Jacqueline Barton

How you can build your financial resilience

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Resilience is the ability to quickly recover from setbacks, and while setbacks can come in many forms most of them will have a financial component. So, what can you do to build financial resilience?

Expect the unexpected

Rarely do we get advance warning that something bad is about to happen to us, so the time to develop your resilience strategy is now. While we don’t know the specifics, we can anticipate the type of events that may throw our finances into disarray. A house fire or a car stolen. Being unable to work due to illness or injury. The death of a breadwinner or caregiver.

With some idea of the types of potential threats we may encounter, we may be able to insure against some of them. If you have taken out any type of insurance policy you’ve already made a start on your resilience plan.

Create buffers

You can’t insure against every possibility, but you can build financial buffers. This might simply be a savings account you earmark as your emergency fund that you contribute to each payday. If your home loan offers a redraw facility you can also create a buffer by getting ahead on your mortgage repayments.

Buffers can be particularly important for retirees. If you need to sell your assets during a market downturn, this can reduce how long your money will last. Maintaining a cash buffer can mean you’re not forced to sell your assets during market downturns[1].

Cut costs

The internet abounds with tips on how to cut costs and save money. In difficult economic times cost cutting can help you maintain your financial buffers and important insurances.

Key to cost cutting is tracking your income and expenditure and yes, that means doing a budget. Finding the right budgeting app for you can make this process simpler, and help you make more mindful choices about your spending.

Invest in quality

There are many companies out there that have long track records of consistently pumping out profits and dividends. They may not be as exciting (i.e. volatile) as the latest techno fad stocks but when markets get the jitters these blue-chip companies are more likely to maintain their value.

This is important. The more volatile a portfolio, the more likely an investor is to sell down into a declining market. This means your losses are realised, and deprives you of the opportunity to ride the market back up again.

The other key tool in creating resilient portfolios is diversification. Buying a range of investments within and across the major asset classes is a fundamental strategy for managing portfolio volatility.

With a well-diversified portfolio of quality assets there is less need to regularly buy and sell individual investments. Unnecessary trading can create ‘tax drag’ where the realisation of even a marginal capital gain triggers a capital gains tax event and consequent reduction in yhe value of your investment.

Take advice

Building financial resilience can be a complicated process requiring an understanding of a range of issues that need to be balanced against one another and prioritised.

As your financial planner, we are ideally placed to assist you in developing your own, personalised plan for financial resilience.

[1] https://www.goodfinancialcents.com/financial-resilience-economic-downturn/

Investing mistakes to avoid

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Investing successfully and improving your investment portfolio can be as much about minimising mistakes as trying to pick the ‘next big thing’. It’s all about taking a calm and considered approach and not blindly following trends or hot tips.

Let’s delve into some of the most prevalent investment mistakes and look at the principles that underpin a robust and successful portfolio.

Chasing hot and trending shares

Every so often there are industries or shares that are all over the media and you may begin to worry that you are missing out on something. For example, there was the ‘dot com’ bubble in the early 2000s, the social media hyped ‘AMC’ shares in 2020 or the lithium shares in 2022. Jumping on every trend is like trying to catch a wave; you might ride it for a bit, but you’re bound to wipe out sooner or later. That’s because the hot tips and ‘buy now’ rumours often don’t pass the fundamentals of investing test.

The key is to keep a cool head and remember that the real winners are often the ones playing the long game.

Not knowing your ‘why’

What would you like your investment portfolio to achieve? Understanding your motivations and goals will help you to choose investments that work best for you.

If you want to build wealth for a comfortable retirement, say 20 to 30 years down the track, you can afford to invest in riskier investments to play the long-term game. If you have already retired and plan to rely on income from your portfolio, then your focus will be on investments that provide consistent dividends and less on capital growth.

Timing the market

Timing the market involves buying and selling shares based on expected price movements but at best, you can only ever make an educated guess and then get lucky. At worst, you will fail.

As the world-renowned investor Peter Lynch wrote in his book Learn to Earn: “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves”.i

Putting all the eggs in one basket

This is one of the classic concepts of investing and something that you have probably heard many times. But it’s worth repeating because, unless you are regularly reviewing your portfolio, you may be breaking the rule.

Diversifying your portfolio allows you to spread the risk when one particular share or market is performing badly.

Diversification can include different countries (such as adding international shares to your portfolio), other financial instruments (bonds, currency, real estate investment trusts, exchange traded funds), and industry sectors (ensuring a spread across various sectors such as healthcare, retail, energy, information technology).

Avoiding asset allocation

While diversification is key, how do you achieve it? The answer is by setting an asset allocation plan in place.

