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Provision Newsletter

What has history shown us about investing?

Posted On:Oct 01st, 2015     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

In view of the recent market ups and downs, if you’re an investor, you might be thinking about pulling out of higher risk investments, such as shares, and transferring them to lower risk investments, like cash or term deposits. 

But if you’ve just started your investment journey, you might not be aware of how investments perform over time.

So here are some

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In view of the recent market ups and downs, if you’re an investor, you might be thinking about pulling out of higher risk investments, such as shares, and transferring them to lower risk investments, like cash or term deposits. 

But if you’ve just started your investment journey, you might not be aware of how investments perform over time.

So here are some things to think about before making any changes to your investments.

Markets always recover

Share markets go up and down and this affects investor sentiment and the performance of listed companies which trade on the official stock exchange. The Global Financial Crisis (2008) had a major impact on the Australian share market but the market recovered. So it’s important to remember that markets always rebound from major events and move on to new highs, as the graph below shows.
 

Actual index level

Time is on your side

History tells us that investing in shares almost always provides a higher return than investing in low risk investments, such as cash or term deposits.

For example, if you’d had shares and switched out of them into cash during the Global Financial Crisis (GFC) in 2008, you’d still be recovering from their drop in value. But if you were an investor who ‘rode the storm’ and kept your money in shares, you’d be better off now, as you can see from the graph below.

We can’t predict the future

There’s no crystal ball to tell us when the markets are going to change and how they’re going to perform over time. That’s why, generally speaking, it’s best to have a variety of investments across different asset classes.

And remember to take a long-term view when it comes to investing.

Want to know more?

Please contact us.

Source: AMP 25th September 2015

Important information

© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

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If you’ve always thought property prices only go up…

Posted On:Sep 25th, 2015     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

With so much emphasis on property in the media, it can be difficult to sort fact from fiction. But before investing in any type of asset―including property―it pays to consider the pros and cons, and any commonly held misconceptions.

Here we bust 3 property myths.

Myth 1: Prices always go up

Believing that property always goes up is understandable―especially given prices have dramatically

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With so much emphasis on property in the media, it can be difficult to sort fact from fiction. But before investing in any type of asset―including property―it pays to consider the pros and cons, and any commonly held misconceptions.

Here we bust 3 property myths.

Myth 1: Prices always go up

Believing that property always goes up is understandable―especially given prices have dramatically increased in our major cities in recent years.

But like most investments, the property market demonstrates cyclical patterns. That means, at times property performance can be stagnant and show little or no growth. And like many investment cycles, a boom can be followed by a bust1.

 

Source: ABS, AMP Capital

Myth 2: All property is the same

When we think about property, we tend to think about it as one market. We generally take a macroscopic view. We hear about the performance of Australian property and may think that buying a property anywhere will turn out to be a good investment. But this approach can lead to decisions that fail to yield the results we expect.

Within the property market are countless micro-markets. And property prices can depend on the different economies they have links to―as we’ve seen in Australian mining towns where prices reached record highs in recent years only to be followed by a sharp decline.

Similarly, we hear general reports in the media that property prices are rising and this general sentiment can set unrealistic expectations. For example, specific price expectations in the CBD should be markedly different from those in a particular region or suburb. But we may tend to think that all prices in all areas will always rise. And this is where the danger lies.

Myth 3: Property’s a sure thing

The combination of low mortgage rates and rising home values means debt levels have increased dramatically. In fact, the ratio of household debt to disposable income is recorded at 155.9%―a record high2.

If you cannot afford to repay a home loan due to changes in personal circumstances, such as losing your job, your entire financial future can be put at risk. Any slumps in house prices could result in many people being unable to cover outstanding loan amounts if forced to sell.

Take a long-term view

It’s important to think about property as a long term investment, even when buying a home to live in―and to borrow within your means so you’re not financially stretched. Explore your capacity to repay a loan with our borrowing power calculator.

And if you take on a home loan, consider buying insurance to help protect you in case your circumstances change and you’re unable to meet your loan repayments.

When it comes to investing, it’s important not to put all your eggs in one basket. That way you may be able to protect your money by spreading risk over different markets. Please contact us to find out more about the types of investments that may suit you.


Source : AMP 17th September 2015

1 http://advice.realestateview.com.au/buying/beginner-guide-to-investing/4/

2 http://www.corelogic.com.au/news/while-housing-and-household-debts-keep-climbing-so-too-does-asset-values.

Important information

© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

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Are we headed for a global recession?

