found that the policy would save $11.4 billion in 2020-21 and 2021-22. Labor said charities and not-for-profit institutions, including universities, would be excluded from the change. The new system would start in July 2019 if Labor was to be elected at the next Federal Election which should occur early in 2019.

If you would like to discuss any financial options with the team, we are always just a phone call away

Financial Checklist For 'Empty Nesters'

Well, they've finally left the nest and now you're trying to get reacquainted with your spouse! The kids leaving home can either give you a great sense of freedom or leave you struggling to find other activities to fill in your time. Either way, it's the perfect time to review your financial plans and set yourself on course for the next stage of life.

It's important to do some planning around this stage, as it's also a time when we see many people making major financial mistakes. This can manifest in a few ways – either blowing the spending budget on lavish holidays or regular dinners out or finally launching into a major house renovation that unfortunately sets you back for years. Examine again what's important for you and plan a smart strategy to move ahead. Here are some tips to help with this phase:

1. Check in on the retirement savings.
Even though you'll feel like you can only just put your head above water now, consider how many more years you'll want to work for and what you'd like your retirement income to look like. It may be an ideal time to increase that salary sacrificing into super, and finally clear that mortgage once and for all.

2. Re-evaluate your cashflow
Now that the kids are gone, you probably don't even have to buy as much food! We'd always suggest looking at your budget at least every two years, so make it a priority to get clear again on what your living expenses are. This will help you determine what surplus cashflow you have and where it would be best to direct these funds.

3. Cut the money cord between you and your kids
While you'll always want to be there for your kids, you're not doing them any favours by continuing to pay for their expenses or to give them money. Give your kids the gift of financial independence and encourage them to take care of this area on their own. You also don't want to drain your own retirement position by having to pay for things that your adult children are now more than able to cover themselves. Stop doing their washing, buying them food or paying the phone bills – they can do it themselves now!

4. Reassess your insurance needs
Now may be a perfect time to reduce the amount of insurance you're holding if your family needs have changed. Insurance is not meant to be something you hold forever – it's a tool to ensure the family position is stable when an unforeseen event happens. If your asset position has improved, you may not need as much cover as you did once upon a time.

5. Check in on your estate plan
Now that the kids are grown up you may have noticed that some of them are more financially able than others. You may also want to name one or some of your children to act in estate roles, such as being a backup executor for your Wills or as a second power of attorney. Also, consider how much you may like to leave your children and what you need to do now in order to make that a reality.

Your transition from active parent to empty-nester can be a challenging one, but with smart financial moves to guide you, it can be a joyous one, filled with new opportunities and new challenges. And to help all of our clients in this transition phase we will be holding one of our Retire Right nights in the coming months. The Retire Right evening takes you through all of the areas you need to consider and provides you with a solid understanding of your options for investment, saving and retirement funding, so that you can live your future the way you choose and maybe leave a bit for the kids too!

If you would like more information on the next Retire Right night near you, register here.

Planning for kids with particular focus on those expensive school years is the first practical thing you can do to ease the burden of your children's education. So for all of you, "Gen Yers" starting to have kids, this week is for you! 

Some important questions you may want to consider are:

1. How much will my children's education cost?
2. How do I invest for my children's education?
3. When should I start investing for my child's education?
4. What types of savings plans are available?
5. Should I put investments in my child's name?

If you are thinking of sending your child to private school for some or all of their schooling, the fees could potentially be over $200,000 per child depending on the school you're considering. At the other end of the scale, whilst public schools are much cheaper there are still costs and fees involved (which at the time can be a big outlay from your budget). But, thinking about your children's schooling when they are born can help you plan for the type of education you're after.

Once you have worked out how much you need it is time to put a savings plan into place. There are a variety of investments you could use from high interest earning bank accounts to managed funds. What you choose as your investment vehicle should be dependent on the time frame you have to invest. If your child starts high school next year and they are going to go to a private school then a high-interest savings account may be your best option. If your child is only 1 and you are thinking of private school for their high school education then you have a longer time frame of around 10 years to save, so could look at an investment such as a small share portfolio or even an education bond.

When considering your child's education, don't forget to consider yourself. It's not all about them. If you have a mortgage it may be wise to offset the education savings account against the mortgage thus reducing your interest and helping you pay off the mortgage sooner. Discuss this option with your bank – you may be able to set up an entirely separate offset account or line of credit against your home that you regularly pay into.

If a savings account is going to be the best option for you, the regular savings amount is the most important factor. For example, starting with a $1,000 initial investment and adding $100 per week to it will give you around $29,000 to put towards schooling over a 5 year period, even with today's low interest rates. Stretched out over a 10 year period and that figure becomes almost $62,000.

