'Unretiring' retirees

 It could be called 'unretiring' if there were such a word. This is the practice of retirees making a decision to return to work.

Financial needs, medical advances and greater longevity are among the most obvious reasons why some retirees decide to try to make a comeback to the paid workforce. Another reason is that a retirement lifestyle may not prove as satisfying as perhaps envisaged.

In the depths of the GFC, such publications as Money Magazine in the US and Forbes magazine published articles about retirees returning to the workforce mainly to rebuild their then diminished nest eggs.

And long after the GFC, tens of thousands of Australian retirees clearly recognise the potential benefits, financial and non-financial, of an extended working life.

One of the most efficient ways to stretch retirement savings is to return to work (or to postpone retirement for a few years). By remaining at work, individuals have an opportunity to save more for what will be a shorter and therefore less costly retirement. Further, they do not have to draw down on their retirement savings as soon.

The Australian Bureau of Statistics has calculated the number of Australians who had fully retired but have since either returned to work or are planning to look for work.

Based on its 2012-13 Multipurpose Household Survey, the ABS reports that 191,200 retirees over 45 fell into in this category at the time of the survey.

The biggest reasons for coming out of retirement (or at least wanting to) are "financial need" (42 per cent) and feeling "bored or needing something to do" (30 per cent).

In practice, thinking about re-entering the workforce and actually succeeding in getting a satisfactory job can be two different things.

Generally speaking, people still in the workforce should find it easier to extend their working lives by several years than retirees attempting to "unretire".

A personal finance article in The New York Times this month - headed After years out of a job, older workers find a way back in - examines the challenges of people in their fifties and sixties finding a place back in the workforce.

The article quotes various human resources and career specialists about the importance of would-be older workers updating their skills, including technical skills, documenting those skills and then practising effective networking in their pursuit of a job.

Any decisions by retirees to try to return to work depends, of course, on such personal circumstances as the state of their health, availability of suitable employment and the adequacy of their retirement savings.

Counting the cost of 'grey' divorce

One of the saddest personal finance stories of the year is a recent piece in The New York Times about the growth of what the author calls "silver or grey divorces".

These divorces involve couples who have been married or in a de facto relationship for 30 years or so who make a decision to separate when close to their retirement or in early retirement.

The article quotes statistics from the National Centre for Family and Marriage Research in Ohio stating that people aged over 50 were twice as likely to divorce in 2014 than in 1990. And the increase was even higher for those aged over 65.

How does the Australian experience with grey divorce compare?

The latest-available divorce statistics from the ABS show that the rate of divorce among those aged over 55 has increased by 80 per cent for men and 68 per cent for women during the 20 years to 2013.

It should be emphasised, however, that the average age for divorce in Australia was 43.5 years in 2013 - up from 37.9 years over two decades.

Certainly, the rate of divorces becomes lower as couples age. Yet the statistics indicate that while divorce rates have tended to plateau for middle-aged and younger couples, the rate of divorce for those over 55 has risen.

Overall, ABS statistics based on marriages and divorces in 2013 suggest that more than 40 per cent of marriages will end in divorce. (Significantly, none of these divorce figures include de facto relationships.)

Sadly, one of the greatest destroyers of personal wealth is the breakdown of marriages and de facto relationships.

Separation means that a former couple's assets - including the family home, their superannuation and their other investments - are split. Solely from a retirement perspective, a relationship breakdown means that not only are retirement savings divided but each person has to pay for separate accommodation.

Many separated individuals, of course, can no longer afford to own a home. And the reality is that it typically costs much more to finance the retirement of two single people than a couple.

Further, it can be extremely difficult for separated older spouses to rebuild their retirement savings. And this task can be even tougher for an individual if his or her partner had much of the control over family finances during a long relationship.

With the rapid ageing of the population together with seemingly ever-increasing longevity means that the rate of divorces among retiring baby boomers is likely to keep climbing.

This expectation underlines the desirability maximising retirement savings while still in the workforce and for both partners in a relationship to save as much as possible in super.

Sound personal financial practices include preparing for the unexpected and gaining quality professional advice when appropriate.

The interest-ing facts about credit card debt

This article shows the astounding level of credit card debt owed by ordinary Australians. It uses the MoneySmart debt clock to explain the debt and associated interest and what it costs on the average card balance if only the minimum repayments are made. It is an excellent reminder of how expensive credit cards can be if not managed properly. 

There is a fascinating page on ASIC’s MoneySmart website. A “Credit Card Debt Clock” (https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock) that displays in real time how much Australians owe on their credit cards. When we started writing this article it was up to $31,591,800,000 in outstanding debt with an astonishing amount of around $5,313,800,000 per annum owed in interest! That’s over thirty billion dollars in credit card debt with an annual interest bill of nearly five and a half billion dollars! At time of writing this represents just over $4,290 per card holder in Australia.

You might be wondering why is there nearly $5,400,000,000 owing just in interest on Aussie’s credit cards – read on and all will become abundantly clear.

