Questions investors should ask themselves - Jamie Nemtsas

The last 18 months have un-nerved even the most experienced investors; however the last eight weeks has also been as unnerving for many investors. Those who converted back to cash with the thought of returning to the market when it is all safe must be asking the question 'how can the Dow Jones rally 2000 (31%) points in six weeks, and the Australian Share market put on nearly 1000 (25%) points without there being a light at the end of the tunnel.'

Of course the answer is that the market is the market! Meaning that the market is not predictable, controllable, logical and even worse - fair! History has shown that the market can pre-empt an economic recovery by six to twelve months. It is easy to quote history, but we are still amazed when markets can look through gloomy economic news to start pricing in the inevitable recovery.

What can the market smell ?

A 30% move in markets means the market has seen and smelt something. The following are key points emerging over the past eight weeks:

• Ben Bernanke's comments regarding "green shoots" emerging of an economic recovery;
  
  
• volatility has subsided with the VIX index (Volatility Index) falling from over 80 to below 40;
  
  
• leading indicators such as the ISM index (which measures non-manufacturing activity in the US) showing a potential recovery;
  
  
• signs that the US banking sector is profitable, and the US banking stress test being seen as positive;
  
  
• a major correction in credit spreads, showing renewed confidence in the lending system;
  
  
• Government stimulus measures (esp. US) increased dramatically; and
  
  
• indications that Chinese stimulus is having a direct impact on demand, driving commodity prices higher.
  

Investors without real resolve and those investors without an active investment strategy, would have retreated back to 100% cash. For the ones that did retreat back to cash, the 25% that markets just moved is a bigger problem than they faced eight weeks ago! Do they get back in, or do they stay on the side lines?

Improving your ability to be a successful investor !

A few simple questions to keep asking yourself that may make you a more successful investor over time include the following:

1. Does my portfolio produce a satisfactory level of income for my basic lifestyle needs?
   
   
2. Do I hold enough low risk assets within my portfolio?
   
   
3. Do I hold enough market linked assets to protect my income from inflation?
   
   
4. Am I comfortable with the fact I don't control the day to day market value of market linked assets?
   
   
5. Would I buy all the individual assets again today if I was only holding cash?
   
   
6. If my portfolio takes 5 years to recover, will it have any material affect on the way I live my life? (The answer here is a very loud and resounding 'No!' if you answer yes to question 1 and 2).
   
   
7. Do I know why I hold each investment?
   
   
8. Do I have a strategy to deal with timing the market?
   
   
9. What portion do I have in equities and bonds in different times of the market?
   
   
10. Can I make better unemotional decisions going forward?
    
    

Zone 5* still remains the safest place to invest in equity markets

The truth of the matter is that after a 40% fall in equity values and with the economy in a recession, the risk of investing is not actually as high as it may seem. The perception is that enormous risks exist in the stock market at current levels, where in fact, the risk is probably in those assets that have accelerated in value, like bonds and possibly gold.

The market has been cleansed of companies that hold too much debt or have an inappropriate structure. They have either failed or become much smaller, so small in fact, they will not have a major impact on the overall market as a whole. Our emotional response is to run for the hills - to sell up to reduce the level of risk further by selling out of our share portfolios, where in fact the risk has materially fallen.

Every one of us has a company in our portfolio that has failed or lost so much of its value it is irrelevant anyway. However as previously said if you have diversified your portfolio and have an appropriate level of risk management, then your portfolio will live to fight another day. The fact remains that properly constructed portfolios will fix themselves over time; however you need to give them time. So, the message here is to get back on your horse and start building a plan for a diversified portfolio for the next economic cycle. Remember the last economic cycle in Australia lasted 18 years!

Jamie Nemtsas -  Director - Investstone Wealth Management

Investstone Wealth Management - Financial and Investment Advisers - www.investstone.com.au
Publishers of "Investing Times" newsletter. Visit the Investing Times online - www.investingtimes.com.au 
This article is an extract from the May 2009 issue of Investing Times newsletter.

* Zone 5 is defined as a Zone where the value of the All Ordinaries Index is at least 17.23% below  the long term trend line of the All Ordinaries Index. The value of the All Ords at 8/5/2009 was 3920 (Zone 5) - 28.56% below the long term trend line. You can learn more about the Zone system by subscribing to the Investing Times Newsletter. To order a complimentary copy of the newsletter email susan@investingtimes.com.au or phone 1300 131 526.

GDP numbers and Economic Indicators - Julia Lee

Gross Domestic Product (GDP) numbers are due out next Wednesday and they are expected to confirm that Australia is in a technical recession, which is defined as two quarters of negative growth.

