Quarterly Economic Update: January-March 2023
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Quarterly Economic Update: January-March 2023

Economy, Investing

The Reserve Bank of Australia has decided to pause its cycle of interest rate hikes, keeping the cash rate target unchanged at 3.6 percent due to softening inflation data, a flat unemployment rate, and the need to assess the impact of previous rate hikes on the economy.

The Consumer Price Index slowed from 7.4 per cent to 6.8 per cent for the year to February with prices increasing by just 0.2 per cent for the month of February itself, raising hopes the Reserve Bank might halt any further interest rate increases. Economists though remain divided on the outlook for interest rates. Some point to the low inflation rate recorded for the month of February and say the back has been broken regarding the recent price hikes of the past year. That any further rate rises will risk tipping the domestic economy into recession with local activity already stalling in key industries such as the housing construction industry, local tourism and other recreational industries. Some economists though point to the fact inflation remains doggedly above the Reserve Bank’s preferred inflation range of between 2 and 3 per cent and that consumer spending remains doggedly high despite recent rate hikes.

Recession fears are also growing, given the ACTU’s push this year for a 7 per cent increase in the minimum wage from $21.38 an hour to $22.88, taking the minimum wage to $45,337 a year for some 2.4 million workers – a pay rise of some $3,000 a year. This comes hard on the heels of last year’s minimum wage rise of 5.2 per cent. More, the ACTU is pushing for this increase to flow to a range of other award rates, prompting concerns any such move could spark a wage rise – price hike spiral, reminiscent of the 1970’s. However, the ACTU argues the cost-of-living pressures are now so high that this increase is needed just to stop workers falling in poverty. That low-income workers typically spend every cent they earn, and this is exactly what is needed to keep the local economy growing. It also points to continued record high levels of corporate profits in recent years and argues Australian employers can easily afford to pay their workers more without it placing further pressure on prices.

Not surprisingly business groups point to Australia’s low level of productivity gains, another increase in the Employers Superannuation Guarantee contribution, to which is set to rise to 11 per cent next financial year and higher funding costs, to argue against any pay increases. Meanwhile, the Federal Government is set to release its first full year budget this quarter. The overriding concern is whether the Government will take this opportunity to deal with the significant structural funding issues within the budget and so start to haul in the Federal deficit. While Government revenues continued to be bolstered by strong international trading conditions for Australia’s key exports of iron ore, coal and wheat, it remains a simple fact that the Federal Government spends more on goods and services than it receives by way of taxes.

This situation will only be made worse by the recent decision to acquire a new fleet of state-of-the-art submarines and other military equipment that is expected to add billions of dollars to Government spending over the next few decades. All at a time, when the Government is equally committed to spending billions helping the domestic economy transition away from fossil fuel energy sources and embark on building a new low carbon economy. Meanwhile, a growing number of economists believe the US economy will most certainly fall into recession sometime this year, as its central bank also deals with a blow-out in domestic inflation by increasing local interest rates. While US employment figures remain strong, the recent US rate hikes have put undue pressure on a number of US and international banks, causing the collapse of two high profile banks in recent months.

Although the US banking system remains strong, there are fears that these failures will cause a retraction in lending to businesses and so will further increase the likelihood and depth of any pending recession.

 

The information provided in this article is general in nature only and does not constitute personal financial advice.

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When an SMSF may be the wrong idea