If you go down the path of a small share portfolio, you should also consider whose name you are investing the money in. You may be able to invest in your child's name for a limited time as once they start earning larger amounts of interest the tax payable can be quite high. It may be more prudent to open the account in the parent's name with the lowest marginal tax rate or that of the parent that may not be working. The other option could be to set up a family trust for which you should seek specialist advice.

An option not to be forgotten is the investment or education bond, which may have tax advantages, particularly to those who are at a high marginal tax rate. These investments allow you to save regularly, earn a rate of return higher than bank interest, and withdraw the investment amount tax-free if you've held the investment for over 10 years. For a good long-term approach, this might be an option for some parents.

Our advice is to work out how much you may require for education costs, start early, chose the right investment vehicle for the timeframe you have, think about yourself and get the right advice!

We hope you have enjoyed this week's "Money in Life" series. Remember we are only an email or phone call away if you would like to seek advice on how to help plan your family's wealth now and into the future.
Well, we've arrived at our discussion for this week – the money side of things when you decide to get married. This milestone is a huge move in anyone's life, as it's a time filled with excitement around planning and moving onto a new phase. For many couples, the planning of the actual wedding and honeymoon take precedence over the boring and not as exciting task of the planning of the financial side of your future... However, just as important as the dress, the cake and the destination of that one big day, is the day-to-day realities of how you will plan, save and invest for times ahead.

Money can be one of the primary sources of disagreement in a relationship, and that is why before you say "I do", it is important that you and your partner take the time to discuss and agree on a "money plan." This includes understanding how tying the knot can impact your financial obligations and potentially affect how you structure your finances. Keep in mind, however, that finances and taxes can vary greatly depending on an individual's or a couple's specific situation. We recommend consulting a qualified professional to discuss your personal situation and get the best plan in place for you.

Here are five things to consider when it comes to how marriage and money can work together:

1. Understand what your relationship with money actually is for both of you. This is definitely a discussion you should have before you walk down the aisle, but research shows that couples who have a similar relationship with their finances generally stand a better chance of staying together. And this makes sense – if one person only likes saving and the other person only likes spending, it will be increasingly difficult to find a happy medium if there is no compromise. It's also worth talking about the financial education (or lack of it) you've grown up with because we're initially very much shaped by the way our parents handled their money.

2. Work out what combined living actually costs. If you're just moving in together for the first time, or if you're changing your living arrangements, there will be new and perhaps additional costs to factor into your budget. Think about your combined rent or mortgage repayments, car expenses, bills, and private health just to name a few. You may find that the cost of having two people under the one roof sends your combined spending either up or down, but getting really clear on this number is your best starting point.

3. Decide on a personal spending amount for each of you and keep it separate. One of our main cashflow strategies is to separate your weekly personal spending from your other money that's used for bills, investments, and savings. Transfer your weekly spending amount to your spending account and use this money to cover gifts, dining out, transport and groceries – all the day to day spending. This works for couples because you each have your own allocation of personal spending deposited into your individual bank accounts, and you each have discretion over how you spend your weekly allocation. Just try and stick to the determined amount! Then with your remaining cash flow, you can set up automatic payment of bills and invest for your goals.

4. Set your goals together. If you're wanting financial success, you both need to know what you're saving and investing for in order to stay motivated, and also to ensure you don't dip into those savings. It's so important to set those investment goals together so that you're aligned and both planning for the bigger picture. When two people are on different pages with what they're wanting form money, the outcome can be disastrous and lead to regular conflict. Get clear on this from the start and put a plan in place together. Being accountable to each other for working towards your plan will also give you a better chance of reaching this.

5. Update your Wills. Getting married actually cancels any previous Will that you already had in place, so make sure you visit your solicitor soon after to get another one done. If you, unfortunately, passed away before having done this, you'll be deemed to have died "intestate" (without a Will), which makes estate planning a lot more complicated and time-consuming for the remaining spouse. Also, revisit your nominated beneficiaries on your super funds. Remember that a spouse can receive a super benefit tax-free, which may also include some life insurance if your super has a policy in place.

We hope you have enjoyed this week's "Money in Life" series and remember we are only an email or phone call away if you would like to seek advice on how to help grow your wealth now and into the future.

The Volatility Beast Returns in 2018

Well, there it is. The correction that we've been told has been coming every month since January 2017, finally arrived. Over? Probably not, but it was needed.

Needed? Yes needed. Nothing in life comes for free. 2017 was an extremely rare year where the entrants enjoyed a free pass to the park and none of the rides had any bumps, jumps or scares. The biggest decline happened early in 2017 and then equity markets happily chugged upwards. How should you deal with the correction we've had in recent weeks? Ignore it. Like all downward movements, there are the regular tea leaf readings, inferences about past crash behaviour being an indicator of the future, along with the unveiling of scary stats and charts reminding us of uncharted territory. In other words, we're expected to believe it's eerily similar to 1987, 2008 and the great depression, but it has the possibility to be much worse!