Will you still have your credit card purchases in thirty years?

If you have $4,400 of credit card debt and only make the minimum repayments, it will take you 31 years to pay it off and cost you around $14,900 in interest. But if you pay off $216 each month you'd pay off your debt in 2 years and save almost $9,700 in interest.

So the best plan of attack is to pay as much as you possibly can every month – preferably the entire balance.

Many people think they will be able to control their credit card debt, but as you can see, when it comes to compounding interest, a small balance can quickly get out of hand.

Whether you just have a few hundred owing on your card or many thousands, here are some simple steps to get you started paying off the debt.

1.     Stop adding more debt to your credit card

2.     Pay more than the minimum repayment - even an extra $50 per month will make a big difference

3.     Set up a direct debit to pay a fixed amount off your credit card balance each payday

4.     If you have more than one card, pay off the one with the highest interest rate first or tackle the one with the smallest debt first

If you have a credit card debt around the average Australian balance and are struggling to get on top of it, please seek professional advice. Acting early will save you many thousands of dollars – not to mention your credit rating.

Sticking to your investments

Here is a textbook illustration of why a disciplined, long-term and diversified approach to investing makes much sense.

Super fund researcher SuperRatings has tracked how $100,000 invested 10 years ago in the median balanced super fund would have grown, excluding any contributions.

If invested on August 31, 2005, this is how the $100,000 would have fared:

• October 2007: The fund's balance would have reached its pre-GFC high of $131,923
• Feb 2009: The fund's balance would have fallen to its lowest point during the GFC of $98,907. (Keep in mind that this is just $1,093 less than the $100,000 initially invested.)
• July 2015: The balance hit its post-GFC and all-time high of $181,322.
• August 2015: The balance would have slipped to $176,478. (To put this in perspective, consider that this is $76,478 more than the amount initially invested, $44,555 above its pre-GFC high and $77,571 above its GFC low.)

Now let's say the $100,000 was instead initially contributed to the super fund just a month later on September 30, 2005 instead of August. During September 2015, the balance would have slipped a little further to $170,579 – further, reflecting the downward volatility on the sharemarket.

The tracking of the $100,000 balance over a decade truly underlines the benefits of setting an appropriate long-term or strategic asset allocation for your circumstances. And it highlights the benefits of adhering to that allocation unless circumstances change and the allocation is no longer appropriate.

Just think about the predicament of a super fund member who, say, had become unnerved in February 2009 when the portfolio fell to its GFC low and moved into an-all cash portfolio.

Such a fund member would have most likely locked-in the fall in share prices and faced the task of getting back to an appropriately-diversified portfolio. It is, of course, extremely easy to miss out on a pronounced bounce-back in share prices.

And significantly, the long-term tracking of the portfolio of the median balanced super fund puts the intense sharemarket volatility of recent months into proper perspective.

Strategy over structure

A key challenge investors face is separating the issue of investment strategy from the best way to implement it. At times the discussion can quickly focus on implementation questions - best products, best structure - rather than the overall investment strategy.

While the selection of the product vehicle is clearly important the pre-eminent decision for investors remains the asset allocation decision because that is what a deep body of research shows is the crucial determinant of your portfolio's performance.

The discussion between the investment strategy and the structure to implement it can easily become blurred. As investors it is natural to want to talk about what shares to buy, what property to look at, what manager's fund to consider...

An example recently has been some of the media debate about whether you are better off investing via exchange traded funds (ETFs) or traditional managed funds.

The debate has no doubt been fuelled by the continuing growth in popularity of ETFs - both in Australia and globally. As of June 30, 2015 total ETF assets stood at $US2.9 trillion which was 11% of total fund assets but what has been clear over the past 10 years is that ETFs have been growing at a faster rate to the traditional fund world.

While the Australian ETF market lagged the global trend initially in recent years it has also been growing strongly and this year to date around $4.5 billion has been invested in the Australian ETF market.

When it comes to any discussion around the right product or structure one simple rule overrides all others - if you do not understand it you should not invest in it. It is critical that as an investor you understand what you are investing in. That is also where getting specialist professional advice can be valuable because professional advisers ought to be able to explain the differences as well as any advantages and disadvantages that certain structures offer.

When it comes to ETFs versus managed a key point to understand is that they share more common characteristics than differences. They are both pooled vehicles that provide exposure to a range of markets and offer diversification usually at reasonable fees. They issue and redeem new units to meet investor demand.

When deciding whether to implement your investment allocation via managed funds or ETFs (or a mix of both) there four factors worth considering: investment strategy, trading flexibility, accessibility and costs.

For investors the investment strategy question comes down to whether you want to take an actively managed approach or primarily an index-based with your portfolio. Most managed funds are actively managed while ETFs are mainly index-based strategies although the indexing concept has been expanded recently to include non-traditional indexes. In fact such indexes represent rules-based active strategies that attempt to outperform traditional market-cap-weighted benchmarks.

