Welcome to our Spring newsletter. September means it’s football finals season and hopefully the beginning of warmer weather despite the recent late winter chill.

In August, the focus was on US Federal Reserve chair Jerome Powell’s speech at the annual Jackson Hole business gathering on August 26, and he was blunt! To hose down talk of interest rate cuts in 2023 (my view was this was never going to happen), he said the Fed was focused on bringing US inflation down to 2% (from 8.5% now), even at the risk of recession. He said this will “take some time”, will likely require a “sustained period of below trend economic growth”, and households should expect “some pain” in the months ahead. The S&P500 share index promptly fell 3.4% and bond yields rose. Markets then recovered most of the falls in the next 2 weeks based on selected economic data that showed the US economy was slowing down. Earlier this week, markets fell again on the updated US CPI data. It showed headline inflation up 0.10% (!!). Markets were expecting a slight drop and hence the market sell off was severe. At the time of writing this, the ASX200 Index on Wednesday 14th September, fell 2.55% (or as the media like to report “investors lost $60bn of wealth yesterday”). This morning, the same index is up 0.64% based on the jobless rate increasing by 0.10%. I wonder if tonight’s headings will be “Investors make $15bn in 2 hours of trading!!

My point, looking at short term data and then investing based on this is fraught with danger and leads to poor investment decisions.

Economists expect the US central bank will continue lifting rates each month for the remainder of 2022. They have been largely saying this for the last 3-4 months and all the above has not changed anything.

In Australia, economic conditions are less gloomy. Australia’s trade surplus was a record $136.4 billion in 2022-23. Unemployment fell to 3.4% in July while wages growth rose to an annual rate of 2.6% in the year to June, the strongest in 8 years but well below inflation. The ANZ-Roy Morgan consumer confidence index rose slightly in September to a still depressed 85.0 points while the NAB business confidence index jumped to +6.9 points in July, well above the long-term average of +5.4 points. Half-way through the June half-year reporting season, CommSec reports ASX200 company profits increased 56% in aggregate while dividends are 6% lower on a year earlier.

The Aussie dollar fell more than one cent over the month to close around US68.5c. Aussie shares bucked the global trend, finishing steady over the month.

In short, markets are moving around at present based on daily economic data. We have to contend with;

– Higher inflation and higher interest rates
– War in Ukraine
– Supply chain issues due to Covid
– House prices falling
– Bonds and Shares selling off together (worst since 1994)
– 3rd worst financial year return for super funds in 21/22.

The good news ?
– The economy is at full employment
– Official cash rate is close to ‘normal’ lows. EG – Cash rate in August 2012 was 4% (it is currently 2.35%)
– Corporate balance sheets are strong and debt levels low
– Some Australian companies well placed to benefit from the war in Ukraine
– House prices still well above pre-COVID levels
– Many borrowers are still well ahead on repayments and there is still record amount in offset accounts
– 2nd best financial year return for super funds in 20/21

Essentially in my view we are entering a period of a return to normal. That is, companies actually need to produce cash and profit in order to justify a share price. We will likely see inflation in the 2-4% range(where we spent most of 2000 – 2013) and mortgage rate of high 4’s to high 5’s which again historically is low. What is happening at present is growth assets (shares and property) are adjusting to this.

I saw an interesting quote this morning from one the countries best performing fund managers in small cap stocks;

“I am hopeless at reading macro market moves, so I’ve given up trying. We look at companies on a rolling 4 years basis, not the next 7 days. So I don’t worry too much about the movements day-to-day. It’ll drive you crazy”

Enjoy this editions read.

How much super do I need to retire?

Working out how much you need to save for retirement is a question that keeps many pre-retirees awake at night. Recent market volatility and fluctuating superannuation balances have only added to the uncertainty.

So it’s timely that new research shows you may need less than you fear. For most people, it will certainly be less than the figure of $1 million or more that is often bandied around.

For most people, the amount you need to save will depend on how much you wish to spend in retirement to maintain your current standard of living. When Super Consumers Australia (SCA) recently set about designing retirement savings targets they started by looking at what pre-retirees aged 55 to 59 actually spend now.

Retirement savings targets

SCA estimated retirement savings targets for three levels of spending – low, medium and high – for recently retired singles and couples aged 65 to 69.

Significantly, only so-called high spending couples who want to spend at least $75,000 a year would need to save more than $1 million. A couple hoping to spend a medium-level $56,000 a year would need to save $352,000. High spending singles would need $743,000 to cover spending of $51,000 a year, and $258,000 for medium annual spending of $38,000.ⁱ

While these savings targets are based on what people actually spend, there is a buffer built in to provide confidence that your savings can weather periods of market volatility and won’t run out before you reach age 90.

They assume you own your home outright and will be eligible for the Age Pension, which is reflected