Posted On:Sep 21st, 2015     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

by Michael Collins, Investment Commentator at Fidelity

September 2015

Remember the hype about the “super cycle” that justified record commodity prices? The term to describe “higher-for-longer” commodity prices was based largely on ever-climbing demand from the Chinese as the country industrialised. Amid the excitement, commodity prices soared by more than six-fold from 2004 to 2011, as measured by the

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by Michael Collins, Investment Commentator at Fidelity

September 2015

Remember the hype about the “super cycle” that justified record commodity prices? The term to describe “higher-for-longer” commodity prices was based largely on ever-climbing demand from the Chinese as the country industrialised. Amid the excitement, commodity prices soared by more than six-fold from 2004 to 2011, as measured by the Reserve Bank of Australia’s commodity price index. [1] That index has collapsed by 63% over the past four years as Chinese demand fell and supply increased after an investment frenzy to build more projects and the revolution in shale. (A high US dollar hurts too because it boosts prices in local currencies, thus curbing demand.) As at August 31, aluminium, copper, iron ore, nickel, oil and zinc had plunged 49%, 47%, 63%, 78%, 61% and 57% from their recent, and mostly record, highs. [2]

The collapse of the commodities bubble – for that’s what it was in hindsight – is buffeting emerging countries (such as Brazil, Chile, Colombia, Russia and Venezuela) that rely on material exports. And plunging commodities is only one of their problems. The prospect of higher interest rates in the US is sucking capital from emerging countries by boosting repayments on the US$4.5 trillion (A$6.3 billion) of US-dollar-denominated debt that these countries owe. Political uncertainty is dogging Brazil, South Africa, Turkey and Malaysia.

The trials of China and other emerging countries on top of the unresolved eurozone debt crisis, Japan’s inability to revive itself and the Federal Reserve’s likely imminent rate increase are fanning talk [3] the world economy is headed for recession. The underlying concern is that policymakers can’t combat any slump as high government debt hampers fiscal stimulus and interest rates are already at record lows. While no one can rule out a global recession because events somewhere could surprise much like the so-called Arab Spring did in 2010, the world economy probably has enough going for it to avoid such a gloomy outcome. Its key advantages are that the US is prospering while China is only slowing, not shrinking.

Judging whether the world might enter a recession requires defining what such a downturn would look like; a task more contentious that it should be. Some define it as annual growth as slow as, say, 2% while others voice that it must be a contraction in global living standards. The world should escape either fate, even if global growth is subdued enough to approach the more-relaxed definition. Still, it must be acknowledged that a growing US economy is less an asset for the world than it was. The world’s largest economy only amounts to 22% of global GDP now, as measured by the World Bank, [4] compared with about 40% two decades ago. While what’s happened to commodities is cyclical in many respects – greater demand and rising prices leads to a supply response that became a glut – the worry, in fact, is that the drop in commodities really reflects a slump in global demand rather than extra supply. The danger in this situation is that the drop in commodities will add to deflationary pressures in a debt-heavy world.

Investors, though, can be reassured that the collapse of the commodities bubble is different from the ending of the bubbles in, say, technology, which blew up stock markets and wealth, and US housing, which nearly crashed the global financial system. While the end of these bubbles just spewed venom, falling commodity prices come with advantages for the world. Diving materials prices are great for commodity importers, including emerging countries such as India and those in eastern Europe. They help trade balances, mend government finances, boost consumer spending power, reduce business costs and lower inflation. The global economy, overall, is better off. Commodities too are still double what they were a decade ago so commodities exporters are not facing a catastrophic decline. Authorities still have room to expand fiscal and monetary stimulus if needed, even if they have less scope than before. A further relief for investors is that China has enough remedies at hand to escape an imminent recession. Another comfort is that much of the increase in the US dollar is because the Fed is poised to increase interest rates. The Fed will only do this if it thinks the US upturn is strong enough to cope. So too is the global economy buoyant enough to handle the challenges thrown up so far.