When an SMSF may be the wrong idea

Updated on Finance, Investing, Superannuation

Since the Australian Government introduced compulsory employer contributions to people’s superannuation funds in 1992, Australia’s funds invested in super have grown to $3 trillion. In this time, self-managed super funds (SMSF’s) have grown in popularity too. There are currently just over 1 million members with $747 billion in SMSFs across Australia. SMSFs can have between one and four members. While not yet legislated, the government has proposed allowing up to six members in an SMSF. Most SMSFs in Australia have two members (70%), with most other SMSFs having a single member (23%). According to the ATO, the average value of assets in people’s SMSFs is $320,000. The general recommendation is to have a minimum balance of $200,000 in your SMSF. While it can be tempting to see the potential of being in complete control over your super balance, it may not always be a good idea to set up an SMSF. Why set up an SMSF?Many people opt to set up an SMSF to have more flexibility in where they invest their money. Along with more investment options such as residential property and rare asset classes such as art, valuable collectables and physical gold, your SMSF income is taxed at a lower rate of 15%. Compared to the marginal income tax rate for average and high-income earners (usually between 30% to 45%), establishing an SMSF can be an attractive option. However, as with any other type of investing, there are potential downsides and SMSFs can carry significant risks and costs. What are the risks associated with having an SMSF?There are several risks associated with having an SMSF. To establish an SMSF, you are legally required to have an investment strategy. When you have an SMSF, you also need to ensure you get tailored advice from your financial adviser to mitigate the risk of making poor investment and financial decisions. Many SMSFs also choose to invest in one asset, such as residential property. This leaves your super balance overexposed to risk, compared to if you had a balanced portfolio in a super fund. Unlike a traditional super fund, an SMSF has time-consuming administrative tasks and costs. Some of the costs you may incur when you have an SMSF include annual compliance, audit and management costs, investment fees, brokerage fees, wholesale managed fund fees and advisory fees charged by your accountant and financial adviser. If you have an SMSF, it’s important that these fees don’t equate to more than 2% of your super balance. On a balance of $200,000 in an SMSF, the fees would ideally need to be below $4,000 per year. When you have an SMSF, you are in complete control of your investing, which means you are also solely responsible for keeping up to date with your compliance requirements. The legislation around SMSFs is constantly changing. If you don’t have a genuine interest in continually staying updated on these changes, or the fees to seek regular advice are going to push your annual costs over 2% of your balance, you need to rethink whether an SMSF is the right option for you. To summariseWhile establishing an SMSF can offer you flexibility in how you manage your retirement funds, there’s a raft of risks and costs associated with having an SMSF. Further, an SMSF can be a lot of work, so it may not be the right option for you if you’re unsure whether you want to commit to the ongoing financial, legal and administrative requirements associated with having an SMSF. If you are considering establishing an SMSF or deciding whether an SMSF is suitable for you, speak to us to obtain personalised advice for your unique situation.    The information provided in this article is general in nature only and does not constitute personal financial advice.

4 Time-Tested Investment Strategies for Young Investors

4 Time-Tested Investment Strategies for Young Investors

Updated on Education, Finance, Investing

The newest generation of young investors were raised during the Age of Information. Growing up alongside the internet, this generation has been exposed to more information and technological advancement than any generation before them. Young investors have greater access to education around investing, more diverse opportunities for investing, as well as a rise in social media content creators creating communities around building wealth – making this topic much more popular among younger generations. However, the world of investing can still seem intimidating, especially for young adults who are just starting out. While investing does involve risk, there are some time-tested investing strategies that all young investors should adopt to set themselves up for success: 1. Know your financial goals Before investing, it’s essential to know what you’re working towards. Are you saving for a house deposit? Or are you building wealth so that you can retire early? You may want to launch a business. Or start a family? Knowing your financial goals can help determine the best investment strategy for you. Once you have set your goals, you can develop a financial plan for achieving these through investing. 2. Start small and grow your portfolio over time When starting, you might think you don’t have “enough” to begin investing. Starting small and gradually increasing your portfolio over time is a great way to begin. It allows you to “learn the ropes” and build your knowledge and confidence over time, without feeling like you have too much at stake. Getting started sooner rather than later also means you’re taking advantage of the power of compounding returns. Compounding returns happen when you reinvest your investment earnings, allowing your investments to grow over time. The earlier you start investing, the more time your investments have to compound, leading to significant long-term growth. 3. Diversify your investments You might have heard the term ‘Don’t put all your eggs in one basket’, which, in the world of investing, translates to ‘Don’t put all your money in one investment’. Diversifying your investments across different asset types is a key strategy that can be used to lower portfolio risk and provide more stable investment returns. 4. Keep calm… and remember your investment plan Investing should generally be viewed as a long-term strategy, as markets are cyclical and typically go through periods of growth, decline and stagnancy. This means that you will likely experience a market crash at some point in your investing journey, which can be a scary time for investors. It’s important to stay calm and avoid making impulsive investment decisions. In many cases, the best strategy during a market crash is to stay the course and stick to your investment plan. Further, market corrections can often present a great opportunity to invest as markets sell off and asset prices reduce. As Warren Buffet said: “Be fearful when others are greedy and greedy when others are fearful”. While investing may seem daunting at first, incorporating these fundamental strategies will pave the way for success. And a final tip… Seek expert guidance! A financial adviser can help you set achievable financial goals, plan ahead, and making informed investment decisions that will keep you on track towards building lasting wealth. Don’t navigate the financial world alone – let us be your partner in success! The information provided in this article is general in nature only and does not constitute personal financial advice.

