It’s September and spring is here, providing a welcome lift in spirits. After some spectacular performances by our athletes at the recent Tokyo Olympics and Paralympics, hopefully you are inspired to achieve some personal goals of your own.
August provided mixed economic news, with central banks, business and consumers remaining cautious. In a widely-reported speech, US Federal Reserve chair, Jerome Powell said there remained “much ground to cover” before he would consider lifting interest rates, sending stocks higher and bond yields lower.
In Australia, shares and shareholders were boosted by a positive company reporting season. According to CommSec, of the ASX200 companies that have reported so far, 84% reported a profit in the year to June, 73% lifted profits and dividends were up 70% to $34 billion. One of the COVID “winners” is the construction sector. While the value of construction rose 0.4% overall in the year to June, the value of residential building was up 8.9% and renovations rose 24.5%, the strongest in 21 years. One of the COVID “losers”, retail trade was down 3.1% in the year to June.
While unemployment fell from 4.9% to 4.6% in July, full-time jobs and hours worked were lower due to the impact of lockdowns. The Westpac-Melbourne Institute index of consumer sentiment fell 4.4% in August while the NAB business confidence index fell 18.5 points in July, the second biggest monthly decline since the GFC. Wages grew 1.7% in the year to June, well below the 3% the Reserve Bank wants before it considers lifting interest rates.
Iron ore prices fell 18% in August, while the Aussie dollar finished the month weaker at US73.2c.
Investing lessons from the pandemic
When the coronavirus pandemic hit financial markets in March 2020, almost 40 per cent was wiped off the value of shares in less than a month.i Understandably, many investors hit the panic button and switched to cash or withdrew savings from superannuation.
With the benefit of hindsight, some people may be regretting acting in haste.
As it happened, shares rebounded faster than anyone dared predict. Australian shares rose 28 per cent in the year to June 2021 while global shares rose 37 per cent. Balanced growth super funds returned 18 per cent for the year, their best performance in 24 years.ii
While every financial crisis is different, some investment rules are timeless. So, what are the lessons of the last 18 months?
Lesson #1 Ignore the noise
When markets suffer a major fall as they did last year, the sound can be deafening. From headlines screaming bloodbath, to friends comparing the fall in their super account balance and their dashed retirement hopes.
Yet as we have seen, markets and market sentiment can swing quickly. That’s because on any given day markets don’t just reflect economic fundamentals but the collective mood swings of all the buyers and sellers. In the long run though, the underlying value of investments generally outweighs short-term price fluctuations.
One of the key lessons of the past 18 months is that ignoring the noisy doomsayers and focussing on long-term investing is better for your wealth.
Lesson #2 Stay diversified
Another lesson is the importance of diversification. By spreading your money across and within asset classes you can minimise the risk of one bad investment or short-term fall in one asset class wiping out your savings.
Diversification also helps smooth out your returns in the long run. For example, in the year to June 2020, Australian shares and listed property fell sharply, but positive returns from bonds and cash acted as a buffer reducing the overall loss of balanced growth super funds to 0.5%.
The following 12 months to June 2021 shares and property bounced back strongly, taking returns of balanced growth super funds to 18 per cent. But investors who switched to cash at the depths of the market despair in March last year would have gone backwards after fees and tax.
More importantly, over the past 10 years balanced growth funds have returned 8.6 per cent per year on average after tax and investment fees.ii
The mix of investments you choose will depend on your age and tolerance for risk. The younger you are, the more you can afford to have in more aggressive assets that carry a higher level of risk, such as shares and property to grow your wealth over the long term. But even retirees can benefit from having some of their savings in growth assets to help replenish their nest egg even as they withdraw income.
Lesson #3 Stay the course
The Holy Grail of investing is to buy at the bottom of the market and sell when it peaks. If only it were that easy. Even the most experienced fund managers acknowledge that investors with a balanced portfolio should expect a negative return one year in every five or so.
Even if you had seen the writing on the wall in February 2020 and switched to cash, it’s unlikely you would have switched back into shares in time to catch the full benefit of the upswing that followed.
Timing the market on the way in and the way out is extremely difficult, if not impossible.
Every new generation of investors has a pivotal experience where lessons are learned. For older investors, it may have been the crash of ’87, the tech wreck of the early 2000s or the global financial crisis. For younger investors and some older ones too, the coronavirus pandemic will be a defining moment in their investing journey.
By choosing an asset allocation that aligns with your age and risk tolerance then staying the course, you can sail through the market highs and lows with your sights firmly set on your investment horizon. Of course, that doesn’t mean you shouldn’t make adjustments or take advantage of opportunities along the way.
We’re here to guide you through the highs and lows of investing, so give us a call if you would like to discuss your investment strategy.
Salary packaging – worth the sacrifice
The principle of ‘salary sacrificing’ may not sound very appealing. After all, who in their right mind would voluntarily give up their hard-earned cash. But it can have real financial benefits for some in terms of reducing your taxable income, which could see you pay less at tax time.
As we nudge ever closer to the end of financial year, it’s worth taking a look at salary sacrificing to see if it’s a worthwhile strategy to put into place for you.
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. In essence, a salary sacrifice arrangement is when you agree to receive less income before tax, in return for your employer providing you with benefits of similar value. You’re basically using your pre-tax salary to buy something you would normally purchase with your after-tax pay.
How does salary sacrifice work?
The main benefit of salary sacrificing is that it reduces your pre-tax income, and therefore the amount of tax you must pay. For example, if you’re on a $100,000 income, you may agree to only receive $75,000 as income in return for a $25,000 car as a benefit.