Tougher hurdle

The IMF in 2009 tightened its definition of a global recession and in doing so defined away some slumps. The body used to say the world was in recession if GDP growth fell below 3% over a period but decided this made little sense. So the IMF toughened its recession definition to make it closer to the one credible bodies apply to countries – when they look at a range of key economic indicators, including GDP growth, to judge the business cycle. (The definition of a recession as two consecutive quarters of negative growth is amateur economics.) These days, the IMF says the world is in recession if a drop in per-capita GDP worldwide (measured on a purchasing-power-parity basis) [5] coincides with weak readings on key variables such as employment, trade and industrial production. By this definition, there have only been four global recessions since World War II; namely, in 1975, 1982, 1991 and 2009 (when per-capita output slid to 0.13%, 0.89%, 0.18% and 2.5% respectively). [6]

The change in the IMF meaning defined away global recessions in 1998 and 2001, years that are instructive of what may lie ahead now. In 1998, an upturn in advanced nations offset a slump in emerging countries, to ensure the world economy expanded 2.5%. In 2001, the opposite occurred – the emerging world counterbalanced their developed peers – such that the world grew 2.5% again.

Investors can take comfort that enough of the world’s economies will grow in the coming year to ensure the global economy expands, even if that’s at a sluggish pace by past standards. By way of comparison, in good years the world economy can expand between 5% and 5.5% – the record since 1980 is 5.7% growth in 2007. Another baseline is that annual average economic growth for the world over the past 35 years is 3.5% (a result that shows how absurdly high 3% was as a benchmark of recession.) [7]

The way economists forecast global growth is to study the outlook for different countries or classifications of countries (emerging or advanced) weighted according to their size in the world economy, and then studying consumption, investment, housing, public spending and net exports within those economies.

Let’s start with emerging markets ex-China, which comprise about 19% of the world economy. Many of them are expanding robustly enough. Emerging Asia, for instance, is in much better shape than it was before the collapse of the baht in 1997 triggered the Asia financial crisis. Back then, emerging Asia was full of foreign debt, had unsupportable fixed exchange rates and was dogged by wonky financial and property sectors. Today, even as currencies drop from India to Korea, emerging Asian countries have sounder financial systems, freer exchange rates, tame inflation, current-account surpluses, large forex holdings and sturdier government finances. While these neighbours face losing export sales to China and currencies are falling accordingly, it’s more the emerging world outside east Asia that’s a bigger problem; namely, much of Latin America, the oil exporters, Russia, South Africa and Turkey. Still, considering emerging countries as a group, when you allow for their young and growing populations and expanding middle classes driving consumption, their resources, pro-business governments (to generalise), infrastructure needs and low labour costs, the IMF’s forecast of 4.2% growth for 2015 (including China) looks reasonable. So too does 7.5% growth for India, which is 2.7% of the world economy and which expanded 7% in the 12 months to June.

China, as 13% of the world economy, deserves separate analysis. No one denies that China confronts challenges as it shifts from an investment- and export-led economic model to one driven by consumption. Its overriding task during this transition is to ensure that aggregate demand stays high enough to avoid a recession. Authorities have vast ability to do just that. Interest rates are well above zero (the one-year lending rate is at 4.6% even after five cuts since November), public debt at only 50% of GDP allows for fiscal stimulus and China boasts the world’s largest forex hoard of US$3.7 trillion. On top of that, Beijing’s autocratic nature will prove an asset in an emergency for it can enforce unorthodox remedies without worrying about the due process that can snarl democracies. The political reality is that Beijing will succumb to short-term growth fixes to keep unemployment low enough to ensure social and political stability, even if that sets up bigger problems later. China’s new wealthy need little encouragement to spend and the world’s highest wages growth is another reason why retail sales are expanding more than 10%. Thus, few would forecast China’s growth to drop below 4% in the coming 12 months. Most predict Chinese growth to be about 6%.

Modern woes

Admittedly, slabs of the advanced world are struggling. The eurozone, which covers 17% of the world’s economy (to outsize China), is yet to regain its pre-crisis size. So it can be classed as in a depression. But the deflation-prone euro area is eking out growth (0.4% expansion in the second quarter) as low interest rates, falling commodity prices, an improving labour market and higher wages are aiding consumer demand. The Greek saga is a threat, for sure. But what Athens’ recent near-default and near-exit from the euro showed is that the Balkan country’s troubles appear to do little immediate economic damage to neighbours. The political damage tied to austerity and joblessness in Greece and elsewhere is spreading. But it will take a few more years to cause vast economic ructions – by, say, if Marine Le Pen were elected French president and fulfilled her pledge to pull France out of the euro and EU. Even if eurozone growth is pegged at 1% to 1.5% for the next 12 months, that’s better than nothing. Japan, for all its radical fiscal and monetary stimulus, might offer closer to nothing. Japan has zero inflation and its economy shrank 0.4% in the June quarter because consumption and investment are spluttering while China’s slowing is curbing exports. But Japan these days is only 5.9% of the world economy. The IMF estimates Japan will eke out about 1% growth in the next 12 months.

