News

Shares now regarded as cheap by some experts.

The sharemarket has recently endured some falls from the end of April.  This is merely one of many trends that the market cycles through on a regular basis.  Based on the prominence that some of these downward trends receive in the media, you could easily being mistaken for believing that it is a permanent change rather than a trend.

The only real issues are how long will the trend last and how deep are any falls likely to be?

There are genuine concerns and these have been well documented in previous newsletters, however there are also positive points to be considered. 

One view put forward by Shane Oliver of AMP Capital is that sharemarkets are in fact cheap.  Logic says the more it falls, the cheaper it gets.  The table below illustrates this point by using the price/earnings ratio.  This measures the number of years it takes for the company earnings (E) to repay the company share price (P).  A lower value means the share price or market is cheaper.

This indicates that it is reasonable to expect a recovery more so than further falls, or at least that further falls should be limited under normal circumstances.

The chart highlights both a falling P/E ratio and current numbers that are below average.

Despite recent market falls, the last 12 months results have been pleasing

A common feeling from clients at the moment is that we are being swamped with bad news and they are expecting to see poor results for the last year.  However our figures that we provide in reviews are showing very pleasing results. 

The one year performance is very good and it continues to add value above the relevant indexes.

Liquidity versus Volatility

We understand the importance of ready access to capital invested in portfolios.  It provides great comfort to know that you can access most or all of your funds in a short period of time (usually 2-3 weeks). 

The downside of this is that many investments, particularly those in share and property markets, whilst very liquid are subject to volatility.  The trend over recent years has been for volatility to increase and we are seeing larger movements in sharemarkets on a more regular basis.

Of course the media thrive on this and a fall can make for a dramatic headline.  You need to keep this in context.  If the sharemarket falls say 2% in a day, it does not mean that your portfolio fell by this amount unless you are 100% invested in Australian shares, not something we would advocate. 

Let’s say a portfolio has 30% in Australian shares, then a 2% fall will equate to a 0.6% impact on the portfolio.  Still not ideal, but not as bad as the first glance.

This is why we support diversification as it important to allocate funds to other asset classes.  Whilst this will not provide a perfect defence as we saw in the GFC, it can provide protection and add some value, particularly in less extreme periods.

For example if you consider that on the same day that the Australian and the US markets fell 2%, that the Australian dollar also fell in value.  The currency movement is a positive for the international share funds that we hold. This happens often as uncertainty leads investors to return to the $US as despite obvious problems, it is still seen as a safe haven. 

Your holding in the cash and fixed interest sector will most likely retain their value and continue growing, depending on the cause of the sharemarket falls.

Insurance Marketed via Telephone & Television Commercials - Be Warned!

We have all seen those television commercials whereby an insurance company (normally one you've never heard of) tells you that "you too can be covered for as little as $1 per day".  Sounds too good to be true?  It probably is.  Some problems with these types of polices are:

• Premiums start off cheap, and become very expensive with age (and as you statistically become more likely to claim);
• Definitions can be convoluted and very hard to meet when it comes to claim time;
• They are often "accident only" meaning that you are not covered for any illness or injury that is not associated with an accident (i.e. you would not be covered for Cancer, Heart Attack, Stroke and many other illnesses and diseases). There is also plenty of research to show that the majority of claims are based on illness, not accidents.
• Pre-existing illnesses and injuries are automatically excluded - but you're often not told this until it comes to claim time and you are unsuccessful.  This is after many years of paying premiums;
• You are often underwritten upon claim (not upon application like most of the insurance companies we use), reducing your chances of successful claim;
• The Income Protection often only runs for a 2 or 5 year period rather than until age 65;
• A warning on funeral plans.  You may already be covered (and paying for this) through your life insurance as many polices pay an amount in advance (before the claim is processed) to cover funeral costs.  This is usually $10,000 to $15,000 which is paid to a nominated bank account within 1-2 business days.   Check your individual polices for this feature.

For insurance assistance please contact Sally Jones at our office.

Last chance to qualify for Government Co-contribution for this year.

You only have until June 30^th for your superfund to receive your $1,000 personal contribution to be eligible to gain the Government Co-contribution.  This is the week to make the payment.

If need some help in working out your eligibility based on your income level, or how best to make the contribution, please call us.