Welcome to the latest edition of our client 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 in the future.

In this edition we discuss “Buying Shares for Kids” and provide you with information on “Managing Finances in 2024” and “Fall and rise of bonds”.

If you would like to discuss any of the issues raised in this newsletter, please don’t hesitate to contact us.

In the meantime, we hope you enjoy the read.

All the best,

Planet Wealth

A gift that keeps on giving – buying shares for kids

Many parents and grandparents worry about how to help the children in their lives achieve financial independence. But the value of long-term investment can seem like a dry and complicated idea for kids to get their heads around.

In fact, many young people would like to know more about money, according to a Young People and Money survey by the Australian Securities and Investments Commission MoneySmart website. The survey found more than half of the 15-21 year-olds surveyed were interested in learning how to invest, different types of investments and possible risks and returns. What’s more, almost all those young people with at least one investment were interested enough to regularly check performance.¹

One way to introduce investment to children may be to begin a share portfolio on their behalf. The child can follow the progress of the companies they are investing in, understand how the market can fluctuate over the short- and long-term, as well as learn to deal with some of the paperwork required, such as filing tax returns.

How to begin

Setting up a share portfolio doesn’t need to be onerous. It’s possible to start with a minimum investment of around $500, using one of the online share trading platforms. Then you could consider topping it up every year or so with a further investment.

Deciding on which shares to buy comes down to the amount you have available to invest and perhaps your child’s interests.

If the initial investment is relatively small, an exchange traded fund (ETF) may be a useful way of accessing the hundreds of companies, bonds, commodity or theme the fund invests in, providing a more diversified portfolio.

ETFs are available in Australian and international shares; different sectors of the share market, such as mining; precious metals and commodities, such as gold; foreign and crypto currencies; and fixed interest investments, such as bonds. You can also invest in themes such as sustainability or market sectors such as video games that may appeal to young people.

Alternatively, buying shares in one company that your child strongly identifies with – like a popular pizza delivery firm, a surf brand or a toy manufacturer – may help keep them interested and excited about market movements.

Should you buy in your name or theirs

Since children cannot own shares in their own right, you may consider buying in your name with a plan to transfer the portfolio to the child when they turn 18. But be aware that you will pay capital gains tax (CGT) on any profits made and the investments will be assessable in your annual income tax return.

On the other hand, you could buy the shares in trust for the child. While you are considered the legal owner the child is the beneficial owner. That way, when the child turns 18, you can transfer the shares to their name without paying CGT. Your online trading platform will have easy steps to follow to set up an account in trust for a minor.

There is also some annual tax paperwork to consider.

You can apply for a tax file number (TFN) for the child and quote that when buying the shares. If you don’t quote a TFN, pay as you go tax will be withheld at 47 per cent from the unfranked amount of the dividend income. Be aware that if the shares earn more than $416 in a year, you will need to lodge a tax return for the child.²

Taking it slowly

If you are not quite ready to invest cash but are keen to help your children to understand share investment, you could consider playing it safe by playing a sharemarket game, run by the ASX.³

Participants invest $50,000 in virtual cash in the S&P/ASX200, a range of ETFs and a selection of companies. You can take part as an individual or a group and there is a chance to win prizes.

Another option, for children able to work independently, is the federal government money managed website. This is pitched at teens and provides a thorough grounding in savings and investment principles.

Call us if you would like to discuss how best to establish a share portfolio for your child, grandchild or a special young person in your life.

Current as at Dec 2023

• 1 https://files.moneysmart.gov.au/media/kjvjabp5/young-people-and-money-survey-snapshot.pdf
  
• 2 https://www.ato.gov.au/individuals-and-families/investments-and-assets/investing-in-shares/owning-shares/children-s-share-investments
  
• 3 https://www2.asx.com.au/investors/investment-tools-and-resources/sharemarket-game

Give your finances a shake out in 2024

Like trees losing their leaves in autumn, why not take a leaf out of their book and choose the new year to shed some of your own financial baggage.

In the style of Marie Kondo, the Japanese organising whizz who has inspired millions to clean out their cupboards, decluttering your finances can bring many benefits.

While you work through all your contracts, investments and commitments, you will no doubt discover many that no longer fit your lifestyle or are simply costing you in unnecessary fees.