The first Friday in February saw the fall on the Dow Jones being 665.75 points. Rounding up it was 666 – the devil's number and apparently to some that were a harbinger of hell about to be unleashed. Unlikely. The Tuesday following's fall was 1175 points and to put the fall in some sort of perspective, the Dow Jones wasn't even worth 1175 points until April 1983. 35 years later the whole weight of that index is a 4.6% daily loss!
Could a correction become a bear market or a crash? This is always possible, however, the time has shown almost no corrections go further to become crashes. Given enough time, most turn into buying opportunities. As one of our favourite charts shows (now updated through to the end of 2017), on average, the ASX portion of a portfolio will get bashed downwards 12% every year, but 75% of the time (since 1985) you're still getting a positive return for the overall year. In addition, you can expect three 5% declines in any one year.

It's usually a recession that sets off serious bad times in equities. So why are sharemarkets tumbling when we have the opposite economic conditions in the world's biggest economy? It's because investors are starting to realize what that growing economy means – inflation and more interest rate hikes.
Rates fell to historic lows in the financial crisis and have only recently started to rebound, although not yet in Australia. Low rates make investors turn away from fixed interest and cash to embrace shares. With rates rising, shares become less attractive. At the same time, an expanding economy means companies can expect greater long-term growth and corporate profits remain robust. While President Trump's giant corporate tax cut hasn't even worked its way into the equation yet.
As usual, if the rough times aren't over, don't sell the good stuff that has served you well in hopes of avoiding the market carnage. If you are inclined to, remember there is no way you'll know when to buy again. Despite a correction often being the best time to buy, most investors don't have the fortitude to don their floaties and enter the choppy water to grab a bargain.
As for the headlines, you'll note they still haven't become more inventive: "50 billion wiped off the market". While we're still waiting for "50 billion wiped on the market". And while the market falls led the news earlier this month, during 2017 the US markets had 12 consecutive months of gains and Australia had 10 positive months. Reporting on any of this good stuff was still relegated to the business section. It's partially why we feel the loss more than the gain. Though the downside happens significantly less, it's afforded significantly more attention. Last year was an anomaly with the markets. Now it's normal programming.

Starting a family, whether planned or unexpected is a time of great joy and for most some fear, panic and overwhelm. Bringing children into the world will generally bring with it quite a large change to your existing financial position and presents its own unique set of challenges and considerations.

There are differing figures all over the internet about the cost of raising a child in the Twenty-first century and some of them can be quite daunting. From $233,610 to raise a child born in 2015 to the age of 17, up to $406,000 to raise a child back in 2013. Regardless of the figure, the fact that remains is that having a child and being able to comfortably support them, continue to live your life and ensure that you have adequate protection in place requires planning and consideration. Below are some tips and also some questions you need to ask yourself when starting a family:

1. To start saving for a baby you might need to consider if you need to cut down on some expenses, especially if you don't have much of a budget surplus and savings plan already in place. This will also be good practice if you are going to stop working once your baby is born and particularly if you are going to take unpaid maternity leave for any length of time.

2. Adequately assess what items you may need to buy in advance. This could be things for the baby's nursery through to upsizing your car or making renovations to your home or moving to a bigger home or unit if you rent.

3. Prepare a budget and try to stick to it during the 9-month period. This will ensure that you have enough funds to pay for the extra baby items you'll need when they arrive. Once they arrive it will be important to sit down and review your budget regularly based on their needs and requirements.

4. Research what parental leave you are entitled to with your employer. Ask the questions "how much time do I get off?" and "how much will I be paid and how long for?" This will help you to decide if you need to increase your savings before having a baby. If you decide you don't want to go straight back to work once your paid entitlements end you will need to assess how much you will need for the length of time you take off and then budget and save accordingly.

5. Look at your health insurance, does it cover the birth costs for your baby? Will you be able to have your baby where and how you want to? Will your current health insurance cover your little one when they are born, or do you need to update it?

6. What will happen if something happens to you or your partner at this crucial time? Where will your income come from if you are unable to work and have a new mouth to feed? Make sure that you have adequate protection in place that will give you peace of mind if something did go wrong.

7. If you'd like to send your children to private school, start saving for that straight away. The cost of private schooling can be in the tens of thousands each year, so it's best to start building a nest egg for this cost as soon as the child arrives.

