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Seasonal patterns in shares – should we “sell in May and go away” and what about renewed trade war fears?

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Key points

  • Seasonal patterns typically see shares do well from around November to May and not so well from May to November. This partly reflects a combination of tax loss selling in the US, new year cheer and the pattern of capital raising through the year.
  • While we see shares doing well this year, right now they are vulnerable to a short-term pull back after strong gains since December. Renewed trade fears obviously don’t help.

Introduction

Since late last year share markets have rebounded with US shares up 25% to their recent high, global shares up 22% and Australian shares up 17% as last year’s worries about tightening monetary policy led by the Fed, global growth and trade wars have faded to varying degrees. Following such a strong rebound some have said that maybe it’s now time to “sell in May and go away” given the old share market saying. Of course, this is a reference to seasonal pattern in shares.

It’s all seasonal

Seasonal patterns have long been observed in equity markets. Yet, despite the potential they provide for astute investors to profit from them – and in so doing arbitrage them away – they seem to persist. The “January effect” has perhaps been the most famous, where January typically provides the best gains for US stocks, but anticipation of it in recent years has seen it morph into December such that it has become the strongest month of the year for US shares. However, it is part of a broader seasonal pattern, which is positive for shares from around October/November to around May and then weaker from May. This can be seen in the seasonal pattern of average monthly changes in US share prices (using the S&P 500 index) shown in the next chart.

The seasonal pattern in US shares
Source: Thomson Reuters, AMP Capital

The key factor behind the seasonal pattern is the regular ebb and flow of investor demand for shares relative to their supply through the course of the year. In the case of US shares the principal drivers of the seasonal pattern are:

  • investors and mutual funds selling losing stocks to realise tax losses (to offset against capital gains) towards the end of the US tax year in September. This is also normally at a time when capital raisings are solid;
  • investors buying back in November and December at a time when capital raisings wind down into year-end;
  • which then combines with the tendency for investors to invest bonuses early in the new year, new year optimism as investors refocus on the future, put any disappointments of the past year behind them and down play bad news all at a time when capital raisings are relatively low. The illiquid nature of investment markets around late December and January (due to holidays) makes these effects all the more marked.

The net effect has been that the US share market is relatively weak around the September quarter, strengthens into the new year with January often being the strongest month and then remains solid out to around May by which point new year optimism starts to fade a bit. As noted earlier, in recent years anticipation of the “January effect” has caused buying to pull it forward into December. Calendar year end window dressing by fund managers may have also added to this tendency. Since 1985 US share prices for December have had an average monthly gain of 1.5% monthly gain. This compares to an average monthly gain across all months of 0.76%. By contrast August and September are the weakest months with falls on average.

Consistent with the influence of the US share market on global markets generally, along with specific local influences, this seasonal pattern is also discernible in other countries, including Europe, Asia and Australia. In Australia the January or now December effect is not as dominant as in the US, possibly because tax effects are not relevant in Australia around that time of year. The seasonal pattern for the Australian stock market is shown in the next chart. While the strongest months of the year in the Australian market are April and July, December also tends to provide above average gains. Since 1985, Australian share price gains in December have averaged 2.1%, with April averaging 2.3% and July 2.2%. This compares to an average monthly gain for all months of 0.61%. (Note that the lower average monthly gain for all months in Australia compared to the US partly reflects the fact that a greater proportion of the return from Australian shares comes from a higher dividend yield compared to the US.)

The seasonal pattern in Australian shares
Source: Thomson Reuters, AMP Capital

In Australia, tax loss selling may explain the weakness often observed in May and June and the strength often seen in July, given that the Australian tax year ends in June.

“Sell in May & go away, buy again on St Leger’s Day”

As a result of this monthly behaviour a typical pattern through the year is for stocks to strengthen from around October/November until around May (or July in Australia’s case) of the next year and then weaken into September/October (and November for Australian shares). This seasonal pattern can clearly be seen in the following chart which shows an index for US and Australian shares and the month to month pattern of share prices after the longer term fundamentally driven trend is removed.

The seasonal pattern in US and Australian shares
Source: Thomson Reuters, AMP Capital

Breaking the year into two six-month periods also reflects this pattern. Since 1970, the average total return (ie, from price gains and dividends) from US shares from end November to end May is more than double that from end May to end November. A similar pattern exists in Australia, Asia and for global shares as shown in the next chart.

A story of two halves
Source: Thomson Reuters, AMP Capital

While the US influence may be playing a big role in the continuation of this seasonal pattern in shares, the old saying in its full form of “sell in May and go away, buy again on St Leger’s Day” has its origins in the UK as St Leger’s Day is a UK horse race on the second Saturday in September suggesting that the seasonal pattern in shares dates back to the UK. In fact it may have its origins in crop cycles with grain merchants having to sell their shares at the end of the northern summer to buy the summer crop (which depresses shares around August/September) and they then bought back in after they sold the crop on to mills. Of course, that’s not so relevant to today. So, the explanation discussed earlier explains why it likely persists.