The ability to transact at the daily net asset value of a managed fund is likely to offer enough flexibility for most investors. However, the exchange-traded nature of ETFs does give investors more flexibility and the ability for intraday trading - albeit with brokerage costs to be taken into account.

Accessibility is also where some investors favor ETFs because investors have access to any ETF listed on the exchange where platforms used by advisory groups will typically have a restricted or approved product list.

Costs are a key consideration for investors in any investment product. With managed funds the major cost is the management expense ratio. With ETFs there will also be an underlying management expense ratio but you also need to factor in transaction costs for each time you trade.

Whether you opt for ETFs or traditional funds will depend on what type of investor you are.

What is key is to get establish the right strategy for you and then decide on the structure that will allow you to implement it the most cost-effective way possible.

Peter's Perspective - Men's underwear and lipstick indices

With all of the economic doom and gloom reported via the mass media, it can be difficult to stay positive. Here is a different, lighter perspective on what’s going on the “real world”.

The share market is down, the Aussie dollar is too, and last quarter the economy barely grew. China is cutting back on construction, the mining boom is over, and global share markets rise one day only to plummet the next.

Listen too much to mainstream media and it would be easy to conclude that we are going down the economic drain. And sure, there are sectors doing it tough. But the economy is a big and complex beast, so in times like these it’s important to keep all the gloomy economic news in perspective.

The real world

For most people, a little slowing in the economy is barely noticed. Most will keep their jobs or find new ones. Pensions will continue to be paid, the shops will be open, and life will pretty much continue as normal. Maybe incomes won’t go up as much as they might have, and some people may need to buy a little less stuff this year. On the other hand, a downturn may mean that some living costs ease, and for investors, the drop in share prices can be an opportunity to pick up some bargains.

Without trivialising the real pain that some people experience when the economy takes a dip, the old saying about clouds and silver linings holds true. To find out what some of these silver linings are we can look to some unusual economic indicators that point to what is going on in the real world.

Ties up, underpants down

Take the Men’s Underwear Index. When belts need to be tightened, sales of men’s underwear decline as blokes extract maximum value from their Y-fronts. On the other hand, sales of ties increase as men seek to maintain a professional image.

According to Leonard Lauder of Estee Lauder Inc., women’s collective view of the state of the economy is revealed by the Lipstick Index. Lipstick sales jump significantly during recessions as women opt for smaller, affordable luxuries rather than more expensive handbags and shoes.

Cinemas benefit from economic downturns with people escaping to the movies for some respite. The Movie Index might be related to the First Date Index. Data from online dating websites reveals that more people go looking for (and hopefully finding) love as the economy slows.

Beyond dollars and cents

Sometimes it’s easy to get the feeling that economists and politicians believe that the only valid measure of our collective well-being is Gross Domestic Product (GDP), but if that was the case Bhutan should be one of the unhappiest countries on Earth. Instead, this tiny nation developed the Gross National Happiness Index and found itself to be one of the happiest!

So, what’s the collective mood “down under”?

As it happens, Australia also does pretty well when to comes to contentment. In 2014 our overall satisfaction with life as a whole came in at 7.7 out of 10, significantly ahead of the Organisation for Economic Co-operation and Development (OECD) average of 6.6. And perhaps surprisingly, the older we get the more contented we tend to be.

Now there’s a thought that should help us all put short-term downturns into perspective.

Where does the money go when the share market “corrects”

During a share market correction or downturn the media will report that a certain market has ‘lost’ billions of dollars. But what happens to all that money and where does it go? Is it really lost?

The answer is that it is purely a book figure – a ‘paper loss’. There is no magical drain other than the metaphorical one to explain this economic concept.

Imagine a real estate agent estimated the value of your home as $450,000. Next week a second agent estimates it would sell for $400,000. Have you lost $50,000? No, even though no money has changed hands, you may feel poorer. This is the difference between value (what someone may be prepared to pay) and the price at which a sale actually happened.

It’s the same with the share market. When there are more buyers than sellers, the price of a share increases and holders of that share feel richer. Conversely, when there are more sellers than buyers, share prices fall. The holder of the devalued shares has not actually lost any money - unless they sell the shares and realise the loss.

Share speculators get burnt by rapid changes in value because they want to realise short-term profits. Investors hold on to their shares in quality companies throughout price fluctuations because they believe in the future of the business and the flow of future dividends.

The secret is to follow your investment strategy not the headlines.

A good time to review your insurance

Not a year goes by without some part of Australia being devastated by a natural disaster. Bushfires, floods, storms and tropical cyclones are a part of our lives. Unfortunately no one knows when or where the next disaster might strike so it’s impossible to prepare for an exact event.

As another summer approaches, this is a good time to review your insurance cover to ensure your financial possessions are protected, as well as the security of you and your loved ones.

The pain of under-insuring

The images of families losing all of their possessions during widespread flooding, storms and bushfires over recent years should provide a constant reminder of how a lifetime of hard work can vanish in minutes. It is even worse when so many of these victims were either uninsured or under-insured.

