Issue 1 2015
Financial Directions
Giving Is Good
The phrase it’s better to give than receive may be a bit of a
cliché but research shows that it’s actually true and it can be
helpful for your bank account – here’s why.
Spending big
Australians like to spend big over the holidays. In 2012 Aussies spent around $32 billion at Christmas, forking out an average of more than $1200 per person, according to the Australian National Retailers Association (ANRA). Check out this infographic, which shows how Australians have spent money at Christmas.
Giving big
Australians are also generous at giving back to the less fortunate. In 2012, Australia was ranked at the top of the World Giving Index ahead of Ireland, Canada, New Zealand and the United States. The Index showed that Australians each donate $291 to charities each year and according to the Charities Aid Foundation; more than two-thirds of us donate to a charity or help a stranger each month.
Helping strangers
Plus, global business intelligence company,
IBISWorld reports that along with corporate and government support, charities and not-for-profits are now a $112.2 billion industry. IbisWorld predicts this will increase to $140.8 billion in 2017-18.
Getting a tax deduction on donations
Being generous is good for the soul but it can also be of value when you become liable for a tax deduction. If you donate money to a registered Australian charity, you can claim back the income tax that you paid on it from the ATO. Tax deductions reduce your taxable income and so reduce the amount of tax that you pay. In this way donations are considered “tax deductible” and while you are still losingthe money – you are choosing how it is distributed.
Workplace giving
If you’re looking for a way to make a difference, then a great way of giving to charity all year is to sign up for workplace giving. This is where you can make small regular donations to charities of choice through your pay. By using the payroll systems, employers together with their employees can make a huge impact to the community collectively. It’s a win-win-win for business, employees and charities. And you can choose the size of the contribution. To find out more about workplace giving check out The Australian Charities Fund website.
Giving to others makes you happy
Finally, it’s actually been shown that giving to others makes you feel better. A US study led by Michael Norton, a professor at Harvard Business School, found spending money on others makes you happier than buying things for yourself and another that showed that donating appears to increase the release of oxytocin – the feel good hormone. So it’s official – give big and have an even happier 2015.Studies:
http://dash.harvard.edu/bitstream/handle/1/11 189976/dunn,%20aknin,%20norton_prosocial_ cdips.pdf?sequence=1 http://www.apa.org/monitor/2011/03/oxytocin. aspxArticle provided with thanks to BT Financial Group
Client disclaimer: Information current as at 12 December 2014. © BT Financial Group - A Division of Westpac Banking Corporation. This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied up on as such. This information does not constitute financial advice. It has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness having regard to your objectives, financial situation and needs. Information in this blog that has been provided by third parties has not been independently verified and BT Financial Group is not in any way responsible for such information.
Contact your Financial Adviser to discuss your investment strategy
The Investment Hunger Games –
5 ideas for investors in 2015
By Graham Harman, Senior Investment Strategist Asia Pacific, Russell Investments
The 2015 investment landscape could resemble the plot of The Hunger Games, where investors face a changing and unexpected environment that requires multiple talents and smarts to emerge victorious. Russell Investments’ overall expectations for 2015 are for global equity market returns of 5 – 10%, but we think some volatility could be ahead.
As we enter 2015, global cash rates are close to zero and bond rates both internationally and in Australia are close to multi-decade lows. The Australian share market delivered flat returns over 2014 (a price return of just +1%), and at the beginning of 2015, stands at levels which are still no higher than 2006. With patchy global economic growth and with Australia in particular facing a painful adjustment phase as the resources boom winds down, there’s no shortage of challenges to tackle.
What will it take to ‘win’ in 2015?
1. Recognise that investors may face relatively hungry times. Our expectations are for the ASX 200 to gain 3.5%, the 10-year bond rate to be 3.5%, cash to be 2.25% and the Australian dollar to be worth the equivalent of US $0.75. Cash rates in most regions of the developed world will remain close to zero, with increases projected in the US of 1%. Global equities and bonds are projected to return 10% (hedged) and -2% (hedged).