Qualifications

There is no guarantee that seasonal patterns will always prevail. They can be overwhelmed when contrary fundamental influences are strong, so they don’t apply in all years. For example, while Decembers are on average strong months in the US and Australia that wasn’t the case last December and not all years see weakness in the May to October/November period. However, they nevertheless provide a reasonable guide to the monthly rhythm of markets that investors should ideally be aware of. In simplistic terms, around May (and July in Australia) is perhaps not the best time to be piling into shares and around September to November is not the best time to be selling them.

What about now?

For the year as a whole we see shares doing okay. Valuations are okay helped in part by very low bond yields, global growth is expected to improve into the second half of the year and monetary and fiscal policy has become more supportive of markets all of which should support decent gains for share markets through 2019 as a whole.

However, from their December lows, shares – globally and in Australia – have run hard and fast and so are vulnerable to a short-term correction. Still soft global growth indicators and the latest flare up regarding US and China trade could provide triggers.

President Trump’s latest threat to increase the tariff on $US200bn of imports from China from 10% to 25% (delayed from January) and his threat to look at taxing remaining imports from China too suggest that the latest round of US/China trade talks in China did not go as well as planned and looks aimed at putting pressure on China to resolve the talks. Ultimately, we remain of the view that there will be a resolution given the economic damage not doing so would cause, particularly ahead of Trump’s re-election bid next year (US presidents don’t get re-elected when unemployment is rising). But the latest threat adds to the risk of market weakness in the short term, particularly if China delays a trip to the US to continue the negotiations in response to Trump’s threat.

In Australia, uncertainty around the impact of various tax increases if there is a change of Government in the upcoming Federal election could cause short-term nervousness for the Australian share market.

Of course, long term investors should look through all this.

SOURCE: https://www.ampcapital.com/au/en/insights-hub/articles/2019/may/seasonal-patterns-in-shares-should-we-sell-in-may-and-go-away

Inflation undershoots in Australia – why it’s a concern, is the RBA running out of ammo & what it means for investors?

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Key points

  • Surprisingly low inflation in Australia has increased the pressure on the RBA to cut interest rates again.
  • We continue to see the cash rate falling to 1% by year end and now see the first cut coming as soon as May.
  • For investors, it’s going to remain a low interest rate environment for some time to come.

Introduction

Surprisingly weak Australian inflation has led to expectations the Reserve Bank will soon cut rates. But what’s driving low inflation? Is it really that bad? Why not just lower the inflation target? Will rate cuts help?And what does it mean for investors?

Inflation surprises on the downside again

Australian inflation as measured by the CPI was flat in the March quarter and up just 1.3% over the last year. Sure, the zero outcome in the quarter was partly due to a nearly 9% decline in petrol prices and they have since rebounded to some degree. And high-profile items like food, health and education are up 2.3%, 3.1% and 2.9% respectively from a year ago. But against this price weakness is widespread in areas like clothing, rents, household equipment & services and communications.

Australian inflation running below the target range
Source: ABS, AMP Capital

But why the focus on “underlying inflation”?

The increase in the CPI is the best measure of changes in the cost of living. But it can be distorted in the short term by often volatile moves in some items that are due to things like world oil prices, the weather and government administered prices that are unrelated to supply and demand pressures in the economy. So, economists and policy makers like the RBA focus on what is called underlying inflation to get a handle on underlying price pressures in the economy so as not to jump at shadows. There are various ways of measuring this ranging from excluding items like food and energy as in the US version of core inflation, to excluding items whose prices are largely government administered to statistical measures that exclude items that have volatile moves in each quarter (as with the trimmed mean and weighed median measures of inflation). Right now they all show the same thing ie that underlying inflation is low ranging between 1.2% to 1.6% year on year. The average of the trimmed mean and weighted median measures is shown in the previous chart and is averaging 1.4%. The common criticism of underlying inflation that “if you exclude everything there is no inflation” is funny but irrelevant. The point is that both headline and underlying inflation are below the RBA’s 2-3% target and this has been the case for almost four years now.

What is driving low inflation?

The weakness in inflation is evident globally. Using the US definition, core (ex food & energy) inflation is just 1.8% in the US, 0.8% in the Eurozone, 0.4% in Japan and 1.8% in China.

Core inflation - US, Japan, Eurozone and China
Sources: Bloomberg, AMP Capital

Several factors have driven the ongoing softness in inflation including: the sub-par recovery in global demand since the GFC which has left high levels of spare capacity in product markets and underutilisation of labour; intense competition exacerbated by technological innovation (online sales, Uber, Airbnb, etc); and softish commodity prices. All of which has meant that companies lack pricing power & workers lack bargaining power.

Why not just lower the inflation target?

