Provision Newsletter

The government’s MySuper reforms take effect from 1 January 2014.

If you haven’t made an active investment choice about where to invest your retirement savings, your employer will be required to pay your super contributions into a MySuper offering from 1 January 2014.

What’s MySuper about?

• Currently, when you join a super fund, you can choose an investment option—how and where you’d like your money invested to suit your financial goals.

• If you don’t make an investment choice, your super contributions automatically go into what’s called a ‘default’ investment option—one that is intended to suit a broad range of financial needs.

• With the introduction of MySuper come MySuper default options– simple and cost‑effective superannuation options that are replacing existing default options.

• On 1 January 2014, employers must start contributing to a MySuper offering for any employees who haven’t made an active investment choice.

Do the MySuper changes impact everyone?

No. If you’ve already made an active investment choice for your super fund, the MySuper changes will have no impact on you.

Now’s the perfect time to start taking control of your retirement savings and make a choice about where to invest your money. Smart choices now can maximise income later.

After all, it’s your money. And it’s your retirement you’re saving for.

Super changes that can help grow your retirement nest egg…

It’s been a big year for super, with some important changes to the way you can save for your retirement.

• If you’ve turned 60 and earn under $300,000, you can put more money into your super at the concessional 15 per cent tax rate. The before tax—or concessional—contributions cap is temporarily going up to $35,000 for 2013-14.

• If you’ve turned 70 and you’re still working, you should have started to receive compulsory employer super contributions on 1 July 2013.

• And if you’re retired, as of November 2013 the government has reduced the rate at which your investments are assumed to be earning income, potentially improving your eligibility for the age pension. The deeming rate has been reduced to 2 per cent for the first $46,600 for single pensioners and $77,400 for couples, and the deeming rate above these thresholds has been reduced to 3.5 per cent.

  • What’s deeming? As soon as you hit age pension age, super starts counting as an asset. It’s treated as a financial investment and subject to deeming.

  • The deeming rules assume your financial assets are earning a certain amount of income, regardless of the income they actually earn.

Please call AMP on 131 267 or your financial planner to talk about how you can make the most of these super changes to boost your retirement savings.

What you need to know

Any advice in this document is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

Back in the day, a big house made sense with plenty of room out back for the kids to play in and plenty of room inside for the family to spread out. But now the kids have flown the nest, you may be starting to feel as though you’re rattling around a bit.

If it’s something you’ve been thinking about, this holiday season could be a good time to float the idea, when your family comes together to celebrate the festivities.

The case for downsizing…

A big house can mean big bills—summer and winter. And then there’s the cleaning, the gardening, the upkeep… sometimes it can feel as though the house is getting on top of you, particularly if you’re on your own or you have health issues.

Downsizing may also have an impact on your insurance arrangements, reducing your premiums as you reduce your belongings and the contents of your home. Also, if you haven’t finished paying off your mortgage, downsizing could also mean a lower mortgage payment, which could make a real difference to your cash flow—short-term and long-term.

What’s more, the idea of a tree change or a sea change can be very appealing. Imagine waking up to the smell of eucalypts or sea breezes every morning.

If this sounds familiar, you’re not alone. In a recent study, 43 per cent of respondents who had moved since turning 50 had downsized.[ 1]

So selling the family home, freeing up some equity and downsizing to a smaller property could be starting to make sense.

…and the case against

But there can be a downside—both emotional and financial.

There’s a lifetime of memories in these walls—after all, your kids grew up in this house. Downsizing means you will need to sell or give away the belongings and collectibles you’ve amassed over a lifetime, but you won’t need any more. It’s harder when it comes to mementos and your children’s belongings, but limited space in a smaller house will mean some things will have to go. 

There can also be practical difficulties with selling up and downsizing. Many Australian suburbs are dominated by large family homes and lack the sort of medium-density housing stock that would suit older couples.

You might need to move further afield to find a suitable place. But that means uprooting yourself. You’ve got a lot of social capital invested in your local area and you may not want to move to a far-flung town or suburb where you’d have to start again.

There’s also the matter of the kids’ inheritance. The family home can be a tax-effective way to pass wealth on to the next generation.

Then there’s the age pension income and assets tests. After a lifetime of hard work, you deserve to maximise your entitlements. The family home is exempt from the assets test. But if you sell your home for $1 million and buy a $500,000 apartment, your $500,000 profit will be included in the assets test and can be included in the income test where it is invested.

Deciding whether to stay put or sell up is complicated. Talk to your financial planner or accountant about the tax and other financial implications before you make a big decision.

What you need to know

Any advice in this document is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

If you’ve been looking forward to those year-end celebrations, then organising your gifts—what to give and who to give it to—can’t be too far from your mind. 

For the late shopper

Been a bit busy these past few weeks to stock up on presents? Technology can help! These apps could help make your shopping experience a smoother and more meaningful one.

• Take the pain out of offline and online shopping with these iPhone apps: Toast, Wrapp, RedLaser, eBay and Amazon.  