Most people understand the consequences of being uninsured: you bear the total loss of whatever damage is suffered and property lost. On the other hand, being under-insured means that you have not insured your property for its full value, which is considered to be less than 90% of any rebuilding costs.

This may not be intentional. It’s easy to fall into this trap, particularly if you don’t review your policy in relation to the value of your home and possessions on a regular basis. How much has your property changed in value over the past three years?

This is how easy it can happen

You don’t have to lose your entire home to suffer the effects of under-insurance. Partial loss can place a challenging strain on your finances.

Take the example of Jake and Joanne whose home was valued at $500,000, but to save money on premiums they decided to insure it for only $375,000 – three-quarters of the value. An out-of-control truck plowed through their front fence before coming to rest halfway through their master bedroom. Thankfully they were both at work and nobody was injured. Their home sustained $100,000 worth of damage but Jake was shocked when he learned that the insurance company would only cover three-quarters of the loss - just $75,000. They had to borrow the $25,000 shortfall.

If you look at it from the insurer’s perspective, when you insure for less than the real value, they are receiving less money in premiums, so they’re not likely to pay the full value in a claim.

Natural disasters and accidents are not fussy about who they affect so don’t let the next one be the catalyst to review your insurance coverage.

And while you’re doing this, make sure you have appropriate and adequate life insurance in place. You and your loved ones are far more valuable than your possessions. Now is the time to act. Give us a call on 02 6583 7588 or email us.

How will changes to the pension assets test affect you?

From 1 January 2017 some retirees will see an increase in their age pension. Many others, however, face a cut, or will lose the pension altogether. This results from changes to the assets test aimed at reducing the federal budget deficit. It also addresses what some people see as an excessively generous test that allows some retirees with more than a million dollars in financial assets to receive a part-age pension.

What’s new?

At present, pensions are reduced by $1.50 per fortnight for every $1,000 of assessable assets above the assets-test free amount for a full pension, currently $205,500 for a single home-owner and $291,500 for a couple home-owner.

From 1 January 2017 this ‘taper rate’ will increase to $3.00 per $1,000 of excess assets. Pension payments will phase out more quickly and the limit on assets up to which some pension is payable drops significantly.

On a positive note, the assets threshold for a full pension will increase to $250,000 for a single home-owner and $375,000 for a couple, so some part-pensioners will see an increase in their payments.

The winners

Mike and Hope are an example of a couple that will benefit from the changes. They own their home and have financial assets totalling $370,000. This exceeds the current threshold for a full pension by $78,500, so their pension is reduced by $117.75 to a combined sum of $1,179.05 per fortnight.

Come 1 January 2017 the threshold for the full pension will increase to $375,000. With assets below this threshold Mike and Hope will find themselves receiving the full pension of $1,296.80 per fortnight, including supplements.

The losers

It’s a different story for John and Ann. As homeowners with assets of $750,000 they currently share a fortnightly pension of $609.05. However, when the higher taper rate cuts in from January 2017, their pension will drop to just $171.80. That’s a reduction of $437.25 per fortnight or more than $11,000 per year.

It’s predicted that 300,000 retired Australians will lose some or all of their pension as a result of this change. Around 50,000 less wealthy pensioners will be better off, while current recipients of a full pension will see no change.

What are the options?

Clearly the change to the assets test will adversely affect a large number of retirees and create a significant incentive to reduce assessable assets. With the family home remaining exempt from the assets test, if you wish to continue receiving a part pension, strategies that could be considered include spending on renovations to make an existing home more comfortable, or upgrading to a higher value home. Assets can also be reduced by gifting (care required here) or through spending on travel and lifestyle.

However, it’s important to consider your overall situation, as maximising age payments at the risk of reducing assets may not be the best way to achieve long-term financial security. Please contact us for qualified advice before taking action.

Don’t forget the income test

The age pension is subject to both an assets test and an income test. Whichever produces the lowest pension payment is the one that applies. While this article concentrates on the assets test, it is worth remembering that the income test underwent some changes in January 2015.

Centrelink now combines new account-based income streams with other financial assets to calculate the deemed income that is subject to the income test. While this treats all financial assets equally, it is less generous than the old treatment of account-based income streams.

Note: current calculations are based on current thresholds and pension rates. Future calculations are based on current pension rates and the thresholds that apply from January 2017. 

The neighbourhood-wealth syndrome

It could be tagged the neighbourhood-wealth syndrome: when our neighbour spends money on a costly new car or major renovations, some of us may feel an urge to somehow compete with our spending.

Falling into the trap of trying to "keep up with the Joneses" - as it always used to be called - can be highly destructive for our personal finances. Indeed, it is one of the detrimental behavioural patterns documented by behavioural economists.

US financial planner and personal investment author Carl Richards writes in a New York Times column - headed Staying out of your neighbour's business - gives the example of a neighbour driving up in a new Porsche Panamera Turbo. (For those with an interest in cars, that's basically a four-door Porsche.)