Some suggest that the RBA should just lower its inflation target. This reminds me of a similar argument back in 2007-08, when inflation had pushed above 4%, that the RBA should just raise its inflation target. Such arguments are nonsense. First, the whole point of having an inflation target is to anchor inflation expectations. If the target is just raised or lowered each time it’s breached for a while then those expectations – which workers use to form wage demands and companies use in setting wages and prices – will simply move up or down depending on which way inflation and the target moves. And so inflationary or deflationary shocks will turn into permanent shifts up or down in inflation. Inflation targeting would just lose all credibility.

Second, there are problems with allowing too-low inflation. Most central bank inflation targets are set at 2% or so because statistical measures of inflation tend to overstate actual inflation by 1-2% because statisticians have trouble actually adjusting for quality improvements and so some measured price rises often reflect quality improvements. In other words, 1.3% inflation as currently measured could mean we are actually in deflation. And there are problems with deflation.

What’s wrong with falling prices (deflation) anyway?

Deflation refers to persistent and generalised price falls. It occurred in the 1800s, 1930s and the last 20 years in Japan. Most people would see falling prices as good because they can buy more with their income. However, deflation can be good or bad. In the period 1870-1895 in the US, deflation occurred against a background of strong growth, reflecting rapid technological innovation. This can be called “good deflation”. However, falling prices are not good if they are associated with falling wages, rising unemployment, falling asset prices and rising real debt burdens. For example, in the 1930s and more recently in Japan. This is “bad deflation”. Given high debt levels, sustained deflation could cause big problems. Falling wages and prices would make it harder to service debts. Lower nominal growth will make high public debt levels harder to pay off. And when prices fall people put off decisions to spend and invest, which could threaten economic growth. This could risk a debt deflation spiral of falling asset prices and falling incomes leading to rising debt burdens, increasing defaults, spurring more falls in asset prices, etc.

The problem for RBA credibility?

The problem for the RBA is that inflation has been undershooting its forecasts and the target for several years now. The longer this persists the more the RBA will lose credibility, seeing low inflation expectations become entrenched making it harder to get inflation back to target and leaving Australia vulnerable to deflation in the next economic downturn.

RBA inflation forecasts risk losing credibility
Source: RBA, Bloomberg, AMP Capital

Due to the slowdown in economic growth flowing partly from the housing downturn we have been looking for two rate cuts this year since last December. We had thought that the RBA would prefer to wait till after the election is out of the way before starting to move and coming fiscal stimulus from July also supports the case to wait as does the still strong labour market. However, with underlying inflation coming in much weaker than expected the RBA its arguably too risky to wait until unemployment starts to trend up. And the RBA has moved in both the 2007 and 2013 election campaigns. So, while it’s a close call our base case is now for the first rate cut to occur at the RBA’s May meeting. Failing that, then in June.

Will the banks pass on RBA rate cuts?

This has been an issue with all rate cuts since the GFC due to a rise in bank funding costs. But most cuts have been passed on largely or in full (the average pass through since the Nov 2011 cut has been 89%), notwithstanding out of cycle hikes. Short term funding costs have fallen lately pointing to a reversal of last year’s 0.1 to 0.15% mortgage rate hikes or at least the banks having little excuse not to pass on any RBA cuts in full.

But will more rate cuts help anyway?

Some worry that rate cuts won’t help as they cut the spending power of retirees and many of those with a mortgage just maintain their payments when rates fall. However, there are several points to note regarding this. First, the level of household deposits in Australia at $1.1 trillion is swamped by the level of household debt at $2.4 trillion. So the household sector is a net beneficiary of lower interest rates. Second, the responsiveness to changes in spending power for a family with a mortgage is far greater than for retirees. Third, even if many with a mortgage just let their debt get paid off faster in response to falling rates this still provides an offset to the negative wealth effect of falling house prices, reducing pressure to cut spending. Fourth, the fall in rates since 2011 has helped the economy keep growing as mining investment collapsed. And of course, RBA rate cuts help push the $A lower. So, while rate cuts may not be as potent with higher household debt levels today and tighter bank lending standards, they should provide some help.

Is the RBA out of ammo?

This is a common concern around major central banks. However, they are a long way from being unable to do anything: the Fed can reverse the 9 rate hikes seen since December 2015 and start quantitative easing again if needed; and both the ECB and Bank of Japan could expand their QE programs. The ultimate option is for central banks to provide direct financing of government spending or tax cuts using printed money. This is often referred to as “helicopter money”. Fortunately, non-traditional monetary policy has worked in the US and so at least these concerns are unlikely to need to be tested. Of course, the RBA still has plenty of scope to cut interest rates if needed (there is 150 basis points to zero) and it could still do quantitative easing if needed so it’s a long way from being out of ammo (not that we think it needs to do a lot more anyway).

Implications for investors?

There are a number of implications for investors. First, low interest rates will remain in place for some time keeping bank deposit rates unattractive. Second, given the absence of inflationary pressure, a 1994-style bond crash remains distant.

Third, the low interest rate environment means the chase for yield is likely to continue supporting commercial property, infrastructure and shares offering sustainable high dividends.

Fourth, an earlier RBA rate cut may bring forward the timing of the bottom in Australian house prices.