Why are GDP numbers important and how do they relate to the sharemarket?

Generally, economic indicators can be classed as lagging, coincident or forward.

Economic indicators are important to investors because they describe business conditions. If the economy is going well, generally it is easier for companies to be profitable and it's good news for the sharemarket. If the economy is shrinking then it is more difficult for companies to be profitable and it's bad news for the sharemarket.

Lagging Indicators

A lagging indicator shows how the economy has performed in the past weeks and months. Unemployment is often referred to as a lagging indicator. Unemployment can show a negative results around 6 months after GDP has turned negative. It's important to look at unemployment because it tells us about the business environment. Generally when unemployment is falling, it's good news for the sharemarket. More people are in jobs, more people are spending money and so more companies are able to make a profit. Keep in mind though, that unemployment as an indicator tends to lag. If you want a more forward looking indicator that reflects employment levels, you can follow the number of job ads in newspapers and on the internet. The ANZ job ads survey can also be used as a forward indicator.

Coincident Indicators

Coincident indicators are those that change at the same time that the economy changes. GDP is a coincident indicator.

At the moment an idea that is gaining traction is the use of copper and other industrial metals as a coincident indicator. The theory is that demand in these metals will occur once global growth starts to pick up, indicating recovery.

Forward Indicators

The sharemarket tends to be a forward indicator. For example, in the 1990's recession, the sharemarket bottomed almost a whole year before GDP turned positive. In the 1980s the sharemarket bottomed a whole 10 months before GDP turned positive. The sharemarket tends to bottom around 16 months before earnings and 10-12 months before GDP.

Interest rates can also encourage or discourage investment.

Low interest rates are generally good for the sharemarket for these 3 key reasons:

1. Businesses, like people, are net borrowers of money and cheaper money makes it easier for businesses to make a profit. Lower interest rates mean less interest costs and smaller costs to fund growth.
   
2. Shares become relatively more attractive compared to other investments such as cash.
   
3. Generally, share valuations rise when interest rates fall as the risk-free rate falls. The risk-free rate is the interest an investor would expect from an investment over a specified period of time where there is no chance of default.

The lesson to learn is that if you wait for the news to turn positive, make sure you are following forward indicators.

If you are following indicators such as unemployment, GDP, or even metals demand, the chances are that you would have missed the bottom of the market.

Indicators can offer a backward, current and a forward looking view of economic conditions. Whether the economy is doing well or not a review of the leading, lagging and coincident economic indicators will assist investors to understand business profitability and the sectors in the sharemarket that are likely to be affected by cyclical movements in the economy.

Happy Investing!

Julia Lee - Equities Analyst - Bell Direct

To buy or sell shares from as little as $15 per trade, go to www.belldirect.com.au  

Bell Direct does not provide investment advice. This information is general information only. You should consider your own financial situation, particular needs and investment objectives before acting.

Property investors everywhere ask one question more than any other ... when is the time right to buy again? - Shane McNally

SOMETIMES all the planets align and you just know the time is right to expand your portfolio and buy again. The economy is booming, confidence is high, your equity is strong and you've had such wonderful recent results, it seems a wasted opportunity not to increase the property numbers. Those perfect times are scarce, though, and most serious investors realise it requires sound reasoning, due diligence and a solid financial base before each new purchase.

With the deepening of the world economic crisis and the belief by some that the Australian property market hasn't yet bottomed out, those qualities are in even greater demand. It's not all bad news though - far from it according to some experts - but the current climate does require greater discipline, rationale and an understanding of which markets to target.

The general consensus among property analysts, economists, advisors and serious investors is to look for in-demand housing and strong yields where possible while steering away from the sorts of property that thrive in boom times - including holiday homes, top-end housing and lifestyle properties.

Latest national property growth and rental return figures indicate that investors may soon have a rare opportunity to achieve positive gearing opportunities across the country.

RP Data reports that Sydney offers the best chance for capital growth after little movement since 2004.

It has also found that while Darwin recorded a huge 11 per cent growth last year, its rental market still outpaced capital growth to return the nation's highest yields.

Adelaide, meanwhile, continues its remarkable run, even if it is at a slower rate of growth. The bottom line, according to RP Data national research director Tim Lawless, is that the time is looming for investors to consider moving again.

"You can't really be too precise or worry too much about the exact timing of when the market bottoms out," he says. "Even if we do see a one or two per cent decline in the next six months, that's not really going to make a whole lot of difference in the grand scheme of things.

"You make your money when you buy, not when you sell, so with that in mind you're not going to see a great deal of difference between now and the end of the year."