Richards believes that most people would jump to the conclusion that this neighbour is doing extremely well financially yet the opposite might be true.

"Your neighbour may be rich," he adds. "He could be leveraged to the hilt. You just don't know. So what's the point of comparing and feeling competitive without knowing the full story?"

Richards' bottom-line: Mind your own financial business.

There is a classic personal finance book, The millionaire next door, by late US academics Thomas Stanley and William Danko.  Research by Stanley and Danko confirms what many of us may suspect: exotic cars and grand houses are not accurate indicators of wealth.

Their research suggests that "prodigious accumulators of wealth" tend not to be conspicuous in their spending and are content to progressively build their wealth.

In other words, they are not in a hurry to either make money by taking excessive risks or to spend their money (or borrowed money) on unaffordable lifestyles, say Stanley and Danko.

Watch out for the neighbourhood-wealth syndrome.

An urge to do something - anything

Countless investors understandably feel a hard-to-resist urge to take some decisive action whenever the sharemarket turns highly volatile.

Such urges-to-act are likely to have been particularly strong in recent days in response to what's been happening on the local and global sharemarkets - as well as in reaction to the more dramatic media headlines.

Unfortunately, this often leads to hasty, poorly-informed and emotionally-driven investment decisions that may be against an investor's own interests.

As personal finance columnist Ron Lieber writes in The New York Times this week. "The impulse when the stock market falls hard for a few days in a row is to do something. Anything." This common investor trait has also been closely observed over the years by behavioural economists.

Lieber suggest that "some deep breaths" are in order rather than a rush to action.

His article makes a series of salient points including: the sharp fall in share prices highlights the attributes of diversified portfolios, investors have generally done well from shares in recent years, and a switch to an all-cash portfolio is often detrimental.

"Plenty of research shows that if you miss just a few days of the market's biggest gains, your long-term portfolio will suffer badly," Lieber warns.

And he asks: "If you decide to put a bunch of your money in cash on Monday, how will you know when to get back into the market? You'll probably be looking for a sign, and that sign will be the very rebound days that you will have missed out on."

Investors who are facing an urge-to-act can take several steps that do not necessarily involve selling shares at a possible low and locking in their on-paper losses.

Such actions may involve turning to a quality financial planner as a behavioural coach to encourage disciplined, non-emotional investment decisions that focus on your long-term goals rather than on short-term market volatility.

Over the past 14 years, Vanguard in the US and Australia has studied so-called "adviser's alpha". This is the value that good advisers can add through their wealth management and financial planning skills - guiding their clients in such areas as asset allocation, cost and tax efficiency, and portfolio rebalancing - and as behavioural coaches.

Rather than falling into the trap of trying time the markets - that is, attempting to pick the best times to sell or buy securities - a smart move is to ensure that your portfolio is as efficient and appropriate as possible. That's decisive action that won't be against your best interests.

Seeking shelter - with unintended consequences

Many SMSFs may be exposed to a much higher degree of risk with their direct share portfolios than their trustees realise.

Research* by Investment Trends shows that SMSFs when surveyed in April held 41 per cent of their overall assets in direct shares with more than half of this invested in financial/banking and resource stocks.

No doubt banking stocks, for instance, with their high fully-franked yields may have provided some comfort to SMSF trustees concerned by market volatility and extremely low interest rates.

It is somewhat ironic that efforts by SMSFs to gain some kind of shelter given their concerns about financial markets and low interest rates may have contributed to their portfolios becoming so reliant on just two sharemarket sectors.

Another clear illustration of SMSF trustees seeking shelter from the prevailing financial markets yet with potentially unexpected consequences is the build-up of so-called "excess cash" in their portfolios.

Excess cash is money that would usually be invested elsewhere when investors recognise other investment opportunities. This extra cash tends to build up during times of increased market volatility and increased concern about financial markets.

When Investment Trends surveyed SMSF trustees in April, 35 per cent of the cash holdings of SMSFs were considered "excess cash" - up from 30 per cent 12 months earlier. In dollar terms, this had amounted to $56 billion in excess cash.

Among the issues arising from a high percentage of excess cash include the question of whether more of the money should be working harder in an appropriately-diversified portfolio to build members' retirement savings. 

The risk of eventually outliving retirement savings, in other words, longevity risk, should never be overlooked when making short-term investment decisions including about how much to hold in excess cash.

A straightforward strategy for investors, including SMSFs, is to ensure that their risks and opportunities are spread across asset sectors by setting an appropriate target or strategic asset allocation for their portfolios.

Keep in mind that seeking shelter can sometimes have unexpected consequences for investors.

Peter's Perspective - Good (investor) behaviour

An understandable challenge for investors during periods of higher sharemarket volatility is to keep making rational, considered investment decisions and to keep focusing on their long-term goals.