Finally, as can be seen in the next chart, low inflation is generally good for shares as it allows shares to trade on higher price to earnings multiples. But deflation tends to be bad for shares as it tends to go with poor growth and profits and as a result shares trade on lower PEs. The same would apply to assets like commercial property and infrastructure.

Low inflation can allow higher PEs, but maybe not deflation
Source: Global Financial Data, Bloomberg, AMP Capital

SOURCE: https://www.ampcapital.com/au/en/insights-hub/articles/2019/april/inflation-undershoots-in-australia-why-its-a-concern

Managing your pension in volatile markets

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Sinead Rafferty, Portfolio Specialist, MLC

The severe falls in global share markets in late 2018, after almost a decade of strong market returns, led many investors to ask whether it was too risky to stay invested in the share market during their retirement. If they did stay invested, should they move to a strategy with less exposure to higher risk investments, like shares? 

As it turned out, markets rebounded in January, recovering most of their December losses.

It’s normal to feel anxious about your investments when markets are volatile. However, changing your investment strategy in response to market volatility can have serious consequences for your wealth in retirement. We put superannuation – specifically, account based pensions − under the microscope and look at some of the lessons we can learn from the past.

How have account based pensions performed after previous market corrections?

An account based pension is an investment that you can begin using superannuation money once you meet certain conditions. It provides a regular, tax-effective income.

Chart 1 shows how an account based pension invested 70% in growth assets (shares and property securities) and 30% in defensive assets (fixed income and cash) would have performed if a retiree had started the pension during some key market downturns of the past. It assumes the retiree was aged 60 and had an account balance of $500,000 when they began their pension. It also assumes they drew down the minimum annual income payment each year.

Chart 1: Real annual pension incomes for selected start dates for an account based pension strategy with an asset allocation of 70% growth / 30% defensive assets.

Note: The portfolio consists of Australian shares (32%), global shares (hedged) (8%), global shares (unhedged) (24%), global property securities (6%), Australian fixed income (10%), global fixed income (10%) and cash (10%).
The sudden jumps in incomes at ages 70 and 80 are due to the rising minimum incomes investors are required to draw from account based pensions as their age increases.
Returns are based on investment market returns from 1900 to 2017 (before fees and tax). Historical returns aren’t a reliable indicator of future investment returns.
Source: Calculations by NAB Asset Management Services Limited and investment market data from Global Financial Data, Inc. and FactSet.

Chart 1 shows the annual pension payments in today’s dollars (we’ve adjusted for inflation) for an account based pension that started in four different years:

  • the 2008 global financial crisis. While the initial result was particularly poor, the income levels have now recovered to pre-crisis levels.
  • 1981, when the market slumped on concerns about the health of the US economy. Despite a further slump with the bursting of the dot com bubble in 2000, those who began their pension in 1981 fared well overall.
  • 1973, during a period of very high inflation. While there was an initial decline, for those who maintained their investment strategy the outcome was ultimately strong as the very positive markets of the 1980s offset the 1970s.
  • the start of 1929, during the Great Depression. While the pension initially performed poorly, 1932 and 1933 delivered very strong returns and the pension stream improved. Incomes suffered as a result of the share market fall in 1952, during the Korean War, but despite all these events, the outcome improved for those who remained invested.

There are important lessons in this look at history. During retirement, you should expect financial markets to deliver a wide variety of returns and at times, returns will be disappointing – as they were over the 2018 calendar year. Both positive and negative periods can continue for some time. Over time, markets generally do recover from serious downturns, but the very strong market returns that we’ve seen over the last decade are abnormally high.

If your time horizon is long enough, the higher return potential of shares usually does come through. But this can take a long time − you’ll need to be patient, and focus on how you’re progressing towards your longer-term financial goals, rather than on the frequent ups and downs of the market.

What if you switch to a more conservative strategy after a major market fall?

History teaches us another important lesson about reacting to market volatility. Assuming you’re in the right investment strategy to start with, switching to a more conservative strategy after a significant market fall probably won’t be in your best interests.  Adopting this approach is likely to impact your lifestyle in retirement.

Chart 2 shows the impact on a pension income of switching from a 70% growth assets strategy to a 30% growth assets strategy after some of the worst one-year returns in history. It shows how much less you’d receive if you changed to the more conservative strategy.

Chart 2: Impact on pension payments of switching to a lower risk investment strategy after a major market fall.

Note: This chart shows the impact of moving from a portfolio with the asset allocation in Chart 1 to a portfolio consisting of Australian shares (12%), global shares (hedged) (1%), global shares (unhedged) (13%), global property securities (4%), Australian fixed income (30%), global fixed income (30%) and cash (10%).
The sudden jumps in incomes at ages 70 and 80 are due to the rising minimum incomes investors are required to draw from account based pensions as their age increases.
Historical returns aren’t a reliable indicator of future investment returns.
Source: Calculations by NAB Asset Management Services Limited and investment market data from Global Financial Data, Inc. and FactSet.

