It has been an interesting start to the year from an economic and market perspective.  We have seen:

  • Shares reaching some of their all-time highs;
  • Property is increasing as affordability is at an all-time low;
  • Cash rates are high compared to recent years;
  • Cost of living is increasing everywhere;
  • Questions still being raised around how will the next generation afford a home?

This can reach a point of maximum destruction of capital if large decisions are made at the wrong time (and without the appropriate advice) and we are seeing that now is a good time for cash buffers, diversification and a strategic approach.

What has changed and what has not and how do you get through this?

People’s expectations have changed.  The expectation of interest rate decreases pulls forward expenditure that would have been otherwise delayed. The thought that assets will increase if rates drop then has more people buying “FOMO” and that feeds that exact cycle.

These cycles become self-fulfilling and feeding on themselves. You can make money during these cycles, but it can also increase the risk of poor financial decisions.

So far in 2024 anything but cash has been king.

When all growth assets are increasing at the same time that is always when I sit back and take stock of what is going on.

During our client review’s, we are finding that clients want to take on more risk for a higher return. I want them to build up their cash buffers and stick to a strategic approach and avoid the traps of trying to be a market timer. That is why you need a long-term strategy and remind people of this approach. You need to avoid the bias that others are falling into.

The same can be said for property that seems on the coast in the last month to have surged again. Higher end properties that have sat for months and months all seem to have sold. Why the sudden change…sentiment has increased.

I have mentioned a lot that in 2024 the conversation will be about Interest rate decreases…. If we continue to see consumers spending, continued optimism and housing prices increase then that will be all it will be… talk.

For interest rates to actually decrease we need to see inflation continue to slow, house prices to at least stabilise and unemployment probably with at least a 4 in front of it.

What are we seeing locally?

We are seeing a lot of new enquiries from people that have traditionally had property exposure. This is now not providing the income it once did based on the increase in costs for everything to do with a rental property.

Although the property has performed well and grown in value, the income percentage return is now lower than the cash rate.

For this to continue to be a good long-term investment it needs to grow, BUT if you are a retiree and post covid, you probably want to travel, help the kids or enjoy a bit more lifestyle,

That is where a well-diversified approach across all asset classes can work. Yes, topping up your cash buffer when investments are doing well is always a great strategy.  I do like the saying “you cannot go broke taking profits”.

Taking profits can have some tax consequences but again, you have made a gain, locked it in and paid some tax because you have made a gain.

Far too often people do not want to pay the tax on a gain… Some time later there may not be as much gain.  It is important to remember that assets do not always go up in value. 

Beware of Illiquid assets or at least understand them

There is a rise in people wanting access to private equity or investments in illiquid assets. This seems to be a rapidly growing trend.

The appeal is higher returns but this generally comes with higher risk and lack of liquidity.

When returns have been strong then this is where the greed in humans sadly comes out.

We are seeing a number of people coming to see us that have either had concerns with their current allocation and were either not aware of the liquidity issues or may not have given this sufficient consideration. Our team is always happy to provide an opinion.

We at RFS Advice do not like exposures to illiquid assets, that is our opinion. There is inevitably a time when clients need their capital. It is our preference for people to buy a property themselves if they are looking for a longer-term asset that is not as liquid as you can at least control the outcome.

Sometimes these trends can pay off. But sometimes they do not.

If you do want to allocate a portion of your net worth into these types of strategies set yourself a percentage allocation that you are comfortable with. We would caution you to not simply adjust that up if it seems to be going well.

Timely Tips

Have at least one year of what you want to spend in cash. No, it is not earning a lot but if you have a higher interest saver account then this will help.

Ideally, have another portion in something that can not go backwards and you can access if you need to.

Sometimes taking some profit is a good thing…(As mentioned in previous episodes, we believe in strategic asset allocations with quarterly reweighting for all of our clients and taking some profits is part of this).

Rental Properties tips to consider

If you are considering purchasing a rental property, there are a number of things that you should consider:

  • Are you wanting more income and access to capital? Rental properties can provide access to income, but the liquidity risk of property can pose issues if you need to access part of your capital.  As you would know, you can’t sell part of your property to release some of your capital so you need to have sufficient cash buffers set aside to help meet any immediate, short term cash needs.
  • Do you have more than one property? During times of market exuberance this can sometimes be an opportune time to offload one of the properties in your portfolio, particularly if you are needing access to capital.
  • Possibly consider selling the one with the largest holding and upkeep costs. This can help alleviate financial and maintenance stress.
  • Exit Strategy: Have a clear exit strategy in place in case you need to sell the property in the future. Consider factors such as market conditions, capital gains taxes, and potential resale value when evaluating your long-term investment goals.
  • Financial Considerations: Evaluate the financial aspects of the investment, including purchase price, financing options, mortgage interest rates, property taxes, insurance, and potential rental income. Calculate the expected return on investment (ROI) and cash flow to determine if the property is financially viable.