How much exposure do you want to diversify into defensive and growth assets? Within them, how much should be invested in the underlying asset classes such as domestic shares, international shares, property, cash, fixed interest and alternatives.

Then review your asset allocation from time to time to rebalance any over or under exposure that may occur due to market movements.

Making emotional investment decisions

The financial markets are volatile and that often leads investors to make decisions that in hindsight seem irrational. During the COVID-19 pandemic, on 23 March 2020 the ASX 200 was 35 per cent below its 20 February 2020 peak.ii By May 2021, the ASX 200 crossed the 20 February 2020 peak. Many investors may have made an emotional decision to sell out during the falling market in March 2020 but then would have missed the some of the uplift in the following months in.

Some of the other common investment mistakes include reacting to the noise in media, trading too much, over-diversification, not reviewing your portfolio regularly to ensure it still aligns with your goals, not doing enough quality research and not working with a professional.

Seeking out quality and trustworthy financial advice can help to minimise investment mistakes. Give us a call if you would like to discuss options for growing your portfolio.

The cycle of investor emotions

Behavioural finance is the study of how psychological influences can affect investing and markets. This chart shows how emotions affect an investor’s behaviour at different points in the market.

Source: Russell Investments – Cycle of Investor Emotions | Russell Investments

  • When your investments are rising, you feel optimistic and eventually reach euphoria which is at the peak of the market and it makes you feel like the smartest person in the room, tempting you to take more risk.
  • As the markets drop, you may deny it as a short-term blip. As it keeps falling, panic sets in eventually leading to despondency – making you question your entire investment decision.
  • As markets start to rise again, there is hope which ultimately leads back to optimism which is the start of the cycle all over again.

Having a financial adviser coach you through this wave of emotions can be a way to limit making irrational decisions.

i From the Archives: Fear of Crashing, Peter Lynch – From the Archives: Fear of Crashing – Worth
ii Australian Securities Markets through the COVID-19 Pandemic – Australian Securities Markets through the COVID-19 Pandemic | Bulletin – March 2022 | RBA

2023 year in review

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Australia’s economy stubbornly defied predictions during 2023, dashing any hopes that we might begin to return to some kind of normal.

Some had expected an end to the Reserve Bank’s continued cash rate rises during the year. Instead, inflation has been a stubborn foe and we saw five rate rises, adding another 1.25%. But there was good news for property investors with an increase in prices in some cities.

On another positive note, superannuation funds bounced back after losses in 2022.i SuperRatings reported that the median balanced option is expected to return 9.6% in 2023, after most funds produced negative returns the previous year.

Australia key indices DecemberShare markets (% change) Year to December
2022202320222023
Economic growth5.8%*2.1%Australia All Ordinaries-7.2%  8.4%
RBA cash rate3.1%  4.35%US S&P 500-19.3%24.2%
Inflation (annual rate)7.8%^5.4%Euro Stoxx 50-11.7%19.2%
Unemployment3.5%#3.9%Shanghai Composite  -15.1%-3.7%
Consumer confidence82.5  82.1Japan Nikkei 225  -9.3%28.2%

*Year to September, ^September quarter # November
Sources: RBA, ABS, Westpac Melbourne Institute, Trading Economics

The big picture

Global economic forecasts for 2023 were also beset by a number of wild cards during the year. While many economists were predicting recession in the United States and Europe and a rebound in China, the year ended differently with no recession in the US, Europe struggling but doing better than expected and China still battling some headwinds.

October brought concerns of a wider Middle East conflict, the International Monetary Fund revising its outlooks for the region, saying that an escalation of the conflict could be far-reaching, affecting tourism, trade, and investment.ii

Inflation and interest rates

In Australia, economic growth slowed a little on 2022’s result but still delivered a better return than forecast. On the latest data available from the end of September, the economy grew by 2.1% although a larger-than-expected increase in the population is putting extra pressure on housing and prices, keeping inflation higher.iii It was the eighth quarter in a row of economic growth.

The rising cost of living is proving harder to tame than hoped or expected despite continuing cash rate rises.

Consumer prices rose 1.2% during the quarter and 5.4% over the year. On a CPI basis, rents rose 7.6%t in the past twelve months, which was the largest annual increase since 2009.iv

The Reserve Bank continued its battle to get inflation under control, raising the cash rate five times to finish the year at 4.35%.