8. Do you need to update your Will? Having a child is one of those life events that require a revision and updating of your Will. You want to ensure that if something happens to you that your estate is in order and the people that need to benefit from it do. And don't forget to nominate a guardian for your child.

And remember, we are only an email or phone call away if you would like to seek advice on how to help plan your families' wealth now and into the future.

Buying a house has become somewhat of a dilemma for our Gen Y's and even potentially some Gen X's due to the increased price of housing, particularly in our Eastern capital cities. When you start thinking about buying a house it is important to be clear on what you can afford and then work backwards from there. 

When deciding on your "first house budget," begin with the facts and look at how much you can afford in terms of mortgage repayments, particularly if the house is going to be your primary place of residence. This will then help you work out how much you can borrow and what your deposit will need to be. There are some great calculators available on bank websites that can help you work this out.
Once you do this you will have a good idea of a purchase price that is affordable for you. The other option here is to go into your bank or give them a call and tell them you want to work out how much you could borrow to purchase a house and what deposit you may need.

Tip – With interest rates at an all-time low be careful not to over-borrow. It is important to think forward and be realistic in terms of what sort of impact an interest rate rise would have on your cash flow if you had a mortgage. Would a 1% rate rise put you under financial stress, could you handle the increase in repayments and still live comfortably?

The next big step is the deposit. Where is it going to come from? Are you going to have to save it or maybe your parents would be willing to gift you the deposit (or loan it to you) or they might offer to go as a guarantor to help you out. If you need to save then the first place to start is creating a budget. You would have received our budget planner last week and we have included it again this week in case you missed it. Using this template you will be able to work out how long it will take you to save your deposit based on your current surplus cash flow. From here it will be best to open a high interest earning account to save your deposit, it may be an idea to shop around and find an account that makes it harder for you to withdraw from whilst encouraging you to save – accounts like ING seem to have good parameters around this. Then it is all about getting into the habit of saving regularly for your deposit which will help you over the long-term as this is the exact same discipline you will need to apply when you're eventually paying down your mortgage. In the May 2017 Budget the Government announced a plan to save for a first home deposit through Superannuation called the 'First Home Super Saver Scheme' which has not been legislated as at January 2018 but it may be worthwhile to keep an eye on this as an option to give your deposit a boost. 

For some of the people reading this item, it may not be the first house you are buying and you may be considering purchasing property as an investment… Our tips here are to look at the rate of return that you would receive from the property. At the moment we are generally seeing around a 2% to 3% income return on residential investment property so unless there is a significant lift in the underlying value of the property, you may want to look at diversifying your investable funds into other asset classes such as shares. Diversification is a word you will hear us talk about regularly. Basically it is spreading your investible funds across different asset classes like shares, property, fixed interest or cash. The allocation that you put toward each of these asset classes comes down to the returns you are seeking and your level of comfort with risk. It is also important to look at the liquidity of your investible assets (how easily you can sell them) and the time frame you want to invest them for.

Tip – If you are looking at property as an investment option and are going to be looking at a buy/sell strategy, make sure you speak to your financial adviser or accountant about taxation issues such as capital gains tax and always take into consideration the fees associated with buying and selling property as this will affect your rate of return.

We hope you have enjoyed this week's "Money in Life" series and remember we are only an email or phone call away if you would like to seek advice on how to help grow your wealth now and into the future.
"A budget is telling your money where to go,
instead of wondering where it went..."
John C. Maxwell

Sometimes it happens at 15, for others, it is 17 or maybe a bit later around 19 or 20. No matter when it happens, it is an exciting, daunting significant milestone. It is your first job! Entering the workforce for the first time is an exciting step for any young person. It brings with it the unmistakable sense of independence – you now have your own money and you can make decisions about what you do with it – and freedom (did someone say shopping?!).

The seduction of money is in the instant gratification of what you can buy with it now. From clothes and accessories to cars and technology… The allure of "things" can be great, and the consideration for long-term wealth is often forgotten with a mantra of "YOLO" (You Only Live Once). However, your first job can also become the foundation of greener pastures and long-term sustainable wealth (someone say, early retirement and travel?). The key to getting ahead is understanding where you are going, how your money can work for you and exactly where your money is going – is it being invested or wasted? The following tips outline the key considerations for anyone new to the workforce (who is keen to get ahead):

1. Get Clear on Your Super
Being from Gen Z (oh to be young again) you may not yet have discovered that it is a legal requirement that your current employer invests a portion of your wages from each pay-check until you reach retirement. This investment is called Superannuation. Over a lifetime in the workforce, your regular instalments of Super can really add up and if planned for effectively and tracked can serve to ensure you enjoy a comfortable and enriching retirement. It is really important to understand what your Super is doing and keep track of it from the beginning. Make sure you've only got one Super fund and that your employer is directing their required payments just into this fund and not another one they've set up for you. Given you'll have a long investment timeframe ahead of you, set your investment choice to a high growth option. This will give you a better chance of getting a higher rate of return on your Super money, and over a 40 year period, an extra percent or two in return makes a huge difference. Put a nominated beneficiary in place on your Super fund. This is nominating where you'd like to direct your Super if you die prematurely, and given there will likely be a life insurance component, there will be a decent amount of money to direct. Supplement your Super personally for a big impact. If you nominate even $20 of your own money each pay-check as a Super Contribution, this amount will compound the effect of your investment and make your returns bigger.