Luckily for the world, the rest of the advanced world is thriving, especially the US, which grew at a vibrant 3.7% annualised pace in the June quarter. Retail sales are buoyant, consumer confidence is touching eight-year highs and the jobless rate is at a seven-year low of 5.1%. Housing is humming. Business investment is climbing and the government is injecting stimulus. Exports play a relatively minor role in driving US growth (at just 13% of GDP compared with 50% for Germany) so the country is insulated from miseries abroad. While wages are stagnant, productivity sluggish and there is some hidden unemployment, at least Washington is unlikely to host soon a destabilising showdown over raising the country’s debt limit, which is due to be lifted again this year. All said, consumer spending is expected to help the US maintain its 3% annual pace of growth into 2016 and beyond. Advanced economies less the US, the eurozone and Japan amount to 23% of the global economy. The IMF predicts 2.2% growth this year for advanced economies overall. That appears a reasonable outlook for countries including Switzerland and the UK, for most of them will benefit from lower commodity prices – even if they are not so good for Australia (1.9% of world GDP) and Canada,

All up, economist might be prudent to trim their global growth forecasts for the next 12 months. But they shouldn’t go too much below the 3.3% the IMF in July forecast for 2015 or the 3.8% it predicted for 2016. The body was well aware when it made those projections that the commodities bubble had exploded. [8]

 

Country and regional percentages of world output come from the World Bank’s database and measure gross domestic product for 2014. http://databank.worldbank.org/data/download/GDP.pdf. IMF growth forecasts are estimates taken from the World Economic Outlook – July 2015, Table 1 (Overview of the World Economic Outlook projections) on page 4 that give estimates for 2015 and 2016 rather than the upcoming 12 months. Other financial information comes from Bloomberg unless stated otherwise.


[1] Reserve Bank of Australia. Commodity price index. In SDR terms, the index rose from 24.4 in January 2004 to a peak of 162.2 in May 2011 before falling to 60.0 in July 2015. http://www.rba.gov.au/statistics/frequency/commodity-prices/2015/icp-0715.html. By way of comparison, the Bloomberg Commodity Index shows an increase of 140% from 1999 to 2011 and a 52% tumble since then.

[2] Prices movements for aluminium, nickel and zinc are based on the London Metal Exchange’s three-month rolling forward contract. The price for copper is the LME’s cash spot price. Oil is based on West Texas Intermediate price. Iron ore is based on the spot China price.

[3] Bloomberg News. “China will respond too late to avoid a recession, Citigroup says.” 28 August 2015. http://www.bloomberg.com/news/articles/2015-08-27/china-will-respond-too-late-to-avoid-recession-citigroup-says

[4] World Bank database. Gross domestic product by country and other categories for 2014. http://databank.worldbank.org/data/download/GDP.pdf

[5] GDP on a purchasing power parity basis makes allowances for the different costs of goods and services in different countries.

[6] IMF. Box 1.1 “Global business cycle” in World Economic Outlook – April 2009. “Crisis and recovery”. Pages 11 to 14. http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf

[7] IMF. World Economic Outlook database. http://www.imf.org/external/pubs/ft/weo/2015/01/weodata/index.aspx

[8] IMF. World Economic Outlook Update release. “Slower growth in emerging markets, a gradual pickup in advanced economies.” 9 July 2015. http://www.imf.org/external/pubs/ft/weo/2015/update/02/pdf/0715.pdf

Reproduced with permission of Fidelity Australia

This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity Australia’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.
© 2015. FIL Responsible Entity (Australia) Limited.  

Any information provided by Fidelity Worldwide Investment detailed above is provided separate and external to us and our Licensee, AMP Financial Planning Pty Limited. Neither we, nor AMP Financial Planning Pty Limited take any responsibility for their action or any service they provide.

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7 tips to spring clean your finances

Posted On:Sep 07th, 2015     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

Source: AMP: originally published on 4th September

After winter, simple things like opening a window to let in the sunlight can transform your space. 

In the same way, shedding light on your finances can give you more control and peace of mind when it comes to money. Spring’s the perfect time to make sure your finances are

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Source: AMP: originally published on 4th September

After winter, simple things like opening a window to let in the sunlight can transform your space. 

In the same way, shedding light on your finances can give you more control and peace of mind when it comes to money. Spring’s the perfect time to make sure your finances are not just in order but set to blossom in the months and years to come.

