January 2025 Newsletter
Our articles cover a range of topics which we hope you will find interesting. We aim to keep you informed of changes as they happen, but we also want to provide ideas to help you live the life you want – now and into the future.
In this edition, we discuss the turbulent markets around the world and how to navigate them, how to ease into retirement with a financial lens, an explainer on the current state of bond markets, and a January-February recap video on the months’ market movements.
If you are interested in discussing the topics raised in this month’s newsletter, please don’t hesitate to contact us.
In the meantime, we hope you enjoy the read.
All the best,
The Wealthy Me Team
As investors grapple with uncertainty, keeping a cool head has never been more important.
“Time in the market, not timing the market” is a popular investment philosophy that emphasises the importance of staying invested over the long term rather than trying to predict short-term market movements. While markets can be volatile in the short term, historically, they tend to grow over time.
It’s a strategy that helps you avoid getting caught up in short-term market fluctuations or trying to predict where the market is heading.
With the recent market turbulence, from the global effects of US President Donald Trump’s administration to ongoing conflicts in Ukraine and the Middle East, savvy investors look beyond the immediate chaos to focus on strategies that encourage stability and growth over the long-term.
It’s a hallmark of the approach by the world’s most high-profile investor, Warren Buffet, who argues that short-term volatility is just background noise.
“I know what markets are going to do over a long period of time, they’re going to go up,” says Buffet.i
“But in terms of what’s going to happen in a day or a week or a month, or even a year …I’ve never felt it was important,” he says.
Buffet first invested in the sharemarket when he was 11 years old. It was April 1942, just four months after the devastating and deadly attack on Pearl Harbour that caused panic on Wall Street. But he wasn’t fazed by the uncertain times.
Today Buffet is worth an estimated US$147 billion.ii
While growth has been higher in the US, investors in Australian shares over the long-term have also fared well. For example, $10,000 invested 30 years ago in a basket of shares that mirrored the All Ordinaries Index would be worth more than $135,000 today (assuming any dividends were reinvested).iii
And it’s not just the All Ords. If that $10,000 investment was instead made in Australian listed property, it would be worth almost $95,000 today or in bonds, it would be worth almost $52,000.
In real estate, the average house price in Australia 30 years ago was under $200,000. Today it is just over $1 milllion.iv
Meanwhile, cash may well be a safe haven and handy for quick access but it is not going to significantly boost wealth. For example, $10,000 invested in cash 30 years ago would be worth just $34,000 today.v
Diversifying your investment portfolio helps to manage the risks of market fluctuations. When one investment sector or group of sectors is in the doldrums, other markets might be firing therefore reducing the chance that a downturn in one area will wipe out your entire portfolio.
For example, the Australian listed property sector was the best performer in 2024, adding 24.6 per cent for the year. But just two years earlier, it was the worst performer, losing 12.3 per cent.vi
Short-term investments – including government bonds, high interest savings accounts and term deposits – can play an important role in diversifying the risks and gains in an investment portfolio and are great for adding stability and liquidity to a portfolio.
Taking a long-term view to accumulating wealth is far from a set-and-forget approach and by staying invested, you give your investments the best chance to grow, avoiding the risks of missing out on key growth periods by trying to time your buy and sell decisions perfectly.
Reviewing your investments regularly helps to keep on top of any emerging economic and political trends that may affect your portfolio. While it’s important to stay informed about market trends, it is equally important not to overreact when there is volatility in the share market.
Emotional investing can lead to poor decisions, so remember the goal is not to avoid market declines but to remain focussed on your overall long-term investment strategy.
Please get in touch with us if you’d like to discuss your investment
i Warren Buffett: The Truth About Stock Investing
ii Bloomberg Billionaires Index – Warren Buffett
iii, v, vi Vanguard Index Chart | Vanguard Australia Personal Investor
iv The Latest Median Property Prices in Australian Cities
Deciding when to retire is a big decision and even more difficult if you are concerned about your retirement income.
The average age of Australia’s 4.2 million retirees is 56.9 years but many people leave it a little later to finish work with most intending to retire at just over 65 years.i
If you’re not quite ready to retire, a ‘transition to retirement’ (TTR) strategy might work for you. It allows you to ease into retirement by:
supplementing your income if you reduce your work hours, or
boosting your super and save on tax while you keep working full time
The strategy allows you to access your super without having to fully retire and it is available to anyone 60 years or over who is still working.
The strategy involves moving part of your super balance into a special super fund account that provides an income stream. From this account you can withdraw funds of up to 10 per cent of your balance each year.
As you will still be earning an income and making concessional (before-tax) contributions to your super, this approach allows you to maintain income during the transition to full retirement while still increasing your super balance, as long as the contributions continue.
Note that, generally speaking, you can’t take your super benefits as a lump sum cash payment while you’re still working, you must take super benefits as regular payments. Although, there are some exceptions for special circumstances.