While in some cases switching to lower risk investments resulted in a short-term increase in the income the investor received, it was generally a losing strategy because it was difficult for the portfolio to recover from the significant negative returns. This could mean that an investor is drawing down more on their capital than they anticipated, so their retirement funds could run out too soon.

Conclusion

In planning a retirement strategy, it’s important to take into account both that negative market events could happen and that over time, markets generally recover from these. If you expect this, you’ll be more able to resist the temptation to sell out of the market, or move into a more conservative strategy, when a market slump occurs. By maintaining your investment strategy at these times, you’ll be well positioned to benefit when the market recovery happens.

SOURCE: https://www.mlc.com.au/personal/blog/2019/03/your-super-in-volatile-markets

Navigating redundancy: make it work for you

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Redundancy unfortunately affects more and more Australians. With the right approach and professional advice, however, it could open up opportunities and work in your favour.

Even though redundancies are often part of business, being told your role is redundant can throw your plans into disarray and leave you feeling blindsided. The key is not to panic.

People often discover that a redundancy can open doors to new financial and lifestyle possibilities.

Threat or opportunity?

While every situation is different, an unexpected redundancy could be turned to your favour. It might not be the timing you wanted but you might even be able to use it to achieve the kind of goals and objectives you’ve been talking about for years.

Understand the payout

A redundancy payout can be complex, with a range of tax implications, so it’s important to make sure you completely understand the payment. Knowing your rights and checking you’re receiving what you’re entitled to is also important.

As soon as possible, obtain a copy of the proposed payout. An accountant or financial adviser can then help you assess the financial implications and options available to you.

If your employer’s flexible, you might be able to use the payout to your financial benefit, for example deferring receipt until the new financial year by taking annual leave in the interim. This could help reduce your tax liability and also boost your super with contributions over your leave period.

Review your options

Before making any financial decisions, take the time to assess your position and get some perspective on the situation.

Meeting your immediate needs

Understanding the size of your redundancy payment, and how long it’s likely to last, will help you determine how quickly you’ll need to find employment. A payment can provide you with the equivalent of six months to a year of salary, so, if you can get another job within that time frame, you could be better off.

You may feel more secure placing your payout into a savings or home loan offset account that you can easily access. It’s also a good idea to review your spending. This is particularly important for smaller payments. Our Budget calculator can help you to review your spending patterns and identify areas for adjustment.

Dealing with the remainder

If you’re lucky enough to find a new job quickly, and/or your redundancy payment can cover your living expenses for an extended period of time, you’ll need to decide what to do with what’s left. Some of the options include:

  • pay down or discharge a loan – e.g. a mortgage or HECS
  • paying an after-tax super contribution to boost your retirement savings (being mindful of contribution caps)
  • investing outside super if you’re saving for a more immediate goal.

The best approach will depend on your specific circumstances and financial objectives. We recommend you seek professional advice from a financial adviser.

Embracing the change

Finally, once you’ve had a chance to review your position, a redundancy can lead to new options and ways of thinking. Some people may embrace the freelance life or turn a passion into a career.

By taking your time to understand and evaluate your options, you could turn an unexpected redundancy into an unexpected and very exciting opportunity.

SOURCE: https://www.mlc.com.au/personal/blog/2019/03/navigating-redundancy

Estate planning: what your will doesn’t cover

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Most of us think of estate planning as simply writing a will. However, ensuring your assets are distributed according to your exact wishes after you pass away can be more complicated than that.

Having an up-to-date will is an essential part of the estate-planning process. Some assets automatically form part of your estate when you die, which means they can be distributed according to the terms of your will. These include individually owned bank accounts, listed securities, managed funds and interests in any property co-owned with someone else.

There are also assets your will doesn’t cover such as superannuation. These can make up a significant proportion of your wealth and you need to plan carefully to ensure they go to the people you want them to.

These are some common assets not covered by a will:

Superannuation and life insurance

It’s possible to ask your super fund trustee to pass your superannuation on to family members who are dependents. All you have to do is complete the death benefit nomination. You can nominate your partner, children or other dependents or you can elect your estate.

It’s important to review your nominations regularly, particularly when your personal circumstances change. If you fail to nominate a beneficiary or your nomination has lapsed, your super fund trustee will decide how your benefit is paid.

If you have dependents, there’s a fair chance you hold life insurance (inside or outside your super fund) that will provide for them financially if you die or are unable to work. This lump sum payment can be paid to the policy owner, a named beneficiary or to your estate, depending on how the policy was established.

Check with your financial adviser or the company supplying your insurance to ensure it will provide for the people you want it to.

Some jointly owned assets

Assets that you own with another person will automatically pass to the surviving owner, regardless of the terms of your will. Things commonly held in joint arrangements include the family home and bank accounts shared between spouses.

Assets in trust

If you’re a trustee or beneficiary of a discretionary family trust, any funds you hold there will remain in the trust when you pass away.

Making sure your wishes are carried out efficiently

If your affairs are complex, it’s especially important to ensure all your wishes are properly documented. A financial adviser can work with you and your solicitor to ensure the right assets go to the right people in a tax-effective way.

