A Finsec View – DINs, Managing Uncertainty, Greetings from Bath and More

23rd September 2022

Almost 2.2 million Australians are millionaires after soaring asset prices pushed another 390,000 adults onto the top rungs of the global wealth ladder. Making Australia one of the richest countries in the world – and Australians its wealthiest inhabitants, with a median net worth of $US273,900 ($409,907) at the end of last year.

For critics of capitalism, the mantle will be a source of serious reflection or even shame, rather than celebration, given the pot arguably could be distributed more equally.

But, as 84-year-old entrepreneur Yvon Chouinard showed the world this week, just because you make a fortune doesn’t mean you have to keep it. The founder of adventure clothing brand Patagonia last week famously announced he was giving the company away, effectively donating its future profits to a range of environmental causes. Chouinard, who apparently drives a beaten-up Subaru with a surfboard strapped to the roof, told the New York Times, “Hopefully, this will influence a new form of capitalism that doesn’t end up with a few rich people and a bunch of poor people.”

Philanthropy is not dead! We are having more and more conversations with clients who have philanthropic aspirations. Should you be considering your own legacy (philanthropic or other), please speak to your adviser to ensure the appropriate planning in particular taxation and transfer structures to meet your goals and objectives, are considered.

In this week’s edition…

Musings on markets, an important reminder for directors (this includes corporate trustees of self-managed-super funds), the realities of uncertainty and a must-read for anyone contemplating a change in their super fund. We hope you enjoy the read.

Not exactly new news, but it would seem many investors had previously misread the Fed’s proper intentions – A rebound in consumer confidence, a strong labour market and a relatively positive corporate reporting season perhaps providing false hopes.

The fact is, Central bankers are committed to seeing through the work required to crush inflation. Within this environment, it will remain a difficult time for markets and equities are likely to see more downside in the short term. (Remember: In Australia, the combination of Australian households being far more exposed and hence responsive to rising rates than US households, lower inflation pressures in Australia and a desire to avoid overtightening means the RBA should not raise rates as aggressively as the Fed).

The good news is on the goods side; global supply chains are healing. Delivery times are dropping, and freight rates are improving.

On the services side, things are a little stickier – For instance, services that are legally contracted, such as rent which goes up by CPI. The only way to slow the inflation expectation loop of this sector, is to attack these headline CPI levels head-on, or they will become a self-reinforcing mechanism that then pushes wage expectations up.

Geopolitical or other exogenous shocks withstanding, it is our view and the view of many experts that inflation will continue to moderate to 5-6% into next year before falling materially into 2024.

The decisive swing factor in all of this is, of course, energy. And, those levers are controlled by a select few, including Biden, Putin, Xi and OPEC – It certainly makes it hard to know with any certainty where it will all land.

To our opening point, it may be a whole new ball game by the time we hit the send button on this missive!

Here at FinSec, we select funds based on our philosophy that higher quality, more robust portfolios own companies with a sound track record. Our managers look past the valuations of speculative companies that don’t make any money and look for those that will be around in decades to come – profitable income streams, free cash flow, higher dividend yields and higher quality management. Actively managed portfolios will always lag slightly in mad booms, but they will more than add value in any big sell-offs.

We look after our client’s life savings and treat their money as if it is the last dollars they have left (for many, it is). We seek to be trusted advisers and with this comes the responsibility to protect our client’s wealth to ensure it is still there in 10, 20 or even 30 years time.

Our first chart of the week shows 79% of those surveyed for the latest Global Fund Manager Survey (GFMS) expect slower global inflation in the next 12 months than today (yellow line beginning to curve).

Our second chart also from the same survey looks at risk. It shows that, not so surprisingly, a record low share of GFMS investors (net -60%) are taking higher risks than normal.

If you are a director of an Australian company (this includes: the corporate trustee of a self-managed super fund, family trust or company director) you must have a unique Director ID in place by 30 November.

The introduction of a Director ID is intended to safeguard against illegal activities and also increase the accountability and traceability of persons wishing to become company directors.

If you have already obtained your Director ID, please notify us of the number as soon as possible, so that we can update the appropriate records.

If you have not obtained a Director ID, please find instructions on how to apply online here. More information on Director IDs can be found here.

If you are at all unsure please contact us for assistance.

Which message on a flight departure board would distress you more?

Flight BA 786 – DELAYED

Flight BA 786 – DELAYED 70 minutes

The second message is a bit of a pain, but at least you have some control over the situation.

You can determine how you want to spend the next 70 minutes and start re-planning your day. On the other hand, the first message is a form of mental torture. You know there is bad news, but you do not have sufficient information to respond to it.

The above example is from the book Alchemy by Rory Sutherland. Elsewhere in the book, Sutherland shares that most people wrongfully think Uber disrupted taxis because it reduced the wait time for a ride.

