Don’t rush in to super decisions
13 May 2009,
Falls in markets and superannuation funds could lead to benefits for those retiring in the longer term, but for those wanting to exit the workforce soon their plans for retirement may need to be put on hold. Financial Planning Association of Australia, Queensland Chapter president Delma Newton tells Brisbane Business News how markets will pick up but investors must be cautious of any get-rich-quick schemes.
SHARE market plunges have resulted in lower super accounts. For people retiring in the near future this poses a serious problem of whether to delay retirement, pull in their belts or at least stay in the workforce on a part-time basis and live off their savings.
So with markets fluctuating, a lot of people would prefer to invest in cash. Indeed, in the middle of last year term deposits were looking very attractive, but this is no longer the case – for most people a portfolio made up of cash only over the long term is not a wise investment as its value will be eaten away by inflation.
When investing it is important to look to the long term of five to 10 years and keep this in mind when markets turn negative.
There are three options when it comes to investing your superannuation. You can invest in retail funds, industry funds or set up your own self managed superannuation fund (SMSF) – under the first two options you give the day-to-day running and investment decisions to others, while for SMSFs extensive research is required.
The type of funds people choose for their superannuation should depend on their situation.It is important to do research into which type of investments are available, how they are made and valued, and look at what services you get for the fees that are being charged.
Personal insurance is very important and not all super funds offer comprehensive coverage at a cost-effective rate.
The Australian Taxation Office is in charge of regulating SMSFs and as such you must take your responsibility of being a trustee seriously — a basic rule of thumb is that you need $200,000 in super to make setting up an SMSF a cost-effective measure. You will be responsible for the investment of the funds and any insurance cover that is needed – typically you will be able to invest in a wider variety of investments, but you must also comply with strict rules set down in legislation. Investments available include direct shares, managed funds, direct property and term deposits.
As for industry and retail funds they are part of both swings of the merry-go-round - you have to look at them on a case by case basis as not all industry funds are the same and not all retail funds are the same. Some have infrastructure investments sitting in them which are re-valued every 18 months and when they are re-valued the returns could be hit quite heavily.
While it is tempting, beware of picking last year’s winner — cash rates have already fallen and government bonds are also likely to fall when interest rates go up again. So while cash and government bonds were the highest returning investments last year they may not be in 2009.
When looking for bargains in the share market remember that some companies are cheap for a reason, as they may have poor management or high levels of debt. I think BrisConnections is the perfect example for investors trading by themselves that shows why you need to know what you’re buying into. Some deals literally are too good to be true, as today’s bargain may be tomorrow’s loss. This environment breeds a lot of ‘Johnny-come-lately’, get rich quick schemes so it’s important not to get caught up in what people may pitch as ‘the next big thing, you beauty’ investments.
The bottom of the market is hard to pick so if you have money to invest do so over a longer period of at least 12 months and seek advice. Also remember that bear markets have rallies too – have we seen the bottom yet? When it comes to investing in the property industry, as more people lose their jobs more will default on their home loans or simply decide that paying the mortgage is too hard, which may result in a greater number of houses on the market and hence property prices may decrease or remain flat for a period of time.
What all this shows is that what’s happening now has happened before, whereby people showed too much confidence when the markets were rising and they did not foresee that the good times had to stop and situations need to be re-aligned. At one stage prices were just ridiculous, like BHP’s returns of more than 30 per cent – this is something that cannot be sustained, but history has shown us that while the good times don’t last forever, neither do the bad times. So it is vital that people think in the long term and invest their money wisely.
*The advice provided is the general view of Delma Newton and is not necessarily representative of the views of the Financial Planning Association of Australia.