As part of the planning process, you may like to appoint an executor to carry out the instructions in your will. This takes the pressure off your loved ones in what can be very a difficult time.

Organising your estate may not be easy or particularly comfortable but planning ahead makes it easier for your loved ones to settle your affairs when the time comes.

SOURCE: https://www.mlc.com.au/personal/blog/2019/03/what-your-will-doesnt-cover

Plan ahead for the aged care you want, for your parents

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Helping parents make the transition into supported living can be challenging, but forward planning and open communication can help everyone. Here are some things to consider together.

There are good reasons to start discussing aged care options with your parents well before they’re needed. Your parents’ circumstances could change quickly and assistance in or outside the family could be necessary years before you anticipated. The impact on your parents, you and your entire family can be dramatic – both emotionally and financially. Ensuring everyone understands what’s involved is vital.

Weighing up your parents’ options

We tend to equate aged care with residential or nursing home living, but there are other possibilities. You’ll need to discuss what mix of the following options your parents prefer.

1. Home care

Home care usually involves a government home care package that subsidises services such as cleaning and transport to appointments. There’s a huge range of approved providers, all pricing their services differently, so it pays to shop around and ask about other people’s experiences.

The My Aged Care website helps you understand the government assessment process before booking one.

It’s important to remember that just because someone has been assessed as needing a certain level of care, it won’t necessarily be immediately available. They may be put on a waiting list or offered a temporary solution. If you have the money, another option is to go private.

Your parents may also need some modifications to their home. You can pay for them independently or your parents may qualify for subsidised modifications to help with independent living. Handrails, non-slip flooring in the shower and easy-turn taps are typical recommended changes. Talk to your package provider about an assessment.

Technology is playing an increasingly significant role in keeping the elderly safe and independent. Devices can include digital bed and chair-fall guards, reminder devices and emergency alert pendants. Some are heavily subsidised and included in the government’s home care packages, while other, more sophisticated, devices may cost extra.

2. Retirement village or low-care facilities

These offer varying levels of independent living. Once in this environment, people can change the services they receive to match their rising level of need. People typically go from independent living to low-care assistance with everyday tasks such as home maintenance, cleaning, laundry and cooking.

Waiting lists for popular retirement villages and nursing homes can be very long. Again, do your research and if your parents want this option on the table, get their names added to the waiting list.

You’ll also need to look at the cost of ‘buying’ accommodation. Some can be as expensive as a city apartment. If funds are limited, your parents might have to sell their home to fund a place. They’ll also need to consider what happens if one needs a nursing home while the other wants to stay at home.

It’s important to discuss other factors such as location, too. Would it be preferable to move into facilities nearer adult family members or remain close to existing social networks? Understanding what’s important to your parents can help them decide which waiting lists to join.

3. High-care nursing homes

High-care nursing homes provide continuous nursing care for the frail. If one of your parents is already in a low-care facility or retirement village run by the same provider, the transition to full care can be quite smooth – providing a place is available. The existing refundable accommodation deposit or daily accommodation payment is usually transferred to the new accommodation.

Weighing up your options

Caring for ageing parents can be as emotionally and financially taxing for you as for them. It’s important to talk to siblings and children about the care that may be required from family members as well as other providers.

It may be important to define which sibling does what. For example, one may volunteer to drive your parents to appointments, another to manage the care home admin. You may also have to reorganise your work hours to accommodate care or visits. This could reduce your income and place a strain on your family life, so it’s just as important to address these topics, making clear your boundaries.

Seek advice

Making the transition to supported living is a major life event and your parents may require significant support to put the necessary arrangements in place. A financial adviser can help you and your parents work through the options and plan ahead.

An adviser can help your parents:

  • decide whether to sell their home, liquidate other assets, or access equity finance in the form of a reverse mortgage
  • determine whether their preferred care option is affordable
  • ensure all estate planning and advance health directives are in order
  • reduce aged care fees and maximise benefits.

An adviser can help you work out if you can:

  • afford to reduce your working hours to care for your parents
  • pay for renovations to your home so they can live with you
  • contribute to the cost of care.

Find an MLC adviser

Accepting that elderly parents can no longer live independently and helping them transition to the next stage can be a difficult time for families. Talking together, planning ahead and seeking professional advice can go a long way towards helping your parents enjoy the best possible lifestyle.

SOURCE: https://www.mlc.com.au/personal/blog/2019/03/aged-care-for-parents

5 ways to take control of your money

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Five ways to take control of your money, grow your wealth and start enjoying financial peace of mind.

It can seem daunting, but you’ll definitely feel the benefit once you’re ‘the boss’ of your own finances. It’s all about getting better at managing your spending and identifying opportunities to grow your wealth. Add in the goals you’re saving for and it can even be exciting.

