Flexible Financial Solutions

It doesn’t seem that long ago but the day that Lehmann Brothers collapsed in 2007 will go down in history as the day the ‘financial dam’ broke. It triggered the GFC into full swing and some 4 years later we are still trying to clean up the mess. If you look back to the US economy in the aftermath of the GFC, it could only be described as a basket case. High unemployment, low economic growth, very high government debt, falling house prices, mortgage defaults and bankruptcies were all features of the economic environment at the time (and what’s changed I hear you ask?).

"Can I buy some shares in the US market?" This wasn’t a question I heard too many people asking in 2007/08. About the same number of people asked the question in 2009/2010 and 2011. Compare that to the Australian experience over the last few years since Lehmann Brothers. We just missed having a recession while the rest of the world was struggling, unemployment was low, inflation and interest rates were rising (a sign of a strong economy), government debt was relatively low and the economy continued to grow. Not a bad time to invest!

The differences between the 2 economies could not be more stark and interestingly enough the difference between the returns on the 2 share markets are equally as dramatic...but not for the reasons you may think.

Let’s look at the numbers. On October 9 2007 the main US share market the S&P 500 (top 500 companies on the US market) peaked at 1565 points. In March of 2009 the S&P 500 bottomed at 676. A fall of over 56% which when combined with an anaemic economy it was hardly surprising no one wanted to buy US shares. The Australian market has similar results with the S&P ASX 200 peaking at 6828 in November 2007 and subsequently falling to 3145 in March of 2009, a fall of nearly 54%.

The interesting and quite staggering point is what has occurred since. The S&P 500 stands at 1344 points (at the time of writing) while the S&P/ASX 200 is 4251 points.

The US market is some 16% off its peak. 16%!!!! Given the state of the US economy this is a staggering result. Whilst the Australian market is still 60% below its peak. Yes 60% and this is from the standout economy in the western world with a set of economic numbers which are the envy of many countries.

The reasons for this are too many and too debatable to cover in this blog, and it’s too simplistic to draw too many conclusions from this analysis, but the one lesson we can learn from this is a crucial one....Share markets and economies are not the same thing and don’t always flow in the same direction. Most economic data that is produced is backward looking and often out of date (and then seasonally adjusted). Whilst share markets are forward looking and consider where the economy is ‘going’ to be rather than ‘where’ it’s been.

Most of us tend to base our investment decisions on the here and now. Of course being an expert in hindsight doesn’t really help anyone but I think this is a great reminder of 2 important points: firstly diversifying your investments remains important and secondly write off the US at your own peril! The US economy is still the biggest in the world and remains a very resilient economy.

Craig Todd

*Image by Alex E. Promios via Flickr

In my line of work I get to meet a lot of people. Then I get to understand their financial situation. And finally, together, we uncover their goals and dreams. That is my job, helping people to achieve their goals and dreams. I wish I could put it in my job title because it is a better description than Financial Planner!

Most goals and dreams I hear involve retiring well and doing that special something they have worked and waited for. Often I am the first person they have shared their secret goal with. Sometimes even their partner doesn’t know it till that point.

My goal is to help as many people as I can to achieve their goals and their dreams. Now, I am not a magician, so I have to rely on good strategies and making sure that you get all the benefits you are entitled to. Working together while you are earning a living, preparing to retire and on through your retired years.

First some bad news.

There are times when it may seem your dreams are slipping away or getting harder to reach, especially in the current economic climate. I have heard of people working longer to secure their future and even some who give up on their dreams.

Since the end of 2007 we have seen the Global Financial Crisis (GFC), a time of mild recovery and then account balances in investments going sideways or backwards. The media is very good at spreading the bad news and love to report dollars being lost on the share markets. It is scary, and with those headlines that is all we tend to look at. For those adding monthly to their investments and superannuation there can be a feeling of throwing good after bad.

However, there is some good news in all this gloom. In fact, there are two aspects of the current markets that can be good news in helping you achieve your goals and dreams.

The first bit of good news.