"There's a great deal of competition in the market place which means buyers have leverage but you need to be comfortable with your own financial position."

The head of financial system economics for the ANZ Banking Group, Paul Braddick, agrees. He expects property growth from later this year and says that while it is a time for caution, increasingly lower interest rates and housing affordability should assist a turnaround.

Braddick is optimistic about Australia's property outlook, suggesting we have many things in our favour to avoid the fallout suffered overseas. "There's a little bit more downside in the short term but the underlying fundamentals are quite good so we don't expect Australian house prices to follow the depths of the falls we've seen in the US and the UK. The general view is that, some time in the next six to 12 months, there are going to be good buying opportunities.

"The economic situation may provide good opportunities for some, particularly investors, even though it may be hurting others on the way through.

"The unemployment rate is expected to rise quite significantly over the next 12 to 18 months and there's going to be a greater incidence of forced selling. But because we don't have a sub-prime crisis as they've had in the US and the UK, we're not going to see anything like the degree of forced selling that they've seen overseas and therefore prices won't fall anywhere near as much.

"There's a whole range of factors to support that - we have a shortage of housing as opposed to a surplus of housing in those two countries and also our vacancy rates are still down around one per cent.

"We've always been advocates of buying in the inner suburbs and that still holds true in the current environment. "In the next 12 months, one of the big opportunities will be for existing and new investors to fix low-level interest rates for security - particularly after the latest Reserve Bank cut to 3.25 per cent. "There are always risks when fixing interest rates but even if you don't pick the very bottom of the cycle, there's little doubt the rates will be back above where they are now."

CAN YOU MANAGE HAVING ANOTHER PROPERTY?

While prominent investor and author Margaret Lomas says the current and immediate future state of the property market is essential information that needs to be carefully studied, investors need to place most stock in their ability to manage their new investment.

She urges investors to make certain their equity is right, particularly in the current economic climate, before deciding to go out and buy more property. The equity needed in today's economy, she insists, should be no less than 20 per cent.

"A couple of things have to be in place before you know it's time to go again," she says.

"The first thing I would do is examine my financial position and make sure I will have at least 20 per cent equity across the board. So assess your equity and make sure you have a good valuation done to know the real market value. And ask yourself some sensible, very basic but very important questions.

What if I don't get the rent returns that I expect? What if expenses blow out? What if I have vacancies?

"If your finances are so tight that you're struggling to get by now, then you're not in the position to invest again.

"A lot of people ask why wouldn't you buy an investment property that's cash flow positive right now? You have to look at the worst-case scenario and not the best-case scenario. If you're relying solely on the cash flow nature of the business and have no real equity to support the property, a six to eight-week vacancy is going to send you broke.

"You shouldn't be going into property today with the expectation that interest rates will continue to fall. That's not to say they won't continue to fall but you shouldn't go into a property with the expectation that finance is going to get better.

"Expect the unexpected and go into property knowing you can handle a couple of interest rate rises."

Lomas warns investors against putting their money into the top end of the market and in "good times" properties that rely on the tourism, lifestyle or holiday market.

She says it's the ideal time to look for lower priced properties.

They provide the investor with more flexibility and less risk and can be expected to offer a strong yield as well as potential growth.

"We're not at the bottom of the market yet and we haven't come through the financial crisis by anyone's measure," she warns.

"Now is not the time to be buying any kind of tourism, lifestyle or niche market property. It's not the time to buy anything that requires a specific market because these markets could be impacted. This includes holiday and luxury homes.

"Stick to the basics. They are reliable and a lot safer for the small or medium investor looking to expand the portfolio.

"Now is the time to buy property that you can get for low dollars and that has a constant demand. If people are forced out of the home ownership market, which some unfortunately will be, they have to live somewhere. So property at the lower end of the market is always in rental demand."

FOCUS ON CAPITAL GROWTH

While Lawless agrees strong yield is an attractive enticement, he urges buyers to do their research and make capital growth the main objective.

He says that while the combination of growth and yield is ideal if it can be achieved, growth needs to be the driver in a market that's expected to rebound soon.

"I don't think there's any point in buying a property only for yield," he says. "If you can get both yield and growth, fine, but the most important thing is the potential for strong capital growth. That's all about buying close to infrastructure, close to schools, retail and, if available, close to the city.

"Some people buy purely for yield because it takes them through the mortgage repayments but capital growth is where the money is. "The most important question many buyers, even investors, need to ask is 'will I still have a job' to help service the new investment. Most people will say yes to that but it still has to be factored in.

"Once you've taken into account your own financial outlook, do your research, analyse the marketplace and understand the relative value of the market.

"You need to apply a rule to say if it was worth $500,000 last year, it might be worth about $490,000 this year. You need to be able to look at the marketplace from that macro perspective but apply it to the micro. Do your due diligence and find out the rate of discounting in the current market."

© Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.

This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting. Please read our warning and disclaimer.

Post May 2009 Federal Budget SMSF Strategy Update - Laura Menschik

The recent Federal Budget brought some surprises as well as expected changes. Below we have addressed some of the more relevant ones in regards to your superannuation, especially your allowable contribution going forward.

Make the most of the opportunities available this financial year to top up your super benefits and plan effectively for the new rules.

Concessional Contributions Cap reduced

The Government has announced that, effective 1 July 2009, the concessional contributions cap (CC) will be reduced to $25,000 (indexed) per annum. Concessional contributions generally include SG, salary sacrifice contributions and personal deductible contributions.

The transitional CC, which applies to individuals aged 50 and over at any time during the transitional period (2007/08 to 2011/12), will be halved from $100,000 pa to $50,000 pa (not indexed) for the 2009/10, 2010/11 and 2011/12 financial years.

However, the annual non-concessional contributions cap (NCC), will remain at the 2008/09 level of $150,000. It is proposed that from next financial year the NCC will be calculated as six times the level of the CC.

There was no mention of any change to the 'bring forward' arrangement.

The indexation method of the CC remains unchanged. The table below compares the projected contributions caps that would have applied over the next six years with the reduced contributions cap in light of the changes announced.

*In this table, concessional contributions caps have been calculated as the 2009/10 concessional contributions cap indexed to AWOTE at 4% pa, rounded down to the nearest $5,000.

Impact

• People who have money available to invest into superannuation in the current financial year could consider maximising superannuation contributions to fully utilise their 2008/09 contributions caps
  
  
• For those currently making total concessional contributions of more than $25,000 each year (or $50,000 if aged 50 or over), you will need to reduce your salary sacrifice (or personal deductible contributions) from 1 July 2009 to ensure that they do not inadvertently breach the reduced concessional contributions cap. Excess concessional contributions are subject to tax of 31.5%, in addition to the 15% contributions tax. Excess concessional contributions also count towards an individual's non-concessional contributions cap.
  
  
• For those not currently making additional contributions to superannuation (ie in addition to SG), the need to start making contributions earlier is now greater, as the ability to make large 'last minute' concessional contributions has been diminished. It should be encouraged to start a regular savings plan into super to ensure adequate retirement savings are accumulated.
  
  
• Contributions splitting - the maximum allowable amount able to be split will be reduced in line with the CC.
  
  
• For those who are salary sacrificing bonuses, especially where the amount is unknown, you need to take extra care not to inadvertently exceed the CC.
  
  

Pension drawdown relief continued

The Government announced last February that those in account based pensions, allocated pensions and term allocated pensions (TAPs) would only be required to draw down half their calculated minimum income requirement for 2008/09. This pension drawdown relief has been extended for a further 12 months to 30 June 2010.

The reduced drawdown rates are set out in the table below.

The Government's mandated Super Guarantee (SG) remains at its existing level of 9%.

The rules surrounding Transition to Retirement (TTR) pensions remain unchanged. This strategy is still of great value to persons, especially over 60, who are able to make maximum contributions to super while salary sacrificing and supplementing their income with this type of pension.

Reduced Government co-contribution

As anticipated, there has been a reduction to the maximum rate and amount of Government co-contributions for eligible clients who make personal after-tax contributions to super. This is a temporary reduction and applies in the five years from 2009/10 to 2013/14. From 2014/15 the co-contribution again increases to a maximum of $1,500. The reduction to the maximum rate and amounts of the Government co-contribution are summarised in the table below.

Gearing/Instalment Warrants

Nothing was announced in the Budget about the future of gearing via instalment warrants in super.

Although there are new restrictions on superannuation in the future, superannuation still remains a preferred tax-effective savings and investment vehicle to ensure adequate funding for retirement.

For effective strategies, both inside and outside superannuation, please consult your professional adviser to ensure that you are able to make the most appropriate decision for your circumstances.

Laura Menschik
Director and Authorised Representative
WLM Financial Services Pty Ltd.
CERTIFIED FINANCIAL PLANNER TM - SMSF SPECIALIST ADVISER TM
WLM provides wealth and lifestyle management services in a professional and personalised manner, by qualified advisers, on a fee-for-service basis. WLM is independently owned by its Directors. Visit WLM Financial Services online wlm.com.au

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