As behavioural economists remind us, investors often act irrationally - particularly when markets are rising or falling sharply. And their common behavioural biases can become significant barriers to investment success.

Several of the undesirable biases identified by behavioural economists over the past 25 years or so are worth thinking about during the prevailing sharemarket volatility. These include what is known as "narrow framing".

Narrow framing is the tendency for investors to concentrate much of their attention on a single aspect of their overall investment portfolios. In turn, this may result in overreacting to short-term falls in share prices in the context of current market volatility.

The Journal of Portfolio Management in the US recently published a timely article, Bad habits and good practices, emphasising that investors falling into trap of narrow framing tend not to fully appreciate the benefits of portfolio diversification.

"It is easier to delve into one attention-grabbing investment than into its interactions with the rest of the portfolio," write the article's authors, Amit Goyal, a professor at the University of Lausanne, and Anitti Ilmanen, a London investment funds manager.

"Fortunately," Goyal and Ilmanen add, "each bad habit has a flip side: a good investment practice". They explain that good practice involves investing in a "consistent, disciplined and patient manner" following a strategic, long-term strategy.

Five years ago, Vanguard published a research paper - headed Understanding how the mind can help or hinder investment success - to provide a succinct explanation of behavioural finance including the investor bias of narrow framing.

Investors taking a narrow frame, the Vanguard paper explains, have a tendency to "fret over the performance" of a single investment or investment sector, increasing their sensitivity to loss.

Investors taking what could be described as a wider frame would tend to see a fall in the price of individual investments or an asset sector as just part of the expected movements within an appropriately-diversified portfolio. Indeed, diversified portfolios are specifically designed with the intention of having some assets rising in value to counter other assets falling in value.

In summary, investors determined to try to avoid the traps identified by behavioural economists typically:

• Set clear and appropriate investment goals.
• Develop a suitable long-term asset allocation for their portfolios, taking into account their goals, tolerance to risk and the need to diversify their risks and rewards.
• Remain committed to their appropriate long-term investment strategy through periods of market uncertainty and increased volatility.

Behavioural economists say investors should recognise that they are vulnerable to making irrational decisions and take such steps to keep undesirable behavioural biases in check.

SMSF loan warnings hit home

At times in our financial lives borrowing to invest makes good sense. For the majority of people when financing a new house borrowing is more out of necessity than a decision to leverage for wealth creation reasons.

Sensible levels of borrowing are an accepted part of business and investment strategies and in the financial planning and accounting worlds are intertwined with tax planning.

But when it comes to your savings for retirement does borrowing - with the inbuilt risk that comes with leverage - make sense?

This is a particular issue for people saving for retirement via a self-managed super fund because limited recourse borrowing is a real option and one that is increasingly being marketed aggressively alongside property development schemes.

Certainly the David Murray-chaired Financial System Inquiry (FSI) did not think borrowing via SMSFs was appropriate and has recommended to the Federal Government that it be banned. The government has yet to announce its response.

The FSI recommendation though flows from concerns that increasing levels of limited recourse borrowing will, over time, increase risk in the broader financial system. Certainly the use of leverage, while still a small part of the SMSF asset pool, has been growing strongly in recent years with the amount of funds borrowed increasing from $497 million in June 2009 to $8.7 billion in June 2014 according to the final FSI report.

But the issue raised by the FSI is a different question to whether it makes sense for you and your SMSF.

The latest SMSF Investor Trends report, based on about 3900 investor responses showed that for the first time in five years the interest in borrowing within an SMSF was losing favour.

No doubt the considerable amount of publicity flowing from the Murray Inquiry recommendation and the focus on limited recourse borrowing arrangements by ASIC has been an influenced SMSF trustees' attitudes to using borrowing within their super fund.

Asked what the barriers were to borrowing within their SMSF, 29% of investors felt borrowing within their SMSF was inappropriate (29%) while 15% said borrowing inside the SMSF was too risky and 11% pointed to the legislative uncertainty.

The question of whether borrowing within an SMSF is appropriate is a complex (and costly) discussion and anyone considering it should seek financial planning and accounting advice from an SMSF specialist.

ASIC has been proactively warning investors about property spruikers trying to lure investors into direct property investments by getting them to set up an SMSF, roll their existing superannuation balances into it and then put borrowing arrangements in place to fund the property purchase.

Clearly those type of arrangements and sales techniques are a cause for concern.

While the Murray Inquiry was primarily concerned about introducing risk into the broader financial system for the individual investor the risk is much more direct - the risk of destroying rather than creating wealth to fund your retirement.

Don't let headlines influence your investment strategy

Thanks to social media it has never been easier to get short-term attention. At the same time it has never been harder to keep the focus on the long-term.

In this age of instant communication our attention span is apparently continuing to shorten to the point where internet marketers now work on the basis they literally have only to count to 10 to have lost your attention.

There is no doubt the pervasive impact of technology has been generally positive on investing in terms of dramatically improving accessibility and giving investors better information and investing tools.