2. Be prepared to adapt quickly to changing market conditions.“May the odds be ever in your favour” is a popular catchcry from The Hunger
Games, highlighting the element of chance. This saying may provide little comfort, but a lot can be done to tilt opportunities in your favour.
For example, our 2015 expectation is that both international equities and global high-yield debt securities will deliver returns of 5% – 10% (after hedging back to Australian dollars). However, the range of likely returns around those forecasts (the ‘standard deviation of return’) is large: plus or minus 20% for shares, versus a well-behaved plus or minus 5% for high-yield debt.
3. If you choose freedom, you must accept the risk. Your risk profile is important in determining whether you are able to access well-valued assets that may take time to pay off, or whether you need to be more prudent with your investment choices. As we enter 2015, we observe stretched global equity valuations; a US Federal Reserve system preparing for higher official interest rates; pressure in commodity markets and in some emerging economies; and a continued winding down of the resources boom that has underwritten the Australian economy for so many years. Be mindful of the investment risks you take and maintain a long-term perspective of your goals and risk tolerance.
4. You may need to search further to gain returns. In 2015, the local Australian economy will have to deal with weaker commodity prices and collapsing resource capital spending – problems potentially compounded by a downturn in the housing cycle. Investors looking to gain exposure to economies that are in a more dynamic phase of the economic cycle will therefore need to consider markets in the Asia-Pacific region, within the Northern Hemisphere developed world, and in the emerging world more generally.
5. Be alert for opportunities. In an environment where nothing is as it seems, the lead character in the The Hunger Games, Katniss, remains on guard to access valuable supplies. Likewise, given the unpredictable investment landscape, one of the lessons of 2014 was to stay diversified across a full range of asset classes. We expect more of the same unpredictability in 2015. In this environment, active management becomes especially important – investors must have wide-ranging sources of opportunities, an eye for making timely decisions and a nimble process.
The bottom line: Believe that adversity offers an opportunity to do your best.
Even if the financial markets resemble The Hunger Games in 2015, it’s possible for investors to weather twists and turns by having a diversified investment mix and making wise choices based on their long-term goals.
Bridging the knowledge gap to
bring peace of mind
It makes financial sense to take out life insurance. However, we know that this alone is not compelling enough for most Australians to actively take out cover. With this in mind, it is increasingly important to remember the emotional reasons why many clients want life insurance. Recent Asteron Life research revealed that Australians who have life insurance overwhelmingly agree that the greatest benefit of having life insurance is the peace of mind it brings. The survey of 1,500 Australians found that ‘peace of mind’, ‘looking after my family’ and ‘being able to relax and live with confidence’ ranked as the biggest benefits of cover across all types of life insurance. Importantly, customers experience these emotional benefits regardless of whether a claim is ever made.
Unfortunately, there is a striking gap between Australians who experience the peace of mind that life insurance brings and those who don’t have cover. Indeed, the research from Asteron Life alarmingly discovered that 47% of Australians said they would never buy life insurance. Education is the bridge to close this gap and extend the positive feeling of peace of mind to more Australians. It isn’t surprising that people don’t value what they don’t understand.
Asteron Life’s research uncovered the alarming fact that 9 out of 10 Australians said they don’t understand life insurance. Many consumers misunderstand what insurance actually covers. For example, 49% incorrectly believe income protection gives them a payout if they lose their job. Further statistics compounded the misunderstandings:
59% of the population believe life insurance cover of $1 million costs more than $50 per month and; 80% of Australians believe 80% of claims are withheld by insurers and not rightfully paid out.
The findings demonstrate how important it is that insurers continue to work with advisers and clients to drive greater consumer awareness.
