Market Commentry

Signs of a sustainable recovery in Global sharemarkets emerge with another quarter of strong results from most world markets.

Since April 2003, sharemarkets around the globe have risen sharply. During the past six months the US S&P 500 Index has risen 14% and the Australian All Ordinaries has risen over 10%. Economic data from major regions released recently indicates a general recovery. The International Monetary Fund expects global economic growth to increase to 4.1% next year, up from 3.2% this year.

Most indicators in the US suggest that there is solid growth with manufacturing indicators increasing, housing sector growing and strong growth in consumer spending. The additional spending being financed by increases in real wages, a home refinancing boom and the federal tax cut in force since July. Continued high unemployment figures dampen this optimism, however more sustained economic growth will impact on this in time.

On October 28 the US Federal Reserve said that interest rates would remain unchanged in an attempt to accelerate the economy’s recovery and lower unemployment. The markets response was immediate with the S&P closing 1.5% higher and the technology heavy Nasdaq adding 2.6%.

Japan is also benefiting from the improved global outlook with GDP growth expected to be 1.2% next year, up from 0.7% in August although consumer spending is being held back by job losses and falling wages.

In Europe, market sentiment has improved, while not as positive as in the US. Business confidence has lifted in the regions largest economies, Germany, France and Italy due to the growth in the US and the fall in the Euro against the US dollar. Economists do, however expect European growth to lag that of the US and Japan in the medium term.

In Australia, weaker economic growth experienced during the June quarter was in line with the low expectations of the market. GDP grew just 2.5% in the year to June 2003 with much of the weaker figure being due to weak exports caused by drought, SARS and weak demand from a generally weak global economy. With these events now behind us, there are positive signs emerging that economic growth is starting to strengthen with GDP expecting to increase to 3.8% next year.

Consumer sentiment and business confidence grew in September and unemployment fell to its lowest level since 1990 with the rate falling to 5.8% in August. Australian consumer demand, similar to that in the US is strong, with much of it being attributed to increases in household debt. With strong demand continuing, the pressure on interest rates has resulted in a 0.25% rise in early November.

The Australian dollar has pushed through US 70 cents the effect of which will be an expected increase in cheaper imports and reducing the competitiveness of local exporters. The rising Australian dollar with its disinflationary pressure may also impact the timing of the decision by the Australian Reserve Bank to raise interest rates, with commentators predicting a smaller and more gradual increase in interest rates than previously expected.

A rising Australian dollar will normally have a negative impact on investors in international funds, however this will be offset by the strong gains in global markets and the level of currency hedging, if any, carried out by the fund managers.
In summary, there are continued signs of a recovery in the major global economies, with the outlook being generally positive. Investor portfolios with exposure to local and international equities will welcome the strong returns experienced since April 2003.

Back to Top

How Much Super is Enough ?

When people consider this question they are nearly always shocked to find how much they need to fund their retirement in the way they imagined. There is no one answer to this question as there are many variables that affect the outcome. It is clear, however, that for most the compulsory 9% employer super contribution will not be enough even for those who have started work since the legislation was introduced. The key variables to consider are:

Age of Retirement
Life expectancies are increasing which has the effect of increasing the length of time that we are retired. Earllier retirement places a greater demand on retirement funds. If you stay at work longer you delay the starting time for funding your retirement. This means that the returns on your superannuation and the other investments in your portfolio can compound for longer and will be needed for a shorter period of time.

Cost of Living in Retirement
If you spend more in retirement you will need more money to fund your lifestyle. Those that live more frugally will need less. Ideally you want enough money to enable to do the things you want and achieving this requires planning.

The good news is that most people spend less in retirement than they do in their working lives. Although in the first few years of retirement many will have quite high expenditure. People will often travel quite extensively in this time. Sometimes they will complete renovations around the house they have been planning. A new car or gifts to their children also often feature. This kind of expenditure tends to settle down after a while.

Risk Profile, Markets and Investment Performance
Making your money last is a big part of the retirement planning process. This involves assessing your risk profile and investing in a matching portfolio of investments. Everybody wants growth but they also want security. The trick is to determine which one is more important for you and how much weighting should be given to each.

Your risk profile will dictate the type of portfolio you have and may determine whether you have a guaranteed lifetime income stream or an allocated pension where you have access to your capital but the investment risk will usually be higher. You may want some money in both income streams, or want to supplement your income with dividends, interest or rental income.

Current Age, Account Balance, Wage level and Contribution Rate
If you start saving younger you will have a longer period for growth enjoying the benefits of compounding over a longer period. Clearly a larger starting balance enhances the outcome. For higher wage earners the compulsory 9% superannuation guarantee will mean higher contributions and this can be further increased through voluntary employee contributions, self employed contributions or salary sacrifice.

Health and Life Expectancy
Those that have good health and a strong family health history may need to fund longer periods than others. Rarely can this factor be planned for but it is a consideration and in examples like this, lifetime income streams are an option to include your considerations.

The following example gives a guide as to how much is needed to be put aside for retirement. Importantly this is only a guide and cannot be relied upon as an accurate calculation for retirement planning purposes.

Example
In this example we estimate how much an employee needs to contribute to super meet their retirement objective. Their objective is to retire at age 60 on an income equal in today’s dollar terms to $45,000 per annum. Their details are:

To achieve their objective the employee would need to accumulate approximately $1.5 million in super by retirement. This would require an additional contribution of 5% of salary beyond the 9% contributed by their employer. This equates to super contributions equal to 14% of their salary for the rest of their working life.