• Help find deals, amass coupons and check prices with these Android apps: RetailMeNot, ShopSavvy, eBay and Amazon

A new home for unwanted gifts…

Another idea is to re-gift, because Santa doesn’t always get it right. Paisley ties… garden gnomes… all-in-one travel utensil sets. We’ve all been there. Your Christmas presents are usually a mixed bag. And along with the concert tickets and the new set of clubs, there are always some gifts that you’re not going to use in a million years.

But remember, one person’s trash can be another person’s treasure. In fact, re-gifting is becoming more socially acceptable, with a recent study finding that original givers are less bothered about where their gifts end up than you might think.[ 1]

Gaudy ties may not float your boat. But there’s always an ageing hipster out there on the lookout for something to complete his retro look.

So, come Boxing Day, what do you do with those unwanted Christmas presents?

• You can donate to a charity such as the Salvation Army or St Vincent de Paul – look for a Salvos or Vinnies shop near your home.

• You can sell online through eBay or Gumtree – it’s an easy way to give away something you don’t need, while making some money as well.

• Or you can save up to hold a garage sale– it’s also fun way to connect with your neighbourhood and community. Either hold your own, or jump on board the annual garage sale trail  to find sales and to download the app. You can also use the ebay price guide to help price your gifts.

What you need to know

Any advice in this document is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the product disclosure statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

Market Watch – November edition,

Download Market Watch – November edition and read the full report.

In this edition:

• It has been a good year for this year’s big economic news stories.

• Spotlight shifts to the non-mining sectors of economy and whether they will start to fill the void left by the mining slowdown.

• Upcoming key decisions for US policy makers will set a path forward for growth and deficit reduction.

• In an environment of low interest rates, growth assets gain momentum.

Market Watch is designed to provide you with a clearer understanding of complex investment issues.

If you would like to discuss any of the issues in this edition, please contact us.

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For twenty five years or so my core focus at work has been on the allocation of assets – shares, bonds, property, cash, Australian, global, etc – across multi asset portfolios. Some might say that’s a job that naturally flows from being an economist with a macro (ie big picture) focus. But my interest in asset allocation actually runs much deeper.

I was reminded of that by the news last month that Eugene Fama, Robert Shiller and Lars Peter Hansen had shared the 2013 Nobel Prize in Economics. For anyone interested in investing the contribution of Fama and Shiller to the understanding of investment markets is relevant, but this is particularly so for me as my PhD thesis, largely undertaken around the late 1980s, related in part to their insights.

Markets are effcient…

But first a bit of history on economic thought regarding the workings of investment markets. Economists prior to World War 2 had a somewhat ambiguous view of the role of speculators in investment markets. On the one hand seeing them as likely to smooth prices out over time (as to make money they have to buy low and sell high) thereby contributing to better functioning markets. But on the other hand the economic literature prior to World War 2 is strewn with references to occasional irrational markets with language like: manias, financial orgies, feverish speculation, frenzies, etc. In other words it was generally thought that financal markets occasionally go off the rails and by definition are not always right.

The well-known economist, John Maynard Keynes waxed lyrical on this, in fact arguing that speculators in investment markets are trading simply on the basis of “anticipating what the average opinion expects the average opinion to be” regarding where a security will go in price rather than what it is really worth based on prospective yields and that this causes instability. And he put his money where his mouth was, reportedly making a lot of money trading shares.

However, starting in the 1960s and 1970s, thanks in large part to the work of Eugene Fama, it became generally thought that asset markets are "efficient" in the sense that all publicly available information will be rationally reflected in prices for things like shares, bonds and currencies. As a result only new information will cause prices to change but since new information is unpredictable (otherwise it wouldn’t be ‘new’) and prices are always where they should be, asset price moves should be unpredictable or follow what became known as a random walk ¹. Initial tests of whether past share prices can predict future prices and whether new information is reflected in share prices provided support for the so called efficient market hypothesis (EMH) and so it became widely accepted. If investment markets are efficient this has a number of implications:

• No one can consistently beat the market – supporting the case for investing in passive share funds that track the index rather than trying to pick individual stocks.

• Starting point valuations don't matter. The same return is available from high or low levels for share prices as the market is always right. It follows from this that there will be a constant return differential on offer between assets to compensate for different risk levels. Eg, shares will always offer a higher return than bonds. This helped cement the concept of buy and hold or set and forget when it came to determining investment portfolios.

• If markets are always right, free markets are the best way to allocate resources in an economy.

The market efficiency notion was often made fun of by the joke about the economics professor and his student walking through a university: the student sees a dollar note on the ground and tells his professor, but the professor says no it can’t be there otherwise someone else would have already picked it up!

…markets aren't effcient

But starting in the early 1980s a group of economists – in particular led by Shiller, but also helped along by some work undertaken by Fama himself – began to seriously question the market efficiency notion.

• In particular Shiller (in 1981) found that the volatility of share markets was far greater than can be justified by the rational expectations of future dividends.