2. Allocate Your Weekly Spending
Now that you're earning more money, you'll also be spending more. Get into the habit early on of splitting up your money into these categories:
Take the time to work out what your weekly allowance will be for those daily expenses that can't be avoided, such as rent, board, groceries, public transport, car costs, fuel etc. (these are your general living costs) and set up a separate bank account for this allowance to go into. Then, set up another different account to receive a nominated personal spending allowance each week. This is the amount you can spend guilt-free on whatever you want – think shoes, clothes, computer games, entertainment (like going out or to the cinema). Lastly, the rest of your money should be allocated to savings and investing and transferred to another account. An aside from this can be an allocated saving into a separate account for bills, but it's vital to be working on your savings from the get-go. Once you have some surplus in this account you can begin to learn about different investment opportunities such as shares – which only need a small amount of capital to start investing. When you start early and take small steps often, you will find that your portfolio will progress quickly set you up early for a prosperous future.

3. Protect Your Income With Income Protection Insurance
Lastly, it is important to understand what protection is available and how it supports you. It won't take long for you to enjoy the benefits of having your own money from your first job, but it's never too early to protect your new found independence in case something happens (accident or illness) and you are not able to work. For a young person, the cost of insurance is relatively low and the benefits in case of emergency are worthwhile, so take the time to research your options and protect your greatest asset – yourself.
If you or someone you know is new to the workforce or would simply like to understand how to use your money to serve you better, contact us today for an obligation-free chat – we'll buy the coffee!

Why You Need a Will as Soon as You Turn 18

When was the last time you sat down and thought about your estate and how it might be distributed (help those you love) when the time comes?

We understand that for many people, thinking about their estate is daunting and emotional. However, it is important to understand and ensure that your assets – the things that you have worked hard to attain – are left to the people you want to have them. It is important that you ensure your legacy is able to be provided efficiently for those that you love and it is important that you understand any tax implications too. Effective planning ensures that you leave your financial house in order and it happens now, today, while you are in a place of wellness and stability. We don't offer legal advice (we do know great lawyers though that can help), we are here to help you understand the impact and importance that your assets (legacy) can have and work with you to make the most of them!

The truth is that life is unpredictable and you do not know when things might change. It is for this reason that we believe it is never too early to plan for a safe tomorrow. The easiest way to do this is with a Will. From the day someone turns 18 having a Will, will ensure that no matter what happens their wishes are heard.

Why 18? Well, chances are an 18-year-old will have a superannuation fund with an amount of life insurance in it, and this will need to be allocated as well as any personal items or sentimental pieces. Regardless of age, we all have items that if the worst was to happen we would want to go to those closest to us. Without a Will, all belongings and possessions including Assets will be distributed by a public trustee – a stranger – who doesn't know you or what you want. Why leave it to chance, when you are only YOUR WILL away from ensuring what you want happens. To ensure you are protected and ready for the future no matter what happens to consider the following and start today:

1. Do you have a valid Will that is regularly reviewed? When making a Will, consider who you would like to act as your Executor. Make sure the person in this role knows something about your financial position and what your wishes are.

2. Do you have children under 18 who need a nominated guardian? Consider who would be best to take care of your children.

3. Do you have children from a previous relationship? In most cases, these children need to be provided for in order to reduce the risk of an estate being contested.

4. Have you considered an enduring Power of Attorney, which lets someone act on your behalf if you lose the ability to make decisions for yourself? If you don't have one in place, in the unfortunate event of not having the "capacity" to maintain your affairs, control of your assets may pass to a government body such as The Office of the Protective Commissioner.

5. And don't forget your Super! Binding nominations are effective choices as to which beneficiaries receive your superannuation entitlements and in what proportions. Please note that if these nominations are not kept up-to-date, you could find your super money is distributed in the way you had not preferred. Your superannuation assets don't always automatically fall into your estate

6. Have you considered Testamentary Trusts? These trusts are formed on the death of a person if they have specified for this to happen in their Will. The main benefits of testamentary trusts are their ability to protect assets and to reduce tax paid by beneficiaries from income earned from the inheritance.