Take the example of Alisha.ii Alisha has just turned 60 and currently earns $50,000 a year before tax. She decides to ease into retirement by reducing her work to three days a week.
This means her income will drop to $30,000. Alisha transfers $155,000 of her super to a transition to retirement pension and withdraws $9,000 each year, tax-free. This replaces some of her lost pay.
Income received from your super fund under a TTR strategy is tax-free but note that it may affect any government benefits received by your or your partner.
Also, check on any life insurance cover you have under with your super fund in case a TTR strategy reduces or stops it.
For those planning to continue working full-time beyond age 60, a TTR strategy can be used to increase your income or to give your super a boost.
To make it work, you could consider increasing salary sacrifice contributions into your super then using a TTR income stream out of your super fund to replace the cash you’re missing from salary sacrificing.
In another example, Kyle is 60 and earns $100,000 a year. He intends to keep working full-time for at least another five years. Kyle transfers $200,000 from his super to an account-based pension so he can start a TTR strategy then salary sacrifices into his super.
This will reduce his income tax, but also his take-home pay. So, he tops up his income by withdrawing up to 10 per cent of his TTR pension balance each year.iii
A TTR strategy tends to work better for those with a larger super balance, a higher marginal income tax rate and those who have not reached the cap on concessional contributions.
Nonetheless, it can still be useful for those with lower super balances and on lower incomes, but the benefits may not be as great.
TTR won’t suit everyone. For example, be aware that you cannot withdraw more than 10 per cent of your super balance each year.
Also, if you start withdrawing your super early, you will have less money when you retire.
The rules for a TTR strategy can be complex, particularly if your employment situation changes or you have other complicated financial arrangements and investments. So, it’s important to seek professional advice to make sure it works for you and that you are making the most of its benefits.
If you would like to discuss your retirement income options, give us a call.
i Retirement and Retirement Intentions, Australia, 2022-23 financial year | Australian Bureau of Statistics
ii, iii Transition to retirement – Moneysmart.gov.au
While we’re only a few weeks into the new year, there have been many significant geopolitical events already – not to mention those that have carried over from 2024. One notable trend in markets at the moment is fluctuating bond yields.
We’ve seen central banks across the globe cut cash rates through the 2nd half of 2024. Notably, the US Federal Reserve, the world’s largest central banking system, has cut rates by 1% over the September – December period. Generally, this would be good news for returns on bonds and fixed interest assets. This time has been slightly different.
The relationship between bonds, rates and central banks
Central banks control what is known as the cash rate. The cash rate is the rate paid by banks for overnight borrowing and tends to have a significant impact on other interest rates, such as the rate paid on deposits, home loan rates, the rates paid by businesses to borrow, and so on. There are also other factors that help determine other interest rates, for example, risks of lending, competition, future economic expectations, etc.
Bond prices have what is known as an inverse relationship with rates, with bond prices increasing when rates decrease. This sometimes can be difficult to get one’s head around but think of bonds as kind of like a term deposit that can be bought and sold. Imagine you had $10,000 in a term-deposit today that paid you 5% but the current rate offered by a bank was 3%. Now imagine someone wanted to buy your term deposit. I would assume that you would want more than just the $10,000 you initially invested, or a premium, given that you can now only get a 3% return if you put that into another term deposit. Simplistically, this is how bonds work.
What is happening in the bond market?
At the start of 2024, there was consensus that inflation would continue to moderate, and that most developed economies would continue to slow down due to the assertive measures taken by the central banks. Since then, we’ve witnessed a rollercoaster of developments that have yielded a remarkably resilient U.S. economy and defiant bond market that is seemingly unwilling to follow the policy directions of the Fed.
Even though we initially saw longer-dated lending rates move in the same direction as the cash rate when the Fed start their rate-cutting cycle, this reversed over in second half of 2024 primarily due to the bond market’s future economic expectations. Essentially, the bond market expects inflation to be a little more stubborn than centrals banks have been signaling with the current rate cutting cycle. There are several factors for this, including a more resilient economic environment and a potential trade war brought about by some of the policies US President Trump has signaled he intends to pursue.
What does this mean for your portfolio?
Although there has been some short-term volatility in the fixed income market, we still believe that bonds will act as a ballast to equity market risk, providing diversification to portfolios, as well as providing a better return than cash over the long term. Therefore, they still play an important role in portfolios.
As always, staying invested, keeping a cool head in the face of sensational headlines, and understanding how portfolio construction is designed for the long-term is key to investing success. If you have any questions about this note or anything else, please feel free to get in touch.
Stay up to date with what’s happened in the Australian economy and markets over the past month.
Headline inflation eased more than expected during the last three months of 2024 – opening the door for the RBA to cut the cash rate.
While the release of China-based DeepSeek’s new cut-price AI model sent shockwaves through markets late in the month, they quickly recovered ground.
Click the video below to view our update.
Please get in touch if you’d like assistance with your personal financial situation.