Want to look up a share price quickly? Grab your smart phone or tap your watch.

Want to compare a number of investment funds? Take your pick from a range of websites. Want to consolidate your super funds? Download the app.

But this era of instant information can be contradictory with the notion of investing for the long term.

While today we measure some things in nanoseconds investing for our retirement is still firmly anchored in years and decades.

So investors today are conflicted with ever-increasing levels of instant information demanding not just attention but promoting the need to act, now.

A quick scan over the past 12 months shows that it has been a good year for dramatic headlines courtesy of a volatile global economic landscape.

There has been the usual collection of plunging markets and roller-coaster rides vying for our attention along with media reports of house prices falling followed soon after by house prices setting record high growth rates...

There was also the coining of a new word to strike fear into an investor's heart - Grexit - as a result of the brinkmanship and confusion around Greece's economic position.

This is where both traditional and new media technology platforms that feed our seemingly insatiable need for information can be both friend and foe.

Friend when it delivers accurate information that helps educate and inform investors about what is happening in markets and its constituent parts and provides direct access at lower transaction prices.
But it quickly turns to foe when the 24/7 media cycle fuels short-term emotional responses to the latest piece of market news.

The clear message from the historical performance of investment markets is that time is indeed an investor's friend - provided they can ride out the inevitable troughs and resist the siren calls of when markets are climbing ever higher.

When you look at the performance of the various asset classes what is clear is that investors have been rewarded over the long run for taking on risk.

$10,000 invested in 1985	Accumulated investment value 2015	30 year percentage returns
Australian shares	$215,685	10.8%
International shares	$118,257	8.6%
US shares	$187,872	10.3%
Australian bonds	$145,055	9.3%
Listed property	$149,198	9.4%
Cash	$86,815	7.5%
CPI (to March 2015)	$27,532	3.5%

That said there is no guarantee that historical performance will be repeated. The challenge for investors is to get the portfolio mix right between growth and defensive asset classes to suit the individual risk profile that is unique to your age and circumstances.

The gender gap in retirement and the challenge for women

The word poverty evokes a stark picture of life in retirement. That is the reality facing a disproportionate number of women in Australia as a result of the ongoing inequality in our workplaces.

Given the advances feminism has brought to our society and the broad acceptance today of equal rights and equal pay it was confronting to read a research white paper compiled by ANZ on the barriers to achieving financial gender equity.

It is true that great strides forward have been made by women in terms of education - 42 per cent of women aged 25-29 hold a university degree versus 31 per cent of men - and that there are more women in the labour force now than ever before. But there remains a long way to go given that women in full-time roles earn, on average, $295 a week less.

Clearly there are a broad range of societal factors at play here and the chief executive of ANZ’s Global Wealth business, Joyce Phillips, used the launch of the research white paper to call for leadership on a range of issues that could shift the status quo and address the inequities that hold many women back.

The three key drivers of financial gender inequality the research highlighted were:

• Fields of study/career choices and pay gaps
• The gendered nature of caring responsibilities
• Discrimination and structural bias

The conclusion was that those factors combine to prevent women from contributing to their superannuation and growing their retirement savings in the same way as men.

The impact on retirement incomes of women is clearly significant.

Women typically have about half as much in their super account as men and as a result 90 per cent of them will retire with inadequate super.

One quite chilling statistic in the research was that one in five women yet to retire has no superannuation at all. But of course in years past it was not uncommon to hear of young women cashing out their super when they were starting a family.

If women are in an enduring relationship they will have access to the combined retirement savings or income of their partner. Which is fine for women in that situation, but the report also says a significant proportion of women in Australia today choose to live alone. An additional factor at play of course is the high level of divorce which can be financially crippling regardless of gender.

The good news when it comes to retirement for women is that they will typically live longer. The downside is that because of their lower retirement savings/earnings they are much more likely to be totally dependent on the age pension.

The ANZ study highlights the issues facing women and the barriers they confront in achieving financial equality. While the problem is broader than just the superannuation system, part of the answer has to be getting women focussed on super and the value of long-term savings.

The other part of the answer is to obtain financial planning advice early rather than later. Contact us to make an appointment… we’ll be happy to help you plan a future that suits your personal needs.

Investors behaving normally

Most super fund members may not realise it but the latest release of returns for the big super funds with balanced portfolios could provide a valuable lesson in behavioural finance.

Super fund researcher SuperRatings reports that the median large super fund with a balanced portfolio in the accumulation phase returned 9.7 per cent return over the 12 months to June 30. And the median fund returned an annualised 12.3 per cent over three years, 9.2 per cent over five years, 5.9 per cent over seven years (which, of course, captures the impact of the Global Financial Crisis) and 6.5 per cent over 10 years.

From the perspective of individual super fund members, these returns illustrate the benefits of regular contributions (or investments) in different market conditions, a diversified portfolio within an appropriate asset allocation, compound returns and a disciplined, long-term focus.

