Viewing posts from: February 2018

What is a market index and how might it affect your investments?

All / 22.02.2018

What is a market index and how might it affect your investments?

Investors who pay attention to the finance segment of the daily news may be gazing in awe at the performance of the US share market. Even taking into account the fall in early February, the Dow Jones Industrial Average has risen 30% in the last 12 months. Meanwhile, the Australian All Ordinaries Index has yet to return to the height it enjoyed before the Global Financial Crisis at 6779.1 points.

This begs two questions: what are these indices? And what do their movements tell us about our investments?

What’s an index?

A share market index is a simple way of tracking the relative changes in the total value of the shares that are included in that index. There are many different indices covering particular national markets, as well as sectors such as large companies, small companies, financials, resources, technology companies and many more.

Capital indices – the type featured on the news each day – simply track the total market value of the companies in the index. This means the largest companies tend to dominate an index’s movements. Indices commonly appearing in news reports include the Australian All Ordinaries Index, comprising Australia’s largest 500 companies; the ASX 200 (Australia’s 200 largest companies); the US Dow Jones Industrial Index that tracks just 30 large industrial companies; and the US S&P 500 consisting America’s 500 largest companies. The NASDAQ is focused on technology stocks and can perform quite differently to the other US indices.

Capital indices ignore the contribution of dividends to the overall performance of the shares that they track. Accumulation indices are calculated on the basis that the dividends paid by each company are re-invested back into that company. They therefore measure compounding returns, and over time this makes a huge difference to the measured performance of the basket of shares. For example, the Australian ASX 200 accumulation index is well ahead of its pre-GFC peak.

This also explains one difference between the perceived performance of the Australian share market relative to the US market. American-based companies pay very low dividends compared to Australian companies. Retained earnings add to a company’s value, so US indices behave a bit more like accumulation indices than their Australian counterparts.

What do the index movements mean for your investments?

What the movement of a particular index tells you about the performance of your share portfolio depends on how closely the two match. If you are invested in an index fund that tracks the ASX 200, then naturally the changes in the value of the index will closely match the performance of your holding in that fund.

However, the Australian share market is dominated by a small number of very large companies. If the big banks are having a bad day the whole index is likely to fall, even if resources have had a good day. If your focus is on the miners, this change in the index may not tell you much about how your shares are performing.

Of course, if you’re following the golden rule of investment – diversification – your precious savings and superannuation will be invested in both Australian and international share markets as well as cash, fixed interest and property. Any given index can then only affect the performance of a part of your portfolio. Nonetheless, if you’re like most people, you’ll want to see the share market arrows on the TV pointing up and not down each day!

Australia vs the world

But why is Australia lagging other markets, particularly the US? One reason is the ‘Trump factor’, and his promise of a very large cut to the company tax rate. This will allow American companies to invest more of their earnings into growing their businesses and increasing their value. Also, Australia has a relatively small technology sector. The US has Google, Apple, Microsoft, Amazon – huge companies that didn’t exist a few decades ago. The massive investment that drove Australia’s mining boom is now past, and after growing strongly from their GFC lows, the banks have taken a bit of a breather.

Coping with market ups and downs

Another golden rule of investment is that past performance is no indicator of future performance. Indices go up, and as we’ve just experienced, they go down, usually suddenly. For advice on how to keep your cool during market gyrations talk to your financial adviser.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6621 8544.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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How to make your term deposits work harder

All / 22.02.2018

How to make your term deposits work harder

In 2011, the average term deposit could earn you around 6 percent per annum. Since then, the times, they have a-changed – and so have term deposit rates.

Since the Global Financial Crisis (GFC) we remain a little nervous around risk, so despite average term deposit rates now being closer to 2.5 percent, they’re included in financial portfolios for the capital security and diversification components they offer.

The Reserve Bank of Australia (RBA) sets the cash rate via its monetary policy. The aim is to stimulate the economy by making savings accounts and term deposits unattractive and make borrowing cheap to encourage consumers to spend.

Generally this kind of monetary policy only lasts a couple of years which is why so few economists foresaw the protracted period of low rates we are experiencing.