Wills will range from simple in nature to complex, depending on the Asset level and wishes of the individual. Regardless, it is important to take the time to consider what you want, speak with a professional and then plan how you would like your Estate distributed as it represents your lifetime of effort. If you are ready to secure how your future legacy will serve the ones you love, we are happy to help at any time with an obligation free assessment of your Estate and Will. Or if you would just like to chat over a cuppa about the options you have simply call us today or book here!

Hello and welcome to 2018!
Firstly, we would like to wish all our clients and friends at Schuh Group a very happy and prosperous year ahead. We would also like to share with you how we will be focusing on supporting you further this year to ensure that you, your family, employees and friends have the information and resources to take positive action around your finances in life & business.

We are passionate about giving you the right information so that you can make decisions that are right for you and your family now and in the future. As the old proverb says "it's not about your resource it's about your resourcefulness." In 2018, we will be sharing the best information we have around all things Money, Life and Business (and how they work together) to support you at every stage of the game, no matter what you have or where you are starting, we are dedicated to helping you move forward.

So, what that will look like for you is a change to the weekly mail-out we do.

Instead of just sharing the market update and other bits of news, we will provide you education around specific areas such as Superannuation, saving for a first home, how to educate your kids to save and more. We will also cover the basics and go deep on various business focuses such as tax minimisation and structures, and we will ensure that you are always given the latest updates (legislative, tax and alike) to make you compliant. Beyond this we will also provide you will tools and templates to download, that will support you to better manage, think about and share your financial goals and aspirations with others. So if you are a parent wanting to support a child move forward and buy their first home, or you are looking to enter the investment market, need to effectively plan for retirement or want to give your staff the low-down on how Superannuation can benefit them – we have you covered!

It became glaringly apparent to us about twelve months ago, when we welcomed a new addition to the Schuh family (the much loved and darling niece and granddaughter Adella below), that finances is about family and beyond profit and loss, having good financial health is about creating security so that you can enjoy the things that matter. We also realised that true wealth is education and that education begins from the moment a child is born as they watch what you do, why you do it and how you do it. So as we move forward this year, we are excited to further support you and yours on a journey to wealth that provides you with the freedom to enjoy the new additions and sleep soundly at night!

As the New Year is a great opportunity to put new habits in place that will give you the best chance of getting where you'd like to be with your money, right now is also the perfect time to set new goals. So, to kick off our new journey together, we suggest you take some time over the next days to consider the following: 

1. Am I happy with the amount of money I've saved or accumulated in the last three years?

2. What needs to have happened in my financial life over the next three years, for me to feel I've made good progress?

3. What are the obstacles getting in my way and slowing my progress down?

4. Will there be family life events in the future that I need to be planning for now?

The first step to change is having clarity. Taking time to reflect will provide you with the building blocks to move forward and achieve your goals and we are here to provide you with the coaching, strategy, and support along the way! We look forward to seeing and working with you in 2018

Book Your FREE Financial Health Check Now!

Yours in Wealth,
The Schuh Team

We Are Hiring!

January is a great time to buy a car. Car dealers all over the country will be clearing last year's stock at knock-out prices. So if you want to take advantage of the New Year car sales, get ready by talking to us about your finance now.

Why talk to us?
It's important that you get a car loan that's affordable, competitive and tailored to fit your personal financial circumstances and goals. Car dealership finance is not tailored to individuals – it's often locked in to the full price of the car and repayment terms can sometimes be too short for many people to afford.
So to make sure you don't miss out on a great car deal, ask us to help you organise your finance now. We'd love to help make your New Year a happy one.

This week, the share market has edged higher as the property sector was boosted by the $33 billion takeover of Westfield, and the consumer staples sector also rose. The benchmark S&P/ASX200 stock index was up 0.14 per cent at 6,021.8 points at 1630 AEDT, after a session in which the index moved within a narrow range. Shares in Westfield jumped 13.7 per cent to $9.66 after the company agreed on Tuesday to a takeover from Europe's biggest property giant that values its securities at $10.01. The retail sector was mixed, with JB Hi-Fi and Premier Investments posting small gains, and Harvey Norman and Super Retail Group modestly weaker. The Australian dollar is stronger due to improved sentiment in some metals markets, and a fall for the US dollar after the Democrats won the Alabama Senate race, which could have implications for the passage of US President Donald Trump's US tax reforms through Congress.