Many super fund internet sites have calculators that can assist in estimating your super funding needs. We can also assist with planning in this area. Most importantly the sooner you start to think seriously about this issue the better chance you will have of achieving your objectives in retirement. Call Financial Keys to discuss whether you are on track to have enough super in retirement.

Back to Top

Investor Risk Profiles – Staying the Course

One of the first things we do when we engage a new client is to identify their “Investor Risk Profile”. Until we know this we can’t really give any advice. The risk profile tells us what a client’s tolerance for risk is; or how much volatility a client is willing to accept to achieve their investment return objectives.

Investing is about getting the best return for the least amount of risk. This is called the risk/return trade off. We all want high returns and low risk but we realise that it is rarely possible to achieve this. Most people realise that you need to take some risk to get better investment returns.

Cash in the bank is a low risk investment but the returns are low and usually not enough for investors to achieve their longer term wealth objectives. A well constructed share portfolio can deliver growth over the long term but the journey can be bumpy. Property can deliver growth but there is a liquidity risk. You can’t sell the lounge room to pay for school fees. The challenge is to work out how much risk is right for you.

There are four primary investment classes each with different risk, income and growth characteristics. These can be broken down further into Australian and international weightings. An investor’s risk profile is a key factor in determining how much of a portfolio should be allocated to each asset class. The following examples give a guide as to how this works.

People are often confused about risk. They may say they are willing to take higher risks with their investments but when there is a market downturn they find that they are uncomfortable with a fall in the value of their investments.

It is important to identify your risk profile and to stick to your plan in the face of market rises and falls. Clients that lose their nerve can suffer significant losses as they sell when their investment value has fallen and they miss out when things change and markets rebound.

Those investors that have a plan, a road map to investing, are ahead in many respects, but never more so than during recent volatile markets. One of the roles of a financial adviser is to understand the risk profile of the client and develop a suitable investment portfolio based on this profile, their goals and other circumstances.

Without this long term view, investors may be tempted to sell those investments that have experienced negative returns, moving the monies to safer fields. As we have mentioned in a previous article, this is like selling your house after there was a 15% fall in the value of your home. Those that have acted in the temptation to bail out of the volatile equity markets have more than likely missed the strong returns that have been experienced in most equity funds during the majority of this year.

Another mistake made by many is to chase returns. That is they may wait for the markets to recover for a period of time before they get back into the market. Market timing is extremely difficult and simply looking at the returns of a market can be misleading. It’s “time in the market” rather than “market timing” that can make the world of difference. And although time in the market is not without its testing times as we have seen, a portfolio that is suitably constructed to your risk profile and is invested for the necessary time horizon will help you ride the rollercoaster through periods of low returns and strong returns.

If you are unsure of the suitability of your investment portfolio and you do not have a structured plan for your investments, call Financial Keys.

Back to Top

Change is Afoot at Financial Keys

There has been action aplenty at Financial Keys. We are pleased to welcome two new principals to the firm with Kevin Minett and Brendan Gallagher joining Financial Keys in September. Kevin and Brendan bring a wealth of experience with them that has bolstered the skills and resources of the team and increases our ability to provide comprehensive financial services to our clients.

Andrew Condell has recently returned from a holiday in Peru and Bolivia where he took his son, Sean trekking. An enjoyable and memorable holiday with some interesting moments in Bolivia during the recent change of Government. Bets are the next one may be closer to home.

The highlights included a visit to Machu Pichu the famous Inca ruin, downhill mountain bike riding in the Bolivian altiplano, horse riding in the Peruvian countryside, site seeing and handicraft markets in Cuzco and La Paz.

Andrew sites his personal highlight as having 4 weeks adventuring with his son Sean. A time together that is rare to find in these busy times.

Kevin Minett

Kevin has recently joined as a senior financial planner and principal of Financial Keys Pty Ltd. Kevin has spent the past 13 years in financial services, most recently heading up a financial planning firm, Bishop Financial in Sydney’s Eastern Suburbs. Kevin has also run his own IT consulting firm specialising in providing IT solutions to fund managers and financial planning firms. His broad experience ensures that Financial Keys, and in particular its IT infrastructure, provides efficient processes which deliver consistent, reliable, quality service for our clients.

Kevin lives in Woollahra, Sydney and counts restoring old cars amongst his hobbies.

Kevin is well qualified with a Diploma of Financial Markets from the Securities Institute of Australia and a Foundation Diploma of Financial Planning from Deakin University. Kevin is currently undertaking the Advanced Diploma of Financial Planning through Integratec.

Brendan Gallagher

Brendan has recently joined Financial Keys Pty Ltd as one of its principals. Brendan has spent the past 12 years in financial services, where he has specialised in many areas including: advanced financial planning strategy, marketing, financial planning software, e-business solutions for investors and planners. His broad financial services experience together with his MBA and other studies ensure that clients receive a comprehensive service.

Brendan is married and lives in Glebe, Sydney with his young family. When not working or studying he enjoys renovating his house.

Brendan’s qualifications include a Master of Management from the Macquarie Graduate School of Management, Bachelor of Commerce (Economics) from the University of Wollongong and a Diploma of Superannuation Management through ASFA/Macquarie University. Brendan has recently completed his MBA studies and will graduate early in 2004. He is also mid way through a Diploma of Financial Services (Financial Planning) with Integratec.

Back to Top