And if that is the case, then it is likely that such commitments will not be sparking any joy. And joy is the key criteria Kondo uses to determine whether you hold on to something or let it go.

So how does decluttering work with your finances and where do you start?

Where are you?

The first step is probably to assess where you are right now. That means working out your income and your expenses. There are many ways to monitor your spending including online apps and the good old-fashioned pen-and-paper method.

Make sure you capture all your expenditure as some can be hidden these days with buy now pay later, credit card and online shopping purchases.

The next step is to organise your expenditure in order of necessity. At the top of the list would be housing, then utilities, transport, food, health and education. After that, you move on to those discretionary items such as clothes, hairdressing and entertainment.

Work through the list determining what you can keep, what you can discard and what you can adapt to your changed needs. Remember, if it doesn’t spark joy then you should probably get rid of it.

Weed out excess accounts

Now you need to look at the methods you use when spending. Decluttering can include cancelling multiple credit cards and consolidating your purchases into the one card. This has a twofold impact: firstly, you will be able to control your spending better; and secondly, it may well cut your costs by shedding multiple fees.

Another area where multiple accounts can take their toll is super. Consider consolidating your accounts into one.

Not only can this make it easier to keep track of, but it will save money on duplicate fees and insurance. If you think you may have long forgotten super accounts, search for it on the Australian Tax Office’s lost super website. Since July 2019, super providers must transfer inactive accounts to the tax office.

Once you have reviewed your superannuation, the next step is to check that your investments match your risk profile and your retirement plans. If they aren’t aligned, then it’s likely they will not spark much joy in the future when you start drawing down your retirement savings.

If you have many years before retirement and can tolerate some risk, you may consider being reasonably aggressive in your investment choice as you will have sufficient time to ride investment cycles. You can gradually reduce risk in the years leading up to and following retirement.

Sort through your insurances

Another area to check is insurance. While insurance, whether in or out of super, may not spark much joy, you will be over the moon should you ever need to make a claim and have the right cover in place.

When it comes to insurance, make sure your cover reflects your life stage. For instance, if you have recently bought a home or had a child, you may need to increase your life insurance cover to protect your family. Or if your mortgage is paid off and the kids have left home, you might decide to reduce your cover.

Prune your investments

If you also have investments outside your super, they too might benefit from some decluttering. As the end of the year approaches, now is a good time to look at your portfolio, sell underperforming assets and generally rebalance your investments.

Many people who have applied Marie Kondo’s decluttering rules to their possessions talk about the feeling of freedom and release. It may well be that applying the same logic to your finances gets you one step closer to financial freedom.

If you would like to review or make changes to your finances, why not call us to discuss.

Current as at Dec 2023

They’re back baby – the fall and rise of bonds

After a horror 2022, AMP Portfolio Manager Fixed Income, Chris Baker says bonds are coming back into favour as interest rates near their peak.

Before we take a closer look at the current state of the bond market, it’s worth a recap on how bonds work.

Most people are pretty familiar with the share market. When you invest in an equity, you’re providing capital to a company that needs to raise funds.

A bond is just another instrument to raise capital. The main difference is that a bond usually has a set maturity date when you get your capital back and you earn coupons or interest over the course of that investment.

So if I buy a BHP bond for $100 it’ll generally have a maturity date of say three, five or seven years (bonds are issued with varying maturity dates) when I’ll get back the $100 I invested, plus I’ll earn interest during that time for lending BHP the money. Like other investments, throughout a bond’s investment term, factors such as changes in interest rates, inflation and expected default risk affect the value at which a bond will trade on the secondary market before it matures.

Bonds typically also offer more protection than equities. So, if the company defaults (or put another way, goes bankrupt), equity investors wear losses first.

That’s why bonds are considered less risky than equities.

All shapes and sizes

Bonds are used by many different organisations to raise money – from companies like BHP and Coca-Cola all the way through to sovereign states.

• Bonds issued by governments in developed economies are the least risky as the likelihood of default is very low – after all, if the Australian Government defaults on its debt, we’ve got some serious problems!
• Bonds issued by governments in emerging markets come with a little more risk.
• And then bonds issued by corporates have more risk of default as they’re not guaranteed but they tend to compensate investors through higher yields.