Doing this would reduce your taxable income to $75,000 which could lower your tax bill because you’re essentially earning less as far as the tax office is concerned.*
This arrangement must be set up in advance with your employer before you commence the work that you’ll be paid for and it’s advisable that the details of the agreement are outlined in writing.
What can you salary sacrifice?
According to the Australian Tax Office (ATO), there’s no restriction on the types of benefits you can sacrifice, as long as the benefits form part of your remuneration. What you can salary sacrifice may also depend on what your employer offers.
The types of benefits provided in a salary sacrifice arrangement include fringe benefits, exempt benefits and superannuation.
Fringe benefits can include:
- property (including goods, real property like land and buildings, shares or bonds)
- expense payments (loan repayments, school fees, childcare costs, home phone costs)
Your employer pays fringe benefit tax (FBT) on these benefits.
Exempt benefits include work related items such as:
- portable electronic devices and computer software
- protective clothing
- tools of the trade
Your employer typically does not have to pay fringe benefits tax on these.
You can also ask your employer to pay part of your pre-tax salary into your superannuation account. This is on top of the contributions your employer is already paying you under the Superannuation Guarantee, which should be no less than 9.5% of your gross (before tax) annual salary, though this may rise in the near future.
Salary sacrificed super contributions are classified as employer super contributions rather than employee contributions. These contributions are called concessional contributions and are taxed at 15 per cent. For most people, this will be lower than their marginal tax rate.
There is a limit as to how much extra you can contribute to your super per year at the 15 per cent tax rate. The combined total of your employer and any salary sacrificed concessional contributions cannot exceed $25,000 in a single financial year. If you exceed the cap, you could be charged additional tax on any excess salary sacrifice contributions.
Most employers allow employees to salary sacrifice into super, but not all employers will allow salary sacrificing for other benefits.
Is salary sacrifice worth it?
Salary sacrifice is generally most effective for middle to high-income earners, while there is little to no tax saving for people who are already in a low tax bracket.
If you are a middle to high-income earner, then it may be worth considering salary sacrifice to reduce your taxable income and to take advantage of some of those benefits.
Before you do, make sure you talk to us so we can help ensure it is an appropriate strategy for your circumstances.
*Note: This example illustrates how salary sacrifice arrangements can work and does not constitute advice. You should not act solely on the information in this example.
Source for all information in this article: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Salary-sacrifice-arrangements/
Not feeling yourself? You could be languishing
Feeling a bit lacklustre as the days roll by? Hitting the snooze button more than usual? It’s a feeling that can be difficult to put your finger on, but it has a name, languishing.
Whether it’s feeling exhausted and unmotivated, or restless and eager to do more, we can be off kilter from time to time. It’s no surprise that many are feeling this way, as we continue to deal with ongoing uncertainty and snap lockdowns due to the pandemic. Knowing this is normal is important, particularly in the current circumstances, but we can also make changes to improve our overall wellbeing.
Flourishing vs languishing
Often, we think of good mental health as the absence of mental health issues, but as the diagram below shows, there is a spectrum between high mental health and low mental health.
While flourishing sits at the top, languishing is at the bottom.
Source: Dual continua model ( Keyes & Lopez , 2002)
You’re kicking goals at work, your relationships with family and friends are harmonious, you’re growing as a person – these are examples of flourishing. On the flipside, languishing can see you struggling to get out of bed in the morning, disengaged from your work, feeling negative about your relationships, or frustrated at not getting to where you want to be.
Called “the dominant emotion of 2021”, languishing has been described as if “you’re muddling through your days, looking at your life through a foggy windshield.”i
Moving towards flourishing
The pandemic has reminded us of how little control we have over external circumstances. While lockdowns are likely to remain in our near future and the way we work and socialise are impacted as a result, there are ways we can improve our outlook.
Take time out
Working from home and remote schooling has become a reality for many of us, meaning we are busier than ever. Scheduling in some time-out is crucial to being able to switch off and feel more refreshed. Even if it’s just a day spent not checking your email and doing something restorative, you’re prioritising self-care.
When you’re languishing, it can be difficult to get motivated, it’s not likely to be the time you embark on a new fitness regime, study or career move. However, starting small can make changes in your life while building motivation for you to make further changes.
Whether it is going for a morning walk each day, reading a book the whole way through or getting to one of those tasks on your to-do list, you’re taking a step towards flourishing.
Cut out the noise
Back-to-back Zoom calls, the 24/7 news cycle, pings of social media, the distraction of everyone being at home together – no wonder it’s hard to focus.
Tap into your ‘zone’ or flow, by switching off from external noise where possible to concentrate on one task at a time. When you’re in the state of flow, time flies by as you’re engrossed in an activity that takes your full attention.
Reach out for help
It’s also worth acknowledging when you need a helping hand. It may be delegating at work so you’re not feeling overloaded or having someone to talk to if you’re struggling through the day.
Mental health issues are on the rise due to the pandemic and there is no shame in asking for help – more than ever, Australians are reaching out for mental health support in these turbulent times to help stay on track.ii
Alex O’Neill and Plan Financial Solutions Pty Ltd (ABN: 44 648 985 479) are Authorised Representatives of Synchron AFS Licence No. 243313
Unless specifically indicated, the information contained in this email is general in nature and does not take into account your personal situation.
You should consider whether the information is appropriate to your needs, and where appropriate, seek personal advice from a financial adviser.