Term deposits can pay slightly higher rates depending on the length of the term. For example, investment over one year may attract 2.45 percent, while over two years the same investment may attract 2.5 percent.

Bonus saver accounts offer investors more attractive rates but you must read the fine print or better still, seek independent professional advice before committing. You could find that the ‘bonus’ may only apply for a short introductory period then revert to the standard cash rate, potentially lower than term deposit rates.

In other cases, bonus rates are only paid if a regular monthly contribution is made to the savings account.

Many people find these features work in their favour, but there can be traps for the unwary.

So if you’ve done your homework, and term deposits remain the most appropriate fixed interest investment for you, there are a few things you can do to maximise their potential.

Loyalty may get you nowhere

We Australians are a loyal bunch usually letting our insurance policies automatically renew each year – same with term deposits. Each time yours approaches maturity, shop around and see what other term deposits are available that will work better for you.

Eggs and baskets

Consider spreading your allocated funds across a variety of institutions with a staggered range of maturity dates. This might enable you to take advantage of better rates as your investments mature.

Interest payments

Many term deposits offer the earnings as a regular income, sometimes resulting in a lower interest rate. Consider reinvesting the interest for a higher rate, or, if you need some income, set up separate term deposits.

Set and forget

Term deposits are not everyday transaction accounts. While it’s possible to access money before the end of the term, it’s not advisable as heavy penalties apply, including fees and reduced interest rates.

As with any financial decision, it’s important to seek advice from a licensed adviser to ensure you’re getting the best product and the best deal for you. For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6621 8544.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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How much money do you throw away?

All / 01.02.2018

While the move is on to become a cashless society, notes and coins are likely to be with us for some time yet. ‘Touch and go’ payments may be increasing, but for many small purchases most of us still rely on good old cash. And because it’s easier to hand over a note for each purchase than to scramble in our pockets or purses for the correct change, by the end of the week we often end up with a hefty pile of low value coins. These coins are such a pain that, according to one survey, 93% of respondents admitted to throwing away five cent pieces, with 29% even ditching ten cent pieces.

Okay, so tossing away a dollar’s worth of small change each week won’t put much of a dent in your future wealth, but at least consider dropping those coins into a donation box. Combined with thousands of other peoples’ donations your spare change can make a real difference to the services that charities provide.

There are, however, other areas where we effectively throw away money, and in amounts that can really add up:

  • Food: on average Australians throw away around one third of the food we buy.
  • Gas and electricity: when was the last time you shopped around for the best deal on your gas and power bills? You could save hundreds of dollars a year.
  • Gift cards: often end up at the back of a drawer until they expire, or you may only spend part of the total value.
  • Impulse buying: how much do you spend on clothing you don’t wear and stuff you don’t use?
  • Lunches: even if you skip the smashed avo, a takeaway lunch costs much more than one you make yourself.

In most of these cases the solutions are pretty obvious.

  • Only buy the food you will use. A few loose carrots and apples might be a better buy than the kilo bags that start to rot in the crisper. If you regularly have a surplus of some foods find recipes that use them. Soups and casseroles are a great way to use up all sorts of ingredients.
  • Compare what other gas and electricity retailers are offering.
  • Have a good look at your credit card statement. Were all your purchases necessary?
  • Place your gift cards in front of your credit cards to remind you to use them instead.
  • Make your own lunch. Many people can easily save $10 or $15 dollars per day with very little effort. Once any impulse buying habits are under control, this could be the supercharger of your savings.

Will implementing these changes make a real difference? Let’s see.

Imagine that you adopt some of these suggestions and as a result save an average of $60 per week. Stashed away in a savings account earning an interest rate of 2% per annum for 20 years, those modest weekly savings will grow to over $76,700. Contributed to an investment that provides an average return of 7% pa and you could be looking at having around $136,000 in 20 years’ time.

Does that give you a better idea of how much money you could really be throwing away?

What to do with your newfound savings capacity will depend on your goals and situation. Your financial adviser will be able to help you make the most of the money you don’t throw away.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6621 8544.


Disclaimer

Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

Read More >>
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