Rates up, bonds down…and vice versa

When you buy a bond, you’ll see a quoted yield to maturity (YTM). That’s effectively the return you’ll earn, assuming you hold the bond to the end of its term.

Like any loan, bonds generate interest payments and so the movement of interest rates will affect the value of a bond from when you invest to when the bond is repaid.

There tends to be an inverse relationship between bond prices and interest rates.

As interest rates increase, the trading value of existing bonds goes down as people can buy newer bonds at more attractive rates.

And when interest rates are falling, the value of existing bonds increases as new bonds are being issued at lower rates.

Post pandemic hangover

So what’s been happening on the bond market in recent years?

During Covid, central banks cut rates to extremely low levels along with other measures aimed to stimulate growth via injecting money into the economy (called quantitative easing). Governments also implemented fiscal stimulus measures to protect the economy from falling into a deep recession. And as we emerged from the pandemic, they unwound these cuts with extremely aggressive increases because inflation was becoming a problem after so much monetary and fiscal stimulus.

The result? Bond returns in 2022 were the worst they’ve been in more than 50 years.

But now with interest rates now at more normalised levels, the income you’ll accrue from investing in a bond is far higher.

Put it this way. Going back to Covid, bond yields were close to zero, depending on maturity. Now the YTM on a 10-year government bond is close to 5%.

Income and protection in retirement

With the cash rate at 4.35%, term deposits and other fixed income investments like bonds are far more attractive than they’ve been for many years, particularly in retirement, when investment income becomes more important.

Bonds deliver a regular income stream through coupons – generally every six months. They are higher risk than term deposits but similar in that you’re earning income through the life of the investment, albeit over a longer period.

So as bonds are less volatile than equities, they can provide protection and an income stream at the same time.

A bumper year ahead for bonds

In 2022, the bond market was very volatile. While it’s since settled down, it’s still higher than the 20-year average. And we expect this market volatility to continue in 2024 as inflation remains ‘sticky’.

If inflation stays above target levels, central banks like the Reserve Bank of Australia may have to hike rates further, negatively impacting bonds given the inverse relationship between bond prices and interest rate movements that we talked about earlier.

While we appear to be very close to the end of the interest rate hiking cycle, the outlook is a little uncertain. This certainly was evident on Melbourne Cup day this year when the RBA increased interest rates again by 0.25% to 4.35%, which is the 13th rate hike in just over a year. The problem is inflation data tends to lag – it takes some time for rate increases to flow through and affect the economy.

So there’s a lot of debate about how 2024 will look in terms of a soft or hard recession as a result of the aggressive rate increases we’ve seen.

If there’s an economic slowdown, the RBA may need to start cutting rates and bonds will start to do very well.

But whatever happens in 2024, bonds are paying yields that are the most attractive in many years. So they’re in a great place to provide a defensive role in an investment portfolio as a counterweight to more volatile asset classes such as equities.

We can help to support your overall strategy. Contact us to see if bonds are the right investment for you.

This article is written by Chris Baker, Fixed Income Portfolio Manager at AMP.

Current as at Dec 2023
Important note: This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM). While every care has been taken in the preparation of this document, NMFM makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

Planet Wealth

• 921 High Street Rd Glen Waverley Vic 3150
• P 1300 004 254
• E info@planetwealth.com.au
• W www.planetwealth.com.au
• Facebook  Planet.Insurance.Australia
• Twitter  alisplanet

Planet Wealth Pty Ltd (ACN 137 467 362) as Trustee of the Planet Insurance and Financial Planning Unit Trust ABN 15 757 194 605 is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706.
This information is provided by AMP Financial Planning Pty Limited (AMPFP) ABN 89 051 208 327 AFSL 232 706 and Charter Financial Services Limited (Charter) ABN 35 002 976 294 AFSL 234 655 Ph. 1800 021 466, both wholly owned subsidiaries of AMP and members of the AMP Group. Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your advisers, AMPFP, Charter its associates and other companies within the AMP Group may receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Ask us for more details. Any general tax information provided is intended as a guide only and not to be relied upon. If you no longer wish to receive direct marketing, please call your adviser. To view our privacy policy visit AMP group privacy policy. AMP Advice is a trademark registered to AMP Limited ABN 49 079 354 519.