Important information
This article is current as at February 2015 but may be subject to change. Insurer: Suncorp Life & Superannuation Limited | ABN 87 073 979 530 AFS Licence No. 229880 I Level 28, Brisbane Square, Brisbane QLD 4000
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9 out of 10 Australians said they don’t understand life
ATO King Hits SMSF Liquidity &
Debt Protection Insurance
On Monday, 20 November 2014, the Australian Taxation Office ("ATO") released the following statement regarding liquidity insurance within an SMSF. This statement appears on the ATO web site. The Statement is as follows:
"Can an SMSF take out insurance on a cross-insurance basis?
Regulations that came into operation on 1 July 2014 do not permit cross-insurance on any new insurance products. These types of insurance arrangements are not permitted because the insured benefit will not be consistent with a condition of release in respect of the member receiving the benefit."1
The ATO has not provided any justification or analysis to back its statement that liquidity insurance implemented after 30 June 2014 on a cross insurance basis contravenes the SIS Rules
If the ATO view is correct, any cross payment insurance arrangement entered into after 30 June 2014 would contravene the Superannuation Industry Supervision ("SIS") Provisions. It is likely that this ATO view would also apply to other liquidity insurance or debt protection arrangements within an SMSF.
Our view is that the ATO position may not be correct, and that arrangements of this type do not contravene the SIS provisions. Unfortunately, the ATO Statement is not backed up by any meaningful analysis of the provisions, and is also is not in the form of a ruling or determination
However, TAL has always taken the approach that any liquidity and/or debt insurance arrangement being contemplated by an SMSF should be reviewed by the trustees/members professional advisers before it is implemented. This advice should cover the treatment of the proposed arrangement under both the tax laws and the SIS Provisions.
We now have an express indication from the ATO as the SMSF Regulator on the question of liquidity insurance. Any tax/legal adviser will have difficulty in ignoring this statement. This means that from a practical perspective, it may be difficult to implement any liquidity insurance arrangements within the SMSF in the short term. Any SMSF implementing an arrangement of this type going forward will be acting contrary to an express statement of the Regulator. The risk posed by acting contrary to the Regulator's express views would be unacceptable in most cases. This conduct could cause the SMSF to lose its tax favoured status as a result of the liquidity insurance arrangement.
1
http://www.ato.gov.au/Super/Self-managed-
super-funds/In-detail/SMSF-resources/Questions-
and-answers/Can-an-SMSF-take-out-insurance-on-a-cross-insurance-basis/
The various interest groups involved may lobby Government and the ATO to change its approach. However, on the best case scenario this will take time to change. The Government may be reluctant to intervene, as there has been negative comment from various sources in the community that the property investment by SMSFs should be restricted or prohibited. Many commentators have expressed the view that SMSF property investment poses inappropriate investment risks for retirement savings and is also responsible for fuelling a property price bubble.
Investment by SMSFs in fixed property will probably continue in the short term, and we still have to address the question of mitigating the risk posed by an investment in illiquid assets and the use of debt finance.
We will have to mitigate these risks using alternative mitigation techniques such as paying benefits in pension form, or holding the liquidity/ debt protection insurance outside the SMSF. This means that the surviving members will have to inject the claim proceeds into the SMSF as non-concessional contributions. This introduces a range of additional complications, including breaching of caps etc.
Interestingly, the ATO Announcement may not apply to liquidity or debt protection insurance located in unit trusts where the unit holders are SMSFs. Liquidity and debt protection arrangements in these structures may not be governed by the SIS Provisions where there is no control of the unit trust by a single SMSF including associates.
Disclaimer
The information contained in this article is general information only. TAL, its subsidiaries and its representatives have not taken into consideration any individual’s personal circumstances, financial needs or objectives. If any persons are intending to act on the information contained in any correspondence on this matter, consideration should be given to the appropriateness of this general information in light of
their own objectives, financial situation or needs before acting on the information.
Hindsight bias
Introduction
After an event has occurred, people often look back and convince themselves that the outcome was obvious and likely, and that they could have predicted it. This is known as ‘hindsight bias’, or the ‘knew-it-all-along’ effect. In actual fact – particularly in the investment world – outcomes can rarely be reasonably predicted ahead of time.