Shares are more than numbers

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Updated on Finance, Investing

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Discovering Your Financial Mindset

Discovering Your Financial Mindset

Education, Finance, Investing

In the quest for financial stability and success, we often focus on tangible elements like earning more money, saving diligently, or investing wisely. But have you ever stopped to consider the role your financial mindset plays in achieving your financial goals. Understanding financial mindset Your financial mindset is a set of beliefs and attitudes you hold about money — how you earn it, save it, spend it, and invest it. This mindset largely influences your financial behaviours, decisions and ultimately your financial success.   Each mindset carries a unique perspective about money, influencing your financial decision-making process.   There are four common financial mindsets: 1. The Spender enjoys the thrill of the present, often overlooking long-term financial security for immediate gratification. If you frequently find yourself making impulsive purchases, or your credit card balance perpetually outweighs your savings, you may identify with this mindset. 2. The Saver is characterised by frugality and a steady focus on long-term financial security. If you diligently maintain a budget or feel a sense of accomplishment when growing your savings, the Saver mindset most likely resonates with you. 3. The Avoider, often plagued by financial anxiety, tends to shy away from money matters. If you find bills and bank statements overwhelming, or frequently procrastinate financial planning, you likely have an Avoider mindset. 4. The Investor sees money as a tool for wealth creation. If you appreciate the potential of assets and are willing to take calculated risks for future returns, you are most likely aligned with the Investor mindset. Identifying Your Current Financial Mindset  So how do you uncover your financial mindset? It begins with self-reflection –    Do you often worry about money, or do you feel confident about your financial situation?   Are you comfortable taking calculated financial risks, or does the thought of investing scare you?   Do you view money as a tool for achieving your dreams, or a necessary evil to be managed?  Examining your feelings and behaviours around money can provide valuable insights into your current financial mindset. This process is beneficial because it sets the stage for potential shifts in perspective that can improve your financial life.    Once identified, you can analyse your money behaviours, uncover potential blind spots, and take action to optimise your financial decision-making. For instance –   If you identify as a Spender, incorporating a budget and automating savings can provide some balance to your financial outlook.   Savers could benefit by introducing an element of investment to their financial strategy, allowing their savings to work harder for them.   Avoiders must confront their fears and actively engage with their finances, perhaps by seeking professional guidance.   While Investors generally have a positive approach, ensuring a balanced portfolio to mitigate risks is essential.  Transforming your financial mindset requires commitment, patience, and time. Take it slow and make gradual changes as you grow more comfortable with your changing perspective on money.  It’s not just about money; it’s about your attitude towards it. Adjusting your financial mindset means transforming both how you see money and how you engage with it, paving the path to financial success.     The information provided in this article is general in nature only and does not constitute personal financial advice.