Five areas to focus on

1. Write a budget

‘Knowledge is power.’ Having a clear picture of where your money goes each month can help you identify where you can perhaps cut back in order to put more into savings or investments. What’s more, it’s easier than ever thanks to the number of tools and apps available. They can help you track your spending, define your financial goals and develop a budget to help you reach them.

Start by tracking your spending for a month or two. You’ll discover where you’re really spending your money, which is the first step in spotting where you could be saving more. Try the NAB Budget Planner Calculator or download the ASIC Money Smart’s TrackMySPEND app.

2. Set savings goals

Most of us find it difficult to motivate ourselves to save but give yourself a good reason and it can be a different story. Knowing you’re working towards a target – say, a holiday, house deposit or even stopping work early – can help you avoid temptation and make it easier to put funds aside each month. The old saying ‘out of sight, out of mind’ can help, too. Think about setting up an automatic direct debit from your wages so you don’t even think about it. If it’s going into a separate bank account, all the better.

3. Take control of your credit cards

The interest on any credit card debt can eat into your money so prioritise paying them off as quickly as possible. Focus on the card with the highest interest rate first, while continuing to make minimum repayments on your others. If your balances are high, you could consolidate them into a personal loan, mortgage or different credit card with a lower interest rate. That way, you can pay the debt off faster. Lastly, try to keep credit cards for last-resort spending rather than everyday purchases.

4. Sort out your super

Your superannuation is potentially one of your biggest assets, so it makes sense to take an interest in how it’s invested.

Choosing an investment mix that’s right for your life stage can help maximise your retirement nest egg. If you expect to be working for a decade or more, this could mean a strategy with the potential for higher returns. If you’re planning to retire soon, a strategy that protects against market fluctuations may be more appropriate.

Making voluntary super contributions can have a big impact on your final figure. Use our Retirement forecaster to see the impact extra contributions could make to your retirement savings.

MLC makes it easy for you to keep up to date on how much you can add each year – just visit the ‘Boost your super’ section of the website. It’s also sensible to annually review any insurance policies you hold through your super fund to ensure they still meet your needs.

5. Explore your investment options

It’s also good to spend some time developing a personal investment strategy outside super to help meet more of your personal goals.

With many of Australia’s real estate markets coming off the boil, many of us are exploring other ways to generate income and build wealth. These could include investing in shares or managed funds as well as in traditionally more secure instruments such as bonds and term deposits.

Whatever investment strategy you choose to pursue, it’s wise to consult a financial adviser first. They can help you work through which would be appropriate for you.

Whether you use a financial adviser or not, educating yourself is always a good idea.  There are free resources available on the different types of investment opportunities available, including ASX online courses and, for those planning for retirement, visit our Retirement hub.

Getting started

Becoming the boss of your wealth takes a little effort but it can be very rewarding – financially and personally. If you need help getting started, MLC’s Advice team can provide advice tailored to your circumstances and goals. Your first consultation is free.

SOURCE: https://www.mlc.com.au/personal/blog/2019/03/take-control-of-your-money

10 habits of highly successful homebuyers

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Ready to take the leap into home ownership? It’s worth doing your homework first.

Buying your own home can be overwhelming – hardly surprising given it represents one of life’s biggest investments. Our buying tips aim to make the whole process a little less daunting – while ensuring you’re thoroughly prepared.

10 things to consider when buying a home

1. Know where you stand

Before you start house hunting, find out how much you can borrow, what you’ll need for the deposit and costs, and whether you qualify for the First Home Owner Grant and other forms of assistance.

2. Don’t overcommit

It can be tempting to borrow the maximum amount available, but make sure you can afford the repayments and consider the impact higher interest rates could have on your household budget.

3. Choose the right savings vehicle

If you need (or want) to save more for the deposit and costs, a cash account may suit if you think you’ll be ready to buy in the next couple of years. If your timeframe is longer – say, five years plus – then you may want to invest in assets with the potential to deliver higher long-term returns, such as shares.

4. Pinpoint your search

When you’re ready to start looking, make sure you decide where you want to live and the type and size of property you want to buy. Also, make sure you consider issues such as proximity to public transport, shopping centres, restaurants, cinemas, childcare, schools and work.

5. Put in the hours

This means attending as many open inspections as you can. It can be very tedious and time is money but compared to the size of the investment, it’s time well spent.

6. Know what you’re buying

When you’ve found something you like, inspect the property thoroughly and consider arranging a building and pest inspection. While these inspections can cost a couple of hundred dollars, they can save thousands of dollars in repairs down the track.

7. Get a formal loan approval

Before making any offers, you should get your loan approved in writing. When deciding which loan to choose, make sure you consider all of the loan’s features as well as the interest rate.

8. Get the contract checked out

A solicitor or conveyancer can review the terms and conditions in the sale contract and your loan agreement. They can also finalise the settlement on your behalf.

9. Arrange appropriate insurances

In addition to insuring your home and contents, you should take out enough personal insurances to cover your debts and income in the event of death, illness and injury.

10. Seek financial advice

A financial adviser can develop strategies to help you save for your deposit and costs, as well as pay off your home loan quickly. They can also review your insurances and help you achieve your other lifestyle and financial goals sooner.