What this means for you:

The major news in our market this week is the sale of Westfield Corporation which will be taken over by European commercial property company Unibail-Rodamco. Under the deal, shareholders will receive $10.01 per share. They last traded at $9.66 when the market closed on Wednesday. The Westfield name will remain and while Mr. Lowy will step down as chairman, he will still chair an advisory board for the new company. Mr. Lowy and his two sons Steven and Peter will also still keep a $1,323,450,000 investment in the company. Westfield Corporation currently controls 35 shopping malls in the US and the UK. Its Australian centers are managed by Scentre Group, which is separately listed. While one big move by a company will dominate headlines for a few days, don't get caught up in trying to pick and choose the short-term movements of shares. Take a diversified position, and hang on for the long haul. As Warren Buffett has said, if you're not willing to hold an investment for at least 10 years, don't make it in the first place. 

At its final board meeting for 2017, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50 per cent.  Conditions in the global economy have improved over 2017. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy continues to be supported by increased spending on infrastructure and property construction, although financial conditions have tightened somewhat as the authorities address the medium-term risks from high debt levels. Australia's terms of trade are expected to decline in the period ahead but remain at relatively high levels.

Wage growth remains low in most countries, as does core inflation. Equity markets have been strong, credit spreads have narrowed over the course of the year and volatility in financial markets is low. Long-term bond yields remain low, notwithstanding the improvement in the global economy. Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high. Employment growth has been strong over 2017 and the unemployment rate has declined. Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. The Bank's central forecast remains for inflation to pick up gradually as the economy strengthens. The Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast. The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Behavioural Investing

When it comes to money and investing, we're not always as rational as we think we are – which is why there's a whole field of study that explains our sometimes-strange behaviour. Where do you, as an investor, fit in? Insight into the theory and findings of behavioural finance may help you answer this question. A lot of economic theory is based on the belief that individuals behave in a rational manner and that all existing information is embedded in the investment process. This assumption is the crux of the efficient market hypothesis. But, researchers questioning this assumption have uncovered evidence that rational behaviour is not always as prevalent as we might believe. Behavioural finance attempts to understand and explain how human emotions influence investors in their decision-making process. You'll be surprised at what they have found.

The Facts
In 2016 Dalbar, a financial-services research firm released a study entitled "Quantitative Analysis of Investor Behaviour", which concluded that average investors fail to achieve market-index returns. It found that in2016, the S&P 500 returned an average of 11.96% for the year, while the typical equity investor achieved only 7.26% for the same period – a startling 4.7% difference! Why does this happen? There is a myriad of possible explanations.

Regret Theory
Regret Theory deals with the emotional reaction people experience after realizing they've made an error in judgment. Faced with the prospect of selling a share, investors become emotionally affected by the price at which they purchased the share. So, they avoid selling it as a way to avoid the regret of having made a bad investment, as well as the embarrassment of reporting a loss. We all hate to be wrong, don't we? What investors should really ask themselves when contemplating selling a share is, "What are the consequences of repeating the same purchase if this security were already liquidated and would I invest in it again?" Regret theory can also hold true for investors when they discover that a share they had only considered buying has increased in value. Some investors avoid the possibility of feeling this regret by following the conventional wisdom and buying only shares that everyone else is buying, rationalizing their decision with "everyone else is doing it". Oddly enough, many people feel much less embarrassed about losing money on a popular share that half the world owns than about losing on an unknown or unpopular share.

Mental Accounting
Humans have a tendency to place particular events into mental compartments, and the difference between these compartments sometimes impacts our behaviour more than the events themselves. Say, for example, you aim to catch a show at the local theatre, and tickets are $20 each. When you get there you realize you've lost a $20 note. Do you buy a $20 ticket for the show anyway? Behaviour finance has found that roughly 88% of people in this situation would do so. Now, let's say you paid for the $20 ticket in advance. When you arrive at the door, you realize your ticket is at home. Would you pay $20 to purchase another? Only 40% of respondents would buy another. Notice, however, that in both scenarios you're out $40: different scenarios, same amount of money, different mental compartments. Pretty silly, huh? An investing example of mental accounting is best illustrated by the hesitation to sell an investment that once had monstrous gains and now has a modest gain. During an economic boom and bull market, people get accustomed to healthy, albeit paper, gains. When the market correction deflates investor's net worth, they're more hesitant to sell at the smaller profit margin. They create mental compartments for the gains they once had, causing them to wait for the return of that gainful period.

Prospect/Loss-Aversion Theory
It doesn't take a neurosurgeon to know that people prefer a sure investment return to an uncertain one – we want to get paid for taking on any extra risk. That's pretty reasonable. Here's the strange part. Prospect theory suggests people express a different degree of emotion towards gains than towards losses. Individuals are more stressed by prospective losses than they are happy from equal gains. An investment adviser won't necessarily get flooded with calls from her client when she's reported, say, a $500,000 gain in the client's portfolio. But, you can bet that phone will ring when it posts a $500,000 loss! A loss always appears larger than a gain of equal size – when it goes deep into our pockets, the value of money changes. Prospect theory also explains why investors hold onto losing shares: people often take more risks to avoid losses than to realize gains. For this reason, investors willingly remain in a risky share position, hoping the price will bounce back. Gamblers on a losing streak will behave in a similar fashion, doubling up bets in a bid to recoup what's already been lost. Investors often make the mistake of chasing market action by investing in shares or funds which garner the most attention. Research shows that money flows into high-performance managed funds more rapidly than money flows out of funds that are underperforming.

