The current downturn in Australian and global share markets is a painful reminder that investment cycles come and go. This time is no different from any other time.
It will turn and investments will rebound.

In this article we have highlighted some of the key points raised in our recent seminar featuring Dr Shane Oliver, for the benefit of those who were unable to attend.

If you’re feeling despondent about the recent performance of your investment portfolio you are not alone. Even if your portfolio has outperformed its benchmark it still hurts when values fall. The following table shows how investor emotions change through the investment cycle. It’s important to note that when investor confidence is at it’s lowest, that is the point of maximum financial opportunity. We consider it is reasonable to deduce that we are at or near that low point now.

Markets tend to recover quickly after significant falls. The following graph shows how much the Australian share market has recovered in the first 12 months following falls of 20% or more since 1980. It is important to be in the market to enjoy these rebounds. Usually the recovery is erratic and can be difficult to pick.

We’ve been here before. Times of doom and gloom are the best times to purchase quality investments and the worst times to sell them. Markets do recover and the trend is upwards.

Clients are often tempted to pull out of markets when things go bad and move their money into cash. The problem with this strategy is that while interest rates can be high at times of uncertainty they can quickly fall when confidence returns. Interest rates are already considered to be at a peak with the Reserve Bank widely tipped to lower rates significantly over the next 12 months. Also, as previously pointed out, if you are in cash you will not benefit from a quick rebound in share markets when it comes. In short, you crystallise your losses by selling at a low point and miss out on the recovery that quality investments invariably deliver when confidence returns.

The following graph compares the return of two investors who invested $100 in 1928 into a portfolio of 75% Australian shares, 25% Australian Bonds and 5% Cash. The first investor remained invested throughout all the bad times. The second investor withdrew their investments and placed the monies into cash following each downturn and then reinvested 12 months later. Note the difference in the result.

If you think you might do better in residential property think again. Housing affordability in Australia is at its lowest level for over 28 years. This combined with low rental yields does not bode well for residential investment properties in the medium term. It is also important to remember that property weakness usually follows share market weakness in the investment cycle.

We are sometimes painfully reminded that “the investment cycle lives on”. Booms followed by busts. Irrational exuberance followed by irrational fear and panic. It’s times like this where comfort comes from the knowledge that quality investments do eventually find their way back to their true underlying value. To find and hold a portfolio of quality investments investors need good advice underscored by sound research and diligence. We at Financial Keys focus on these qualities in delivering our services to you. You won’t get the latest fads or structured product offerings from us. Just solid investments into real assets backed by research and due process.

Andrew Condell

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The biggest cost of failing to insure against the unexpected is the burden we may place on those around us.

What would happen if you could no longer work? How would those regular expenses be paid if your most valuable asset was taken away i.e. your ability to earn income? What burden of care would you place on others?

For most Australians their current level of life insurance cover is inadequate. The life insurance requirements for an average full time working couple in their mid thirties with young children is approximately 10 to 13 times their annual pre-tax income i.e. level of cover needed is between $500,000 to $650,0001 . For a couple in their mid forties, this falls to between 6-9 times their pre-tax income. i.e. level of cover needed estimate to be between $300,000 to $450,000. Levels of cover depend upon age, income, existing net wealth and lifestyle goals.

Insurance Gap
So what cover do you have and is there a gap that needs to be filled? Of course the actual amount of cover needed depends upon individual circumstances. A report conducted by insurance researchers, Dexx&R2 found that only 22 percent of Australians have life insurance and of those, the average cover was $210,976, far less that the needs of the average Australian.

So while for most of us, insuring our car or our house is something of a priority, life insurance is something we don’t like to spend much time thinking about, but probably should.

How Much Cover Do I Need
The adequate level of insurance cover will be dependant on the circumstances and needs of an individual and their family however as a rule of thumb, life insurance cover should be sufficient to:-

• Pay-out any debt such as mortgages and personal loans
• Provide income replacement
• Cover the additional costs such as medical costs or home duties assistance.
  If you have children or plan to have children the cost of child care should be included and/or
• Pay for rehabilitation or home modifications as a result of disabilities

Insurance Cover to Consider
There are four main types of cover that should be considered:-

1) Life,

2) Total and Permanent Disablement

3) Income Protection

4) Trauma

Life
In the event of your death your beneficiaries or your estate receive a lump sum payment. The cover is designed to ensure your family has sufficient resources to repay debt, and cover living expenses. This type of cover is often held within your super fund, with the premiums paid from your super fund account balance.

Total and Permanent Disablement
TPD cover is also a lump sum payment that is made should you be injured or become ill and aren’t able to work again.

There are two main definitions for TPD cover, one that covers “any occupation” and the other covers your “own’ occupation. The more favourable definition is “own” occupation because as the name implies, you will be paid the insurance benefit should you be unable to perform the duties of your “own” occupation. With “any” occupation you will not qualify if you are still be able to perform any job for which you are reasonably suited by education, training or experience. It’s a wider definition and harder to meet the eligibility criteria.

TPD cover is usually provided along side Life cover and is often held within your super fund.

Income Protection
This type of cover provides a monthly income payment to you, usually 75 percent of your income, after you have been unable to work for a set waiting period, due to injury or illness. This cover is designed to replace a portion of your income while you are unable to work for a period of time.

Waiting periods vary, but the most common is between 30 and 90 days. Benefit periods can also vary, either up to 2 years, 5 years or to age 65.

This type of cover is generally tax deductible. It can be held inside or outside your superannuation fund.

Trauma
Also known as critical illness cover, it pays a lump sum benefit should you suffer a specific medical condition, such as cancer, heart attack or stroke, so as to maximise the insured life’s medical recovery and to minimise the financial impact of the medical trauma. The payment is made even where there is a complete recovery. This cover is meant to reduce the pressure to return to work early or to provide some protection against a permanent reduction in income earning capacity.

Changing Circumstances
Another aspect that is important when looking at sufficient insurance cover is ensuring it is kept up to date. If you have recently bought a new home; or taken out a loan to renovate your home; been married; or had children, there’s a good chance you will need to increase your cover. Alternatively if your mortgage is paid off and the kids have left the nest you can most likely reduce the level of cover you have.

Your life cover needs to be kept up to date with your changing circumstances and changing needs just like home and contents insurance which you renew each year.

Check Your Cover
So while many of us understand the need for sufficient insurance cover, it is often something we tend to neglect until it’s too late. It’s often just too hard or time consuming.

The best way to ensure you have sufficient cover is have your insurances reviewed. You will need to look at the existing cover you have and calculate your needs based on your cost of living, mortgage levels, children and other factors identified above. You then need to look through the many policies available in the market, compare features, costs and benefits.

At Financial Keys we assess your personal and financial circumstances to determine the appropriate levels of cover for you. We then use our comprehensive research tool to sift through the market and identify a well rated, price competitive cover suitable for you. We have no ownership connections with any particular insurer and are focused on getting the best deal for our clients.

If you would like to have your situation reviewed to ensure you have sufficient cover, give us a call. We can take the hassle out of the process so that you can rest easy.

1. Rice Walker Actuaries, Analysis of Insurance Needs, May 2005
2. Dexx&R 2005

Brendan Gallagher

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