SOURCE: https://www.mlc.com.au/personal/blog/2019/03/successful-homebuyers

Stay covered with your insurance in super

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Nobody plans to have a serious accident or illness. But if it happens, you may be able to make an insurance claim through the insurance in your super.

Here is a summary of the main types of insurance cover available in super, why it can be worth having and what you should do to make sure it’s working for you.

The types of insurance cover typically offered by super funds

  • Death cover – Pays a benefit to your dependants, estate or legal beneficiaries in a lump sum if you die or become terminally ill.
  • Total and permanent disability cover – Pays a benefit in a lump sum if you’re unable to ever work again due to an injury or illness.
  • Income protection – Pays a replacement income, usually a monthly benefit of up to 75 per cent of your regular income if you’re temporarily unable to work due to illness or injury for a specified period of time. You can generally only claim on one IP policy so you should check if you have other IP cover elsewhere.

Why insurance can be worth having

There’s little doubt insurance can help ease the strain when life’s turned upside down. Even if you’re in great health now, your situation can change suddenly. An accident or illness could put you out of action temporarily or permanently – or cause your untimely death, leaving you at risk when you need it the most and your loved ones to pick up the pieces. So, no matter what stage of life you’ve reached, there can be significant advantages to having insurance in place.

The benefits of insurance in your super

  • Automatic coverage – If the insurance in your fund offers “automatic acceptance”, and you’re eligible for this type of cover, this will save you the hassle of applying and filling out a personal health statement provided you’re at work or able to work the day that your insurance commences.
  • Zero impact on your weekly budget – Because the premiums are deducted from your super account, you won’t have to budget for the cover you need. If you’re managing other big life goals, such as saving for a house or paying down a mortgage, this strategy could help alleviate the demands on your finances, while still providing peace of mind. But keep in mind that since the premiums are being deducted from your super balance, this will reduce the amount of your super balance over time.
  • Potential tax benefits – If you don’t want your premiums to affect your super balance, you may be eligible to salary sacrifice the cost of the premiums to your super and in turn reduce your taxable income. You should get tax advice for your personal circumstances.

Find out if you’re covered

The government has made changes to insurance provided for super members, which apply from 1 July 2019. We’ll be updating you about the changes, but in the meantime, now’s a good time for you to find out if you have insurance in your super. You can do this by logging into your mlc.com.au account, through the MLC app or checking your 2018 statement or your welcome kit letter.

SOURCE: https://www.mlc.com.au/personal/blog/2019/03/insurance-in-super

Coming into an inheritance: key considerations

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The death of a parent can be a hugely distressing time. It may also mean coming into an inheritance. Working out what to do with an inheritance isn’t always straightforward, so here are some tips on how to approach it. 

Receiving a financial windfall isn’t always an occasion for celebration. If it comes in the form of inheritance following the loss of a parent, it’s likely to be a time of sadness and reflection – for you and your extended family. In time, deciding how to manage any inheritance will become more pressing and getting professional advice could help smooth the process. Here are some of the things you may need to work through when that time comes.

Understanding what you’ve inherited

Inheritances can take many forms: cash, property, shares, superannuation interest or simply treasured personal possessions. There can be complicated tax considerations associated with some bequests. The form yours takes is likely to influence whether you choose to retain or sell it and the timing of any sale. It can be helpful to get professional legal and or financial advice before making any decisions.

Managing shared ownership

If an inheritance is shared among two or more people, settling an estate can become complicated, particularly if there are different ideas about whether assets should be retained or sold. It can be a stressful time and clear, open communication is the key to ensuring relations don’t become strained while you work towards an agreement. This might involve people accepting unequal shares of the various assets. For example, a brother or sister may opt to buy the others out of the family home, or trade their share of cash or a superannuation interest for a larger share of the property. This is where professional help can be really useful, particularly if the arrangements are complex or involve large sums.

Discussing inheritance with your parents can make things simpler down the track. It can be a difficult topic to tackle but talking through the terms of the will with everyone in advance, including who’s been chosen to act as executor, can ensure everyone knows where they stand.

Establish your priorities

It’s possible you’ll decide on a combination of saving, sharing and spending your inheritance. However, taking the time to think things through before deciding anything is key. Talking through your priorities and plans with a financial adviser can also help you choose how to put your funds to best use.

Your life stage and financial position are likely to influence what you do with a lump-sum inheritance. If you still have a mortgage on your home, you may decide to reduce or discharge it. Alternatively, you might top up your super with a non-deductible lump sum contribution.

Sharing the inheritance with your children may also be something you want to consider. It’s become common for parents to help their kids get a foot on the property ladder by investing a lump sum or buying an investment property for them.

If you’ve been thinking about a major purchase or have something you’d love to tick off the bucket list, you may decide the time has come. It can be a lovely way to honour your parent’s memory.

SOURCE: https://www.mlc.com.au/personal/blog/2019/03/coming-into-inheritance