Spring clean your finances

Start your financial spring clean by working out how you’re placed financially—you need to work out how much you earn, how much you owe and where your money’s going every week.

Our budget planner and the TrackMYSPEND app at the MoneySmart website can help you gain control over your spending. You’ll get to know your spending habits and can decide where your money can work hardest for you.

Set an overarching goal to maximise the amount you hold on to and gradually minimise the amount you owe. And read our tips for cutting debt. If you are lucky enough to be debt-free turn your mind to saving.

Then set short-term and long-term goals so you know where you’re heading.

Once you’ve worked out what you’re aiming to achieve, set smaller milestones—like saving $1,000 at a time—and mark them on your calendar. That way you’ll enjoy some quick wins along the way to achieving bigger goals.

Stem your spending

Most of us would be a lot better off if we spent less. And even if you are spending less than you earn you may be able to boost your savings and reduce debt by making additional spending cuts.

Look for ways to spend less and be creative!

Here are seven simple and practical ways to get into better financial shape this spring:

  1. Consider holidaying on a budget. You may be able to put the extra money you’d normally spend into repaying your home loan more quickly.
  2. Work out how much you’re spending on non-essentials like buying lunch—calculate the costs over a one-year period and set a goal to make your lunch and pocket the money instead.
  3. Automate your money. Set up automatic transfers and send some of your money to separate savings and expenses accounts before you can spend it.
  4. Revise your shopping strategies! Before you buy, compare prices at online comparison sites. And before walking into the supermarket, arm yourself with a shopping list and stick to it―consider generic brands or take up a special offer.
  5. Consider making changes at home. Suppliers of household services like gas and electricity will often compete for your business. By negotiating a better deal you could save hundreds of dollars by the end of next winter!
  6. If you exercise at the gym, ask yourself how you can look after yourself just as well without paying a formal membership.
  7. Instead of eating out at expensive restaurants, consider spending some gourmet time enjoying a picnic lunch outdoors.

Enjoy the fruits of your labours

It’s true that money doesn’t grow on trees―so spring into action and get yourself into a good financial position so you can start enjoying your best life. Use our budget planner to manage and plan for every cent you earn. And contact us. Good advice can make a big difference to how quickly your financial position improves.

Important information

© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

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Global share markets fall despite sound fundamentals

Posted On:Aug 25th, 2015     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

All major share markets have been sold down heavily over recent days. The correction on equity markets has also been accompanied by ongoing falls in the price of commodities and emerging market currencies. Since the beginning of August, Australian shares are down 12%, with losses of 10% to 12% recorded across the United States, Europe and Japan. Chinese shares have

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All major share markets have been sold down heavily over recent days. The correction on equity markets has also been accompanied by ongoing falls in the price of commodities and emerging market currencies. Since the beginning of August, Australian shares are down 12%, with losses of 10% to 12% recorded across the United States, Europe and Japan. Chinese shares have declined 14% since the start of the month.

What has caused the market correction?

There appears to have been little change in underlying market fundamentals, with the economic backdrop remaining relatively stable and supportive of modest company earnings growth. Rather, the sell-off seems to have been largely sentiment driven. AMP Capital Chief Economist Dr. Shane Oliver highlights that markets are currently “full of emotion” and characterised by nervousness.

Underpinning the market’s nervousness seems to be increasing concern over the outlook for Chinese economic growth, ongoing weakness in commodity prices and fears that the combination of falling commodity prices and weaker Chinese growth will be particularly problematic for emerging markets. As a result, funds have flowed out of emerging markets causing sharp falls in many emerging economy currencies.

Is it a correction or something worse?

Whilst a fall of the magnitude experienced in recent days was not expected, sharp declines in share markets of up to 20% are not unusual and do not imply there will be an extended period of weakness. In fact, corrections can be a healthy characteristic of “bull” markets, allowing investors to reassess valuations before a rising trend resumes. Dr. Oliver believes that the longer term trend for shares remains upwards, stating that:

“Our view remains that the cyclical bull market in shares likely has further to go. Put simply shares are not seeing the sort of conditions that normally precede a new cyclical bear market: shares are not unambiguously overvalued; they are not over loved by investors; uneven and below trend growth is extending the economic expansion cycle; and monetary conditions are likely to remain easy for a while yet.”