Hindsight bias is common and can be attributed to our natural need to find order in the world. We create explanations that allow us to make sense of our surroundings, and that help us to believe that events are predictable.
The human ability to find patterns and to link cause and effect can be useful - for example, to a scientist carrying out experiments. However, finding false links between an event and its outcome can sometimes result in unreliable over-simplification.
Studies2 have also shown that hindsight bias occurs because it’s easier for people to understand and remember the actual outcome than it is to
consider the many other possible outcomes that, in the end, didn’t come to pass.
Given how important investment decisions are in our everyday lives, hindsight bias is frequently observed among investors.
Impact on investment decisions
One of the most significant effects of hindsight bias is the way in which it can influence investment decisions.
It does this by encouraging investors to over-estimate the accuracy of their past forecasts. This leads to a false sense of security, causing investors to assume that their future forecasts and decisions will be equally accurate.
As a result, investors often make decisions based on future investment outcomes which may seem obvious and highly likely to them, but actually involve much more uncertainty and risk than they realise.
Philip E. Tetlock, a Professor of Management at the Wharton School of the University of Pennsylvania, has studied people’s tendency to exhibit hindsight bias. “Even after it has been explained to you 100 times, you can still fall prey to the bias” he has said. “Indeed, even after you’ve written about it 100 times.”
The ability of investors to identify a bubble after it has burst is a classic case of hindsight bias. In both 1999 and 2007, for example, very few investors correctly forecasted that stock markets were about to fall. However, when we now look back at those times, it’s often felt that the signs of what would happen next were clear and there for all to see.
Case study
Hindsight bias can be illustrated by the following case study and chart. In this example, our investor William invests in two stocks during 2013. In January, after much research, William decides to invest in Company A. The share price soon increases substantially in value. William is delighted – his research has paid off! He congratulates himself on his perception and investment insight.
In December, William decides to invest again. His success with Company A gives him confidence that he will be able to pick another winning stock. This time, William invests in Company B.
Of course nobody can be certain how Company B’s shares will perform, including William. But he is more confident in his expected (positive) outcome for Company B – and less focused on the wide range of other possible investment outcomes for its share price – than he might have been before his success with Company A.
In short, hindsight bias has led William to become over-confident in his stock-picking skills.
2 Jacoby, L. L. (1978). On interpreting the effects of repetition: Solving a problem versus remembering a solution.
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Investors must always balance risk and
Financial Directions is a general advice communique issued by Sentry Group ABN 40 125 343 384 on behalf of its related
AFSL companies, Member Firms and Authorised Financial Advisers.
General Advice Warning: This editorial provides general information only. Before making any financial or investment
decisions we recommend you consult a Sentry Financial Adviser to take into account your particular investment objectives,
financial situation and individual needs.
The following are jointly and severally referred to herein as “Sentry Group” or “Sentry”
Sentry Financial Planning Pty Ltd AFSL 247105
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Head Office: Level 1, 190 Stirling St Perth WA 6000
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www.sentrygroup.com.au
Eliminating hindsight bias
The first rule of avoiding the common investment pitfalls associated with hindsight bias is to be aware that it exists. Even experienced investors can never be certain how particular investments will perform in the future. Investors must always balance risk and return, placing equal emphasis on all factors that have impacted previous investment decisions, both successful and unsuccessful. Doing so will provide investors with a clearer and more balanced perspective to their decision-making process. Maintaining this focus can enable investors to avoid the unfounded over-confidence in their predictive abilities that hindsight bias can trigger.Illustrative purposes only.
An alternative approach would be to invest in a managed fund, run by a professional investment manager. Investment managers tend to follow consistent, repeatable investment processes which can help eliminate hindsight bias from investment decisions.
Speak to your financial adviser if you have any questions about hindsight bias.