Sharemarkets

Global sharemarkets ended 2023 on a more positive note. In the US, welcome news from the Federal Reserve of an end to rate hikes saw stocks and bonds soar in the final weeks of the year. During the year, the Dow Jones index increased by 13.7% and the Nasdaq by 43.4%. There was mixed news in Asian markets with a jump of 28.2% on the Nikkei 225 and 18.7% on India’s BSE Sensex but China’s Shanghai Compositive fell 3.7% and the Straits Times index of Singapore was down 0.3%.v

Australia’s sharemarket may not have experienced the heady double-digit returns of some global markets but it ended the year with a gain of almost 8%, marking its best performance since 2021.vi

Commodities

Despite big falls from the peaks of 2022, commodity prices remain high across the board.

Iron ore, Australia’s biggest export, rose more than 21% as the Chinese government continues to create strong demand by stimulating property and infrastructure development.

Oil prices saw some spikes during the year but steadied by December. However, the World Bank notes that conflict in the Middle East, on top of the disruptions caused by the war in Ukraine, could cause a major oil price shock, pushing global commodity markets into uncharted waters.vii

As the US dollar gathers strength and Australia’s high inflation figures persist, the Australian dollar is under pressure. It ended the year where it began after recovering from a slide in the second half of the year.

Property market

While rising interest rates usually dampen property prices, by year’s end we saw a remarkable turnaround for some cities in another result that upended forecasts.

CoreLogic’s national Home Value Index rose 8.1% in 2023, up from the 4.9% drop in 2022 but not quite at the stellar 24.5% increase recorded in 2021.viii

It was a patchy performance across the country. House prices rose at more than 1% every month on average in Perth, Adelaide, and Brisbane in the second half of the year. While Melbourne values dropped in November and December, Sydney and Canberra prices barely moved, and Hobart and Darwin prices fell slightly.

Looking ahead

As floods and storms ravage the eastern states and bushfires break out in the west, another tumultuous Australian summer might be mirrored by a chaotic year for the economy both in Australia and overseas.

The RBA expects economic growth to remain subdued but resilient in 2024, largely supported by construction and infrastructure work. Meanwhile the rebound in international students and tourism is expected to contribute to robust growth in consumer spending.ix The RBA is also confident that inflation will continue to fall slightly throughout the year, but many predict at least one more cash rate increase during the year.

Worldwide, China’s spluttering economy and the outcome of the US presidential election may cause ripple effects across the globe, meanwhile markets will be nervously watching the conflicts in the Middle East and Ukraine as well as China’s threat to blockade Taiwan, for the potential to create broader economic challenges.

Whatever the year ahead brings, we are here for you. If you would like to discuss your investment strategy in the light of prevailing economic conditions, don’t hesitate to get in touch.

Note: all share market figures are live prices as at 31 December 2023 sourced from: https://tradingeconomics.com/stocks
i https://www.afr.com/policy/tax-and-super/super-balances-grow-almost-10pc-thanks-to-tech-rally-20240103-p5euwb
ii https://www.imf.org/en/Blogs/Articles/2023/12/01/middle-east-conflict-risks-reshaping-the-regions-economies
iii https://www.abs.gov.au/media-centre/media-releases/australian-economy-grew-02-cent-september-quarter
iv https://www.abs.gov.au/articles/11-things-happened-australian-economy-during-september-quarter
v https://www.businesstoday.in/markets/story/global-market-performance-heres-how-global-equity-markets-major-currencies-performed-in-2023-411391-2023-12-31
vi https://www.abc.net.au/news/2023-12-29/asx-markets-business-live-news-dec29-2023/103271578
vii October 2023 Commodity Markets Outlook: Under the Shadow of Geopolitical Risks [EN/AR/RU/ZH] – World | ReliefWeb
viii https://www.corelogic.com.au/news-research/news/2023/australian-home-values-surge-in-2023
ix https://www.rba.gov.au/speeches/2023/sp-ag-2023-11-13.html

Economic Update Video: December 2023

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It’s December – the month that always seem to race by as we approach the end of the year and all the festivities it brings. We hope you all have a lovely, happy, and safe festive season.

On the economic news front, there was some good news. Consumer prices eased by more than expected in October. The news that inflation may have been tamed means interest rate rises may be behind us, for now. The positive data also led to a jump in the Australian dollar, taking it to a new four-month high.

Retail spending slowed in October after a short-lived boost in August and September. But, in a further sign of good times ahead, business investment in the September quarter increased by 0.6% to almost $40 billion.

In mixed outcomes for sharemarket investors, there were some devastating lows this year, and a flat performance as November ended, but the ASX200 is up 4 points since the beginning of the year. The unemployment rate has increased slightly to 3.7% with an extra 27,900 people out of work in October.

Overseas, China’s plan to bolster support for infrastructure drove iron ore prices 36% higher than the low in May. Although prices slipped $4 in November from a one-year high of $138 per tonne. While oil prices have steadied with cuts to production on the table to reduce stocks. Brent crude ended the month at around $83.