When you purchase an investment (or contribute to super) you actually buy units or shares. The price these units or shares are bought and sold will rise and fall as the markets move. That is what the media focuses on.

The good news starts when you understand that no matter what the price, you still own each and every unit or share you bought. In fact, as you contribute more you buy more units or shares. So even if your dollar balance is staying flat, or decreasing, you may be growing the actual number of assets you own. This is your platform for capital growth when markets trend upwards.

The good news continues when you realise that these units or shares actually provide and income annually. Your investments are in corporations that are making profits and paying dividends. So the more units/shares you have the more income you are going to receive, regardless of the account balance.

Don’t get me wrong, the account balance is important and we would all like to see them rising. And given time history shows the increasing capital value of shares. Time is the key to true investing, as opposed to short term speculation. If capital value growth is the pie, the annual and recurring income is the cream on it.  

Of course we all know that there is risk in buying units or shares. Price can go down as well as up. A better way to describe that is volatility, and it is volatility that ultimately adds the value. When you buy investments they are in corporation like BHP, Rio or Telstra and no matter how their share price might go up and down there is little risk of the company collapsing. So while there is risk you are actually buying volatility and a recurring income that does not fluctuate very much.

Even more good news.

If you have been dismayed over reduced account balances there may be silver lining in those clouds. Lower balances are making more people eligible for CentreLink benefits. CentreLink only looks at your account balance and not the number of units or shares you hold in your investment. So even though the number of units or shares may be growing your lower account balance could now mean you are eligible to receive a benefit.

I am finding more and more people over 65, who are still working, are now eligible for an age pension. Yes still working and getting a CentreLink age pension!

I met with a client recently who is still working for his half yearly Financial Health Plan check. After we looked at his situation, I got him to register with CentreLink. With our assistance he applied for the age pension and now he and his wife receive $226.00 every fortnight plus all the benefits that goes with it.

Getting that dream.

When you are chasing a dream it is important to make every dollar count. Making sure you receive your full entitlements is one way I can help you get there faster. Some people I am helping are even using their CentreLink payments to help build their investments, buying more units and shares. Building their income and a springboard to achieve their goals and dreams.

Don’t leave it until you are 65 to start planning.  Even if you are not 65 yet, Centrelink may be able to help you. Make sure you receive your entitlements and get your dollars working. Then make your dreams come true.

Stephen Redbond

*image by o5com via Flickr

Where to from here for the Global economy? How will the US and Europe recover from their debt problems? ... and why does all of this continue to weigh on Australia when supposedly we are in such a strong position?

 

These are the questions that continue to make headlines and create endless streams of noise for the print and online media. There is no doubt that the debt problems in the US and Europe are not going to go away quickly. It seems the whole world is focussed on what happens in Greece, which is amazing given that Greece’s economy is about half the size of Australia’s.
 
Greece however is the "canary in the coal mine" for other European countries and their banks. If Greece can’t pay back its debt, it will default and that could cause a flow on affect to the European banks and other countries such as Spain, Italy or Portugal.

If you defaulted on your home mortgage, the bank will take your house and then sell it. If the mortgage is bigger than what your house is worth, and it doesn’t pay off the mortgage, the bank will come after you for the difference. This is a very different situation when you lend money to a foreign government. If a country defaults you can kiss your money goodbye – there’s no house to repossess! Which is worrying a lot of banks in Europe at the moment as they may not see much of the money they lent to Greece again.

So, how did we get here? The reality is that it was the same dumb lending practices that got the US into trouble – lending too much money to people who couldn’t pay it back.

In the years before the GFC, US banks had NINJA loans – No Income, No Job, No Assets. And then they were surprised when these people couldn’t pay back the loans – unbelievable! The same thing happened in Europe, banks lending money hand over fist to in this case foreign governments. The assumption was they were low risk loans! It’s a government - what could go wrong? Well if they had bothered to check they would have seen that these countries Greece, Ireland, Portugal etc were living way beyond their means – but of course nobody bothered to check, or if they did they didn’t look very hard.