Previous market falls that have preceded more extended market downturns tend to have been associated with financial system dysfunction, excessive overvaluation or imminent economic recession. None of these factors appear to be in place today. In particular, the global economy remains on a modest growth path with low inflation and accommodative policy support creating an environment conducive to company profit growth. Locally, the latest profit reporting for the period ending June 30th, confirmed a steady rise in the profitability of Australian non-mining companies of around 7% from the previous year.

Although share market fundamentals may remain sound, share market valuations can move away from fundamentals for extended periods. As such, the latest sell-off suggests that caution is required by investors, particularly around emerging markets. However, with little change in the outlook for underlying company profitability, investors should maintain longer term strategies and asset allocations. In fact, for investors with underweight positions to equities, the current sell-off may represent an opportunity to enter the market. Please do not hesitate to contact us should you wish to discuss recent market events or any aspect of your investment strategy.

 

What you need to know
AMP Financial Planning Pty Ltd ABN 89 051 208 327, AFSL 232706 and Australian Credit Licence 232706. Any advice contained in this brochure is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your financial planner, their practice, AMP Financial Planning Pty Ltd and other companies within the AMP group will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Contact
AMP for more details by calling 133 888 or ask your financial planner.

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Going undercover

Posted On:Aug 19th, 2015     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

First the good news. Millions of Australians gain their life and disability insurance as well as income-protection insurance through their super funds’ default cover. And the level of that default cover tends to be much more adequate than a decade ago.  Now the not-so-good news. It can be a costly mistake to assume that your super fund’s default

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First the good news. Millions of Australians gain their life and disability insurance as well as income-protection insurance through their super funds’ default cover. And the level of that default cover tends to be much more adequate than a decade ago.  Now the not-so-good news. It can be a costly mistake to assume that your super fund’s default insurance cover is adequate for your circumstances.

Underinsurance in Australia 2014, a 94-page report published over the past week by Rice Warner Actuaries, estimates that the median default cover provided by super funds cover meets 60 per cent of the life insurance needs for average households. However – and this is a big however – the funds’ default death cover meets a much lower proportion of needs for families with children.

Young families with children are calculated to have a “basic level” life insurance need of about $680,000 – $400,000 more than the typical default coverage. (This calculation is based on certain assumptions including that the parents in these families are aged 30.)

Interestingly, half of the $14 billion collected annually in life insurance premiums each year is through super funds for their group insurance cover.

Rice Warner has gathered its superannuation insurance data from 45 industry funds, 14 public-sector funds and six employer master trusts. These funds have a total of 16.5 million members.

The Underinsurance in Australia report makes the crucial point that members’ insurance needs “vary significantly” depending upon the composition of their families.

“This could be addressed by superannuation differentiating members’ default cover by marital status and the number of independent children instead of just age,” the report suggests.

A reality highlighted by the researchers is that the level of default life cover held by the youngest single members of super funds is “likely to be higher than their needs”.

Yet the coverage of members as they grow older and form families and accumulate debt typically falls well short of needs.

Rice Warner says the key challenges for super funds in regard to improving the adequacy of insurance cover for their members are to:

  • More closely tailor insurance cover for younger people to reduce the possibility of over-insurance given their typically more limited liabilities and responsibilities.

  • Maintain insurance for older members. Many super funds’ default covers “taper rapidly” as members grow older but their insurance needs may not reduce.

  • Encourage members to report to their super funds “life events” such as having children, taking a home loan and older children becoming financially-independent. This would assist super funds to fine-tune insurance products to their members’ circumstances.

While these particular pointers are directed at super funds, the report may prompt individuals – perhaps with the guidance of their financial planners – to take the initiative and make sure their insurance is adequate for their family’s circumstances.

Perhaps as starting point, consider feeding your family’s details into an online insurance calculator provided by large super funds. Also, ASIC’s personal finance website MoneySmart has some valuable tips on gaining the right level of cover – inside or outside super. (See Insurance through super.)

One tip is that if you are considering switching super funds to first check whether you will get the same level of life, total and permanent disability and income-protection cover with the new fund – at the right price. This can be particularly critical if you have an existing medical condition.

A core message is not to jump to the assumption that your super fund’s default cover is sufficient your circumstances.

Rice Warner’s research confirms that the levels of underinsurance for permanent disability and income-protection cover are even greater than for life insurance.

Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.

 

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2015 Vanguard Investments Australia Ltd. All rights reserved.

Any information provided by Vanguard Investments Australia Ltd detailed above is separate and external to us and our Licensee, AMP Financial Planning Pty Limited. Neither we, nor AMP Financial Planning Pty Limited take any responsibility for their action or any service they provide.

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