- Spread the risk between Australian and international shares
- Generate income safely while managing longevity risk
- Return to gearing but be responsible
- Avoid ATO penalties while maximising super contribution strategies
- Avoid one-sided investment advice – demand holistic advice
2011 is the time to implement proactive wealth building strategies after a volatile year in which investors and advisers focused on rebuilding investment portfolios and digesting multiple Government reviews, according to leading independent technical strategists Strategy Steps.
Led by Assyat David and Louise Biti, the firm provides high level investment and technical strategy advice to financial planning firms.
“2010 was a mixed year for investors as their recovery from the GFC was hampered by volatile share markets, a surging Aussie dollar and a swag of government reviews in the financial services sector,” said Assyat David, Director of Strategy Steps.
“For financial advisers, 2010 marked a year of fundamental change in their industry as they face a legislated ban on commissions, which has prompted a rethink of the advice value proposition,” she said.
Reduce exposure to Australian shares
As investors and advisers develop wealth building strategies for 2011, Ms David said investing only in Australian shares is an increasingly risky proposition with financial and materials stocks now representing a staggering 60% of the Australian share market (S&P/ASX 200), and the top 10 stocks representing 52% alone.
“Investors have enjoyed a love affair with Australian shares which is understandable given our home country bias and the lure of franked dividends, but this is an increasingly risky strategy, given the very narrow focus of our market,” said Ms David.
“There’s also a view that investing in globally-focused Australian companies is a good way to get overseas exposure but this is misguided as it only increases an already risky proposition.”
“While the commodities boom is a great story for Australian investors, history has repeatedly shown mining booms follow a volatile boom bust cycle, so investors should take heed and spread their exposure across sectors and markets,” Ms David said.
Manage longevity risk and generate income
Ms David says many previously high flying income products such as mortgage funds and listed property trusts came to grief during and after the GFC which taught investors that higher-thanaverage yields can carry structural risks. 2011 calls for a new approach focused on balancing income generation and an investor’s longevity risk.
“A crucial issue in designing an income strategy is to determine the type of income required by an investor, including whether it is essential income or discretionary income,” Ms David said.
Louise Biti, Director of Strategy Steps, said an individual’s longevity risk is also increasingly part of a savvy income generation strategy.
“The greatest fear of retirees is that they will exhaust their savings before they are ready to give up activities in retirement which require discretionary income, including travel and leisure pursuits,” Ms Biti says. “Planning ahead can go a long way towards alleviating longevity risk, and a strategy may include a combination of account-based pensions which provide access to capital, annuities which guarantee essential income, and then if required, reverse mortgages and social security solutions.”
Return to gearing – responsibly
Ms Biti said 2011 is also a good time to return to gearing, but the lesson from recent market experience is to stay in control of a gearing strategy at all times, she said.
“With any gearing strategy, whether this is a mortgage, a margin loan or limited recourse borrowing in your SMSF, it is crucial to manage the loan-to-valuation ratio, ensure you have access to other income, have adequate insurance and set up the right structure.”
Build your superannuation – Maximise contributions and avoid ATO penalties
In 2011, investors and advisers should focus on ways to maximise superannuation savings, Ms Biti said. The lesson from recent experience is to use the rules carefully to avoid tax penalties for excess contributions.
“You need to keep track of all contributions, often over several years, to stay within the caps. And if you are an investor aged over 50, aim to maximise the $50,000 a year pre-tax concessional contributions cap before it becomes means tested in 2012.”
“If you are a business owner, consider transferring your business real property into an SMSF and/or contribute sale proceeds to super using small business CGT caps to give your savings a boost,” Ms Biti said.
Seek holistic advice
In 2010, advisers had to rethink their value proposition to position for a fee for service regime, therefore investors should start asking what services their financial planning firm can offer them outside of pure investment advice, Ms David said.
“In 2011, advisers should seek to build their value proposition by taking the same advice they give investors, that is, they should look to diversify their business offering with value added services including aged care and estate planning advice,” Ms David said. “Strategy Steps is already assisting forward thinking financial planning firms to do this.”