These returns underline the potential rewards of being a highly-disciplined investor who concentrates on achieving long-term goals and who doesn’t fall into the trap of making emotionally-driven investment decisions.

Indeed, here is a lesson in behavioural finance - whether investing through a big super fund, a self-managed fund or in your own name.

Behavioural economists tell us that among the biggest roadblocks to investment success are the investors themselves.

This is because most of us are vulnerable to making decisions driven by emotion, greed, temptation, instinct, fear, anxiety, irrationality, regret and over-confidence. The list goes on. And often procrastination stops us making decisions when we should.

In other words, we are likely to behave in a human way whether in terms of our investment decisions or other decisions affecting our lives.

The basis of behavioural finance is that investors can be expected to behave like normal people, explains Meir Statman, one of the founders of the field of behavioural finance.

Statman, who is a professor of finance at Santa Clara University in California, says in an introduction to one of his articles in The Journal of Portfolio Management in the US: "In behavioural finance, people are normal. Sometimes normal smart, sometimes normal stupid."

Behavioural economists typically tell us that investors should first recognise their human frailties and learn to mistrust their financial instincts. And then they can set effective rules to address any behavioural traits that may be determinantal to achieving their long-term goals.

As Statman says, "...normal people create rules to help them do the right thing".

In his book, What investors really want, Statman stresses that investors should set goals and then to work towards those goals in a realistic way.

Investors with a disciplined, long-term focus are less-likely to try to time the investment markets - that is, attempt to pick the best times to buy and sell. Market-timing often ends in disappointment.

And disciplined, long-term investors are less likely to be swayed by the prevailing "noise" in the markets as numerous people offer opinions about which way asset prices may next move.

Financial Planning for Women

While we may be stating the obvious by saying there are distinct differences between men and women, when it comes to money, there definitely are!

It has never been more important for women to obtain personalised financial advice. Consider the following -

• 81% of single parents are women;
• 52.1% of professionals in Australia are women;
• over 65% of business operators or independent contractors are women;
• at least 80% of women will spend at least a decade on their own;
• women make up 54% of all people aged 65 years and over, and 66% of those 85 years and over;
• nearly 43% of Australian marriages end in divorce, with women often financially worse off.

While many conclusions can be drawn from these statistics it highlights why women are taking greater control of their financial future.

Considering that in many cases women are still not paid as highly as men, the following life circumstances can have a more dramatic effect on a woman:

·         Outliving a partner, whether young or old;

·         Divorce;

·         Serious illness of either partner;

·         A very sick child who requires ongoing medical attention.

Start planning now

When you consider the trends, there is a vast number of women who may not have accrued the necessary superannuation and will find that their retirement nest egg just won’t last the distance.

That’s why it’s important to plan for your retirement now. If you are a woman, either working for your family, yourself or for an employer, please take the time to sit down and do some homework. Work out when you would like to retire and do some quick sums on how much money you’d like to retire with. If the two scenarios don’t match, contact us to make an appointment… we’ll be happy to help you plan a future that suits your personal needs.

Why astute investors are a little like astute kayakers

US financial planner and New York Times columnist Carl Richards remembers a valuable tip he received more than a decade ago when learning to ride a river on a kayak.

The advice was straightforward: Avoid focussing on the rocks and other obstacles. Rather, concentrate on the "space between the rocks".

However, he didn't heed the tip and flipped upside down in the icy river.

In a recent article, Focus on the opportunities, not the shoals, Richards writes that investors experience a similar challenge when trying to maintain their focus despite all of the noise in the market about what could go wrong.

"Unfortunately, devoting all of our attention to the financial rocks," he emphasises, "makes it difficult to see the opportunities we have some actual control over."

Investors have faced a series of financial "rocks" in recent weeks to potentially throw them off course.

Besides the challenge of investing in a low-interest environment, there have been the headlines about the Greek debt crisis, the state of the Chinese share market and the latest iron ore price - to name just three.

In turn, investor concern is being reflected in heightened volatility on world share markets.

While investors can't control the markets or the emotions of other investors, there is plenty they can control.

The things that investors can have much control over include:

• Their investment management fees. High fees can handicap returns if the manager does not perform.
• The tax efficiency of their portfolios. Frequent trading, for instance, can trigger CGT in addition to extra transaction costs. On the other hand, the concessionally-taxed super system can provide excellent opportunities for greater tax efficiency.
• Their portfolio's long-term asset allocation. Successive research has concluded that a diversified portfolio's strategic asset allocation - the proportions of its total assets invested in different asset classes - is responsible for the vast majority of its return over time. Appropriate diversification spreads both risks and opportunities.
• Their own emotions. Investors who maintain a disciplined, unemotional approach to investing focus on the long-term without being swayed from their course by short-term market movements and the latest media headlines. This makes them less likely to fall into the trap trying to time the market - that is, attempting to pick the best times to buy and sell.

An investor's challenge is to look beyond the financial obstacles or rocks that will inevitably arise along the way.