• Various studies, including one co-authored by Fama (in 1988) found that while share price changes are positively (but not significantly) correlated at time horizons out to a year or so, over long time horizons – over 3 to 5 years or more – they are negatively correlated (and significantly so). In other words if shares perform poorly over one five year period they are likely to perform well over the next. This suggested that share markets are mean reverting with years of below average returns followed by years of above average returns. The next chart, showing rolling five year changes in Australia share prices, illustrates this to some degree.

Source: ASX, Bloomberg, AMP Capital

• Various other studies found that share market valuation measures provide a guide to future returns.

• Finally, various anomalies in share markets – such as seasonal patterns like the January effect which sees above average returns from November through May – also called into question the efficient market hypothesis.

At its core, most of the early tests of the EMH focussed on whether publicly available information is quickly reflected in asset prices, whereas the tests by Shiller and others asked whether it was “rationally” reflected and the answer was no: share prices move more than is justified, they move in cycles over years and are affected by starting point valuations.

The final nail in the coffin of the EMH was the October 1987 share crash – changes in the long-term outlook for profits & interest rates cannot explain the 30% swing in US shares and the 50% swing in the value of Australian shares in late 1987. Likewise, changes in the outlook for IT stocks cannot justify the 80% swing in the tech heavy Nasdaq index early last decade. Problems with the efficient market hypothesis were all obvious long before the GFC came along!

Irrational man (and woman)

At the same time there was increasing evidence that individual decision making is not rational, but rather that individuals suffer from various lapses of logic. For example, they tend to: downplay uncertainty and project the current state of the world into the future; overweight recent spectacular or personal experiences; focus on occurrences that draw attention to themselves; be overconfident in their own abilities and suffer from wishful thinking. And these lapses tend to be magnified at times by crowd psychology.

The combination of lapses of logic by individuals in making investment decisions and the reinforcing effect played by crowd psychology go a long way to explaining why speculative surges in asset prices develop (usually after some good news) and how they feed on themselves (as individuals project recent price gains into the future, exercise “wishful thinking” and receive positive feedback via the media). Of course the whole process goes into reverse once buying is exhausted, often triggered by contrary news to that which drove the rise initially.

Now of course some argued that it doesn’t matter whether all individuals are rational (economists know they aren’t really!) but if enough are then a share market will behave as if everyone is. In other words: if lots of Warren Buffetts buy when everyone is panicking and sell when everyone is greedy this will push share prices to where they should be despite an irrational bunch of investors. But it is clear that while there are rational investors like Buffett, there are barriers to their ability to buy low and sell high in sufficient volume to keep share prices at fundamentally justified levels:

• First, there simply may not be enough rational investors to battle against a constant stream of new investors with little knowledge of cyclical swings in markets.

• Second, given the size of the irrational crowd, to paraphrase Keynes “markets can remain irrational for longer than sensible investors can remain solvent”.

• Thirdly, competitive pressures may make it hard for institutional investors to have long term investment horizons making it harder for them to trade against the market if they believe it will take a long time to pay off.

• Finally, the true value for assets can never be known with certainty so at extremes there is always an element of doubt causing even the Buffetts to hold their punches.

So where does all this leave us?

There are several observations. First some see the EMH as an example of how economists have their heads in the sand, only to see them eventually wake up to reality that occasionally investment markets go off the rails. But in order to understand how markets work it’s useful to get an idea of how they should work first, and then work from there. Which is in essence why Fama's work has been so valuable and recognised as such in the Nobel Prize.

Second, if investment markets get it wrong should we really trust them to play the key role in allocating resources in the economy. The short answer is yes. I would much rather trust a market than a soviet style bureaucrat to allocate capital throughout the economy. The proof is in the pudding – market driven economies performed much better than socialist economies last century which explains the demise of the latter. Related to this, speculative manias arguably play a role in the innovation that drives economic prosperity. Snuffing out the 1920s boom based on electricity and mass production or the 1990s IT boom prematurely could have starved a lot of great ideas of capital and slowed the long term rise in living standards that we are all benefitting from.

Third, some markets do behave efficiently for much of the time. For example the US share market is so overanalysed that it is very hard for individual stock pickers to consistently beat the market. In such markets it makes sense to just use passive index funds, futures or ETFs to gain exposure.

Finally, and perhaps most importantly, the insights of Robert Shiller and others over the last thirty years demonstrating that markets are excessively volatile and tend to follow mean reverting cycles highlight that asset allocation should be adjusted dynamically over time. Using a process that is increasingly referred to as ‘dynamic asset allocation’ (or DAA) this involves increasing the allocation to assets when they are undervalued and out of fashion with investors and reducing the allocation to them when they are overvalued and very popular with investors. This essentially means overweighting assets around the time their potential return is greatest and vice versa. It’s perhaps the best way to take advantage of the insights of Robert Shiller and others.

Dr Shane Oliver
Head of Investment Strategy & Chief Economist
AMP Capital

¹Now of course someone with inside information will have an advantage – but that's why it’s banned.