So why does Australia get caught up in all of this? The bottom line is "globalisation". We are no longer immune from things that happen on the other side of the world. How does this work?  Basically if Greece defaults, the European banks will have less money to lend and less credit in an economy (especially right now in Europe) will cause things to slow and maybe a recession. If that happens, the US could follow which would slow resource hungry China which then flows through into lower demand for resources. Which is where we come into the picture, as this could affect the only industry keeping Australian afloat at the moment. We have become very reliant on China to keep our economy rolling on.

One of the interesting sideshows that has come from this is the “Occupy Wall Street” movement which has arrived in Australia. I call it a "sideshow" simply because we don’t really know exactly what they are demonstrating about. Corporate greed seems to be the catch cry ie too much of it. This movement was created out of the sheer frustration of "Joe Public" having to wear the pain of no jobs in the US, and seeing the banks and bank executives back to making profits and obscene bonuses. It will be interesting to see what comes of it.

Unfortunately, too date not a huge amount has changed post the GFC and my concern is that the main reason for this is the US political system is very reliant on Wall Street’s money to keep the status quo. Which suggests you can protest all you like, but not much will change.

Do you agree?

Craig Todd

*Image by david_shankbone via Flikr

Events within global markets are concerning for many investors. Despite strong overall returns in the two years to the end of April, sharemarkets globally have fallen sharply on the back of:

•    US economic growth concerns;
•    Debt issues within the Eurozone; and
•    Low market confidence in the ability of policymakers to increase economic activity.

While I am confident of better times ahead, I recognise that these types of market conditions can test the resolve of even the most experienced investors. Making sense of the current mess is testing the experts and I am far from being called that. So I have had some help putting the following together to give you some perspective on events and some guidance for the future.



Current Issues

•    The US debt ceiling debate has drawn attention to America’s public debt problems and brought forward fiscal austerity at a time when the US economy is showing new signs of weakness (e.g. slower than expected GDP growth, weak manufacturing data). The recent credit rating downgrade is another headwind for the US economy.

•    There is growing concern that the sovereign debt saga in peripheral Europe could worsen and spread across the broader region. The potential sovereign debt liquidity issues affecting large European countries (particularly Italy and Spain) have seen bond spreads growing to post-euro record highs. Currently the attention is on Italy (Europe’s biggest debtor) and its capacity to rollover its debt.

•    Markets are worried that policy makers will not be able to put the economy back on a path of growth with proper job creation. These worries have been amplified in recent weeks in the US (i.e. political dysfunction exposed by the debt ceiling debate) and in Europe (i.e. policymakers continuing to be reactive rather than pre-emptive).

Outlook

Actions taken by governments and central banks (in the main in Europe and the US) will remain a key driver of market volatility. Sovereign debts levels will continue to disrupt markets until balances become more manageable though it is likely markets have already priced in much of this concern. A few points to make here are:

•    There is a lot of cash on the sidelines;
•    Most large corporations have strong balance sheets and increased profit numbers;
•    The outlook for China is positive and despite recently putting the brake on a possible property bubble and inflation concerns, China has the luxury of being able to use both a brake and an accelerator;
•    Australia is well placed with low unemployment, a high savings rate, the ability to reduce interest rates and introduce more fiscal stimulus if need be; and
•    While the ride for sharemarkets and other assets may remain rough in the short-term, taking a longer term view they are likely to be supported by attractive valuations.

As you already know, we believe that reacting after markets have already declined usually does more harm than good. I also believe that the probability of long-term investment success is higher for investors who plan and implement a sensible investment strategy and stick to it. A lesson learned from the Global Financial Crisis (GFC) and other similar unnerving market declines is to ensure that cash is set aside for short term liquidity needs. Beyond that, look to reinforce the importance of portfolio diversification and a long-term investment focus. The message during this period of heightened volatility is no different.

Market downturns can be an uncomfortable time for investors. Watch our blog posts and Facebook page for updates. And remember, you are not alone at these times, every investment portfolio is feeling some pain.

Trevor Hutchings