Investors get optimistic when the market goes up, assuming it will continue to do so. Conversely, investors become extremely pessimistic during downturns. A consequence of anchoring, or placing too much importance on recent events while ignoring historical data, is an over- or under-reaction to market events which results in prices falling too much on bad news and rising too much on the good news. At the peak of optimism, investor greed moves shares beyond their intrinsic values. When did it become a rational decision to invest in shares with zero earnings and thus an infinite price-to-earnings ratio (think dotcom era, circa the year 2000)? Extreme cases of over- or under-reaction to market events may lead to market panics and crashes.

People generally rate themselves as being above average in their abilities. They also overestimate the precision of their knowledge and their knowledge relative to others. Many investors believe they can consistently time the market. But in reality, there's an overwhelming amount of evidence that proves otherwise. Overconfidence results in excess trades, with trading costs denting profits.

Behavioural finance certainly reflects some of the attitudes embedded in the investment system. Behaviourists will argue that investors often behave irrationally, producing inefficient markets and mispriced securities – not to mention opportunities to make money. That may be true for an instant, but consistently uncovering these inefficiencies is a challenge. Questions remain over whether these behavioural finance theories can be used to manage your money effectively and economically. That said, investors can be their own worst enemies. Trying to out-guess the market doesn't pay off over the long term. In fact, it often results in quirky, irrational behaviour, not to mention a dent in your wealth. Implementing a strategy that is well thought out and sticking to it may help you avoid many of these common investing mistakes.


Tis The Season to Make Wrong Forecasts!

The year's winding down, so in the financial world that can only mean one thing – forecasts for next year.

Every mainstream media outlet will be putting them together over the next month because
A. people like lists; and
B. they're easy to string together.

The thing to always keep in mind: they're all worthless. There's no value that could be gleaned from forecasters who don't own working time machines or crystal balls.

The fun part comes from looking back because picks and forecasts are mostly made with impunity. There are so many of them that rarely does anyone ever get held to account. So a few of the clangers should always be highlighted to remind investors not to pay them any attention.

This time last year the Australian Financial Review published a 5000+ word opus: "The Best Choices for 2017: Equities". Surprisingly, despite suggesting it was important to pick carefully in the year ahead, for the most part, the article didn't offer up many picks. It did, however, allow analysts and managers to muse on the general prospects for various sectors in the year ahead: retail, infrastructure, energy, technology, healthcare, agriculture, mining, property, and banks. It named companies expected to do well but mostly stopped short of offering outright recommendations. 

However, in retail, while consensus was the sector would be subdued the suggestion was there would be some winners and losers. Leading to some necks being stuck out with explicit buy and sell calls made by Citigroup and UBS. With those names collected, it's time to see how well they've performed in 2017. The buys were Myer, Harvey Norman, JB HiFi and Super Retail Group. The sells were Woolworths, Metcash. 

So, how'd they fare? As the chart shows, had you done the opposite of all their recommendations you would have enjoyed a much better return than actually doing as they said. The four companies they recommended buys went into the red by a minimum of 16%, while the two sells gave positive returns:

From the buys, Citigroup was mostly positive on Myer, noting "we expect to see better-operating margins and positive sales trends even with the sluggish [consumer spending] backdrop." Yet it was the worst of the bunch, having fallen 47% year to date. The sell on Woolworths from UBS was reliant on the idea that price competition from food retailers may turn into a full-blown price war. In other words, a forecast on a possibility. Not exactly the most robust way to invest. Many of the forecasting articles follow a similar formula. It's always based on a perverted understanding of diversification. Where the investor needs to have a grab bag of shares from various industries. List each sector of the economy and pick the companies 'most likely to succeed' and because you've got a bit of everything, you're diversifying, right?

True diversification spans asset classes and countries. It's not reliant on whether Woolworths gets into a price war with Coles and Aldi, meaning your retail exposure should be elsewhere for that year. It allows you to remove your focus away from your portfolio and onto your life. For the media though, they need your eyes, while the analysts and brokers need you churning for a commission. So what you won't find the best choices for 2018 is the recommendation of a portfolio tailored to your needs with a minimum 10-year horizon.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation, and individual needs


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