Shares & Managed portfolios

Bucketing Strategies for retirees:

Bucketing strategies for retirees involve dividing their investment portfolio into different “buckets” based on the time horizon and purpose of the funds. Each bucket is invested in a way that aligns with the needs of the retiree at different stages of retirement. These strategies offer several benefits for retirees:

Risk Management:

Bucketing helps retirees manage risk more effectively by segregating their assets based on their time horizon and liquidity needs. By having short-term, medium-term, and long-term buckets, retirees can ensure that their short-term expenses are covered without having to liquidate long-term investments during market downturns, thereby reducing the risk of selling assets at a loss.

Liquidity Management:

Retirees often need access to cash for their living expenses and unexpected emergencies. Bucketing allows them to set aside enough liquid assets in the short-term bucket to cover their immediate expenses, providing peace of mind and reducing the need to sell investments prematurely.

Income Stability:

With bucketing, retirees can create a stable income stream by allocating a portion of their portfolio to income-generating assets such as bonds, dividend-paying stocks, or annuities. This ensures a steady cash flow to cover living expenses, regardless of market fluctuations, in the short to medium term.

Long-Term Growth Potential:

While the short-term bucket focuses on meeting immediate cash needs, the long-term buckets can be invested in assets with higher growth potential, such as equities or real estate. This allows retirees to benefit from the potential upside of these investments over the long term, helping to preserve purchasing power and support their lifestyle in the future.

Inflation Protection:

By including growth-oriented assets in the long-term buckets, retirees can better protect their purchasing power against inflation. Historically, equities have outpaced inflation over the long term, making them an important component of a retirement portfolio to help maintain the retiree’s standard of living as prices rise.

Emotional Comfort:

Bucketing strategies can provide emotional comfort to retirees, knowing that their short-term expenses are covered regardless of market volatility. This can help prevent emotional decision-making during market downturns, reducing the likelihood of panic selling or making impulsive investment decisions that could harm their long-term financial goals.

Simplified Management:

Managing multiple buckets simplifies the retirement income planning process. Retirees can easily track their spending needs, monitor the performance of each bucket, and make adjustments as needed without disrupting their overall investment strategy.

Legacy Planning:

Bucketing strategies can also facilitate legacy planning by earmarking specific assets for bequests. This ensures that retirees can leave a financial legacy for their loved ones or support causes they care about while still meeting their own retirement income needs.

Bucketing strategies offer retirees a comprehensive approach to managing their investment portfolio throughout retirement, providing benefits such as risk management, liquidity management, income stability, long-term growth potential, inflation protection, emotional comfort, simplified management, and legacy planning. By structuring their assets into different buckets based on time horizon and purpose, retirees can better navigate the complexities of retirement and achieve their financial goals with confidence.

Cashflow tips for retirees

Managing cash flow effectively is crucial for retirees to maintain their lifestyle and cover expenses throughout their retirement years. Here are some cash flow tips tailored specifically for retirees:

Create a Detailed Budget:

Start by creating a comprehensive budget that outlines your monthly expenses, including essentials like housing, utilities, food, healthcare, transportation, and discretionary spending. Understanding your cash flow needs is the first step in managing your finances effectively during retirement.

Build an Emergency Fund:

Set aside a portion of your savings as an emergency fund to cover unexpected expenses such as medical bills, home repairs, or car maintenance. Aim to keep at least six to twelve months’ worth of living expenses in a liquid account, such as a savings account or money market fund, to provide financial security and peace of mind.

Maximize Social Security Benefits:

make sure you have updated MyGov with your relevant details and that you remind yourself to update this at least each 6 months.

Downsize or Rent Out Property:

If your housing expenses are too high relative to your retirement income, consider downsizing to a smaller home or renting out a portion of your property to generate extra cash flow. Selling a larger home and moving to a more affordable location can also free up equity for additional retirement savings or income.

Explore Part-Time Work:

If you’re able and willing to work part-time during retirement, consider pursuing flexible job opportunities to supplement your income and stay engaged in the workforce. This can provide a financial cushion while allowing you to pursue hobbies or interests that bring fulfilment and enjoyment.

Stay Flexible and Adjust as Needed:

Finally, remain flexible and adaptable in your retirement cash flow strategy. Life circumstances and financial markets can change, so be prepared to adjust your budget, investment allocations, and withdrawal strategies as needed to ensure long-term financial security and stability.

By implementing these cash flow tips for retirees, it can help you to better manage your finances, cover your expenses, and enjoy a fulfilling retirement lifestyle without undue financial stress. Remember to consult with a financial advisor to tailor these strategies to your individual goals, risk tolerance, and retirement timeline.

What are the largest mistakes Investors make?

Investing can be a rewarding endeavour, but it also comes with risks, and mistakes are inevitable, especially for inexperienced investors. Understanding these pitfalls can help investors avoid costly errors and improve their long-term financial outcomes. Here are some of the largest mistake’s investors make:

Lack of Research and Due Diligence:

One of the biggest mistakes investors make is failing to conduct thorough research before making investment decisions. This includes understanding the fundamentals of the companies or assets they’re investing in, assessing market conditions, and evaluating potential risks. Without proper due diligence, investors may fall prey to investment scams, speculative bubbles, or unsustainable trends.

Overlooking Diversification:

Concentrating all investments in a single asset or asset class exposes investors to significant risk. Diversification, or spreading investments across different asset classes (e.g., stocks, bonds, real estate) and sectors, can help mitigate risk and reduce the impact of market volatility on the overall portfolio. Failing to diversify adequately can lead to large losses during market downturns.

Market Timing and Speculation:

Attempting to time the market or predict short-term price movements is a common mistake that even seasoned investors struggle with. Market timing often leads to buying high and selling low, as investors chase trends or panic during market fluctuations. Instead, investors should focus on a long-term, disciplined investment strategy based on their financial goals and risk tolerance, rather than trying to outsmart the market.

Ignoring Costs and Fees:

High fees and expenses can eat into investment returns over time, significantly impacting long-term wealth accumulation. Whether it’s management fees, brokerage commissions, or expense ratios, investors should be mindful of the costs associated with their investments.

Emotional Investing:

Allowing emotions, such as fear, greed, or overconfidence, to dictate investment decisions is a common mistake that can lead to poor outcomes. Emotional investors may panic sell during market downturns or become overly optimistic during bull markets, resulting in buying high and selling low. Maintaining a disciplined investment approach and sticking to a well-thought-out plan can help investors avoid emotional pitfalls.

Chasing Performance:

Focusing solely on past performance or chasing hot investment trends can lead to suboptimal outcomes. Just because an investment has performed well in the past doesn’t guarantee future success, and chasing performance often leads to buying assets at inflated prices. Investors should instead focus on the underlying fundamentals of investments and adhere to a disciplined investment strategy based on their financial goals.

Lack of Patience and Discipline:

Successful investing requires patience and discipline, yet many investors lack these qualities. They may become impatient during periods of market volatility or lose sight of their long-term goals, leading to impulsive decisions that harm their financial prospects. Maintaining a long-term perspective and staying disciplined, even in the face of short-term fluctuations, is key to achieving investment success.

Overconfidence and Confirmation Bias:

Overconfidence can lead investors to overestimate their abilities and take on excessive risk. Similarly, confirmation bias, or the tendency to seek out information that confirms pre-existing beliefs, can prevent investors from objectively evaluating investment opportunities and considering alternative viewpoints. It’s important for investors to remain humble, open-minded, and willing to reassess their assumptions in light of new information.

Failing to Rebalance and Review:

Neglecting to periodically review and rebalance investment portfolios can lead to asset allocation drift and unintended risk exposures. As market conditions change and investment performance varies, investors should regularly reassess their portfolios to ensure they remain aligned with their risk tolerance and financial goals. Rebalancing involves selling assets that have become overweight and reinvesting the proceeds into underweight assets to maintain the desired asset allocation.

Not Having a Long-Term Plan:

Investing without a clear, well-defined plan is a recipe for disaster. Without a roadmap outlining their financial goals, risk tolerance, and investment strategy, investors may make haphazard decisions that lack coherence and consistency. A comprehensive financial plan provides direction, discipline, and a framework for making informed investment decisions that are aligned with investors’ objectives.

Investors can avoid these common mistakes by conducting thorough research, diversifying their portfolios, avoiding market timing and speculation, minimizing costs and fees, controlling their emotions, staying patient and disciplined, remaining humble and open-minded, regularly reviewing and rebalancing their portfolios, and having a long-term investment plan. By learning from these mistakes and adhering to sound investment principles, investors can increase their chances of achieving long-term financial success.

At RFS Advice that is what we help our clients with everyday.

Click here to view my Economic research material for April 2024

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