But, he argues that it’s actually because they eliminated the uncertainty of waiting.

Eliminating the uncertainty of waiting made taking an Uber significantly less frustrating.

In a nutshell, these two examples offer insight into the frustrations of investing through down markets.

We rarely voice it this way, but it’s not necessarily the waiting that’s difficult…

… it’s not knowing how long we’ll have to wait for the market to recover that causes the majority of investor anxiety.

To test this theory, let’s say that in six months or two years (or any time frame), we knew the market would recover back to all-time highs.

Knowing that, how might that impact how you view the current downturn?

I’m guessing you would probably have more patience and a higher tolerance for volatility because you would know when it would end. Having this information would also allow you to make some changes if changes were required. Unfortunately, this type of certainty doesn’t exist in the world of investing, so we often find ourselves frustrated.

But uncertainty is an unavoidable truth throughout our lives, which is an interesting parallel.

For instance, on a personal level, we know that life is full of good and bad surprises.

The difference is that nobody is blasting out a play-by-play announcing this uncertainty every day as they do about the financial markets.

More so, when we have a bad day, bad week, or bad six months, there are no pundits predicting that everything is hopeless and that our lives will never improve as they do with the market.

So, it’s not that the markets are more uncertain than our lives; it’s just that the uncertainty of the markets is so much more apparent thanks to the continuous news cycle.

If you are an avid investor reading this, I believe the best way to overcome the anxiety of the unknown is to remind yourself that good financial advisers have planned for periods like right now.

We may not have been able to foresee the specifics of this situation, but we have planned for—and are prepared for—extended periods of market downturns.

Turn off the TV, take a deep breath, and take comfort in the fact you are okay and stay the course.

With these sorts of results, it stands to reason that some may question how to better deal with market volatility and consider moving funds and/or changing strategy.

Our advice – proceed with caution. When assessing whether switching super funds is actually in your best interests, here are a few golden rules to consider.

1. Insurance – Know what you are giving up.

In swapping funds, you may not only be throwing away ‘hundreds of thousands’ in existing insurance, but you could end up with no cover at all (found ineligible), subject to hefty exclusions or having to pay premium loadings (extra fees).

In fact, whilst the common wisdom is that it is best to have just one superannuation fund, for some people, it can be worth having two. One that preserves the original, and potentially more generous, insurance plan; and another that may be a better fit for investment goals.

Remember, when it comes to insurance in super, there is rarely a simple answer. It is often complex and requires time and knowledge to sort through it properly.

2. Take extra care if you are approaching or in retirement

Navigating the transfer balance cap (the total amount of superannuation that can be transferred into a retirement phase pension before earnings are taxed) can be a labyrinth when rolling over to a new fund. If a fund is big enough, breaches can occur within a matter of days.

Additionally, if a retiree has started an income stream, there is a minimum payment that must be made every year for the fund to be considered in the pension phase. If a retiree decides to change funds halfway through the year, they’ll need to make sure they’ve taken out at least half the year’s pension payment.

3. Don’t let tax trip you up on extra contributions

This one is often overlooked!

If you have made a personal deductible contribution to your original superannuation fund and plan to claim a tax deduction, you must remember to file a ‘notice of intent’ with the trustee and have it acknowledged before switching funds.

Failure to do so will mean your tax deduction is prorated down to nothing.

4. Stop & take a breath

Last but not least, do not make decisions based on one year of returns alone!

Yes, if your fund is consistently underperforming or the fees seem high, then it is worth having a conversation. But we caution savers against making decisions based on annual superannuation fund league tables – In all likelihood, the fund that was top of the pops last quarter won’t be top of the pops next quarter. In other words, you’ll always be chasing your tail.

They report that English pubs and the customary glass of stout aside, it has been a very successful few days. FinSec has worked closely with the Cradle’ boys’ (Joe and Matt) for several years now and together we aspire to deliver the best-integrated pension transfer service on the market.

They have spent time this week analysing the end-to-end process, updating on regulatory guidelines and looking to streamline the client experience.

And, whilst the ability to meet online via zoom calls is a godsend, there is nothing quite like face-to-face. As Andrew scribed in his memo to the office, ‘magic happens when people are in a room together’.

We look forward to a full report on their return. In the meantime, enjoy a few photos from picturesque Bath.

In the meme mania, too many people leveraged into options without knowing what they were doing, and that’s how US$700,000 can turn into US$122,000 (see example below). We don’t hear enough about these losses and risks as ‘diamond hands’ (gamblers) tend to only talk about their wins. The beauty of social media, however, is that it does have the capacity to work both ways… (Example courtesy of MyMoneyBlog).

Stay safe and look after one another. As always, if you have any concerns or questions at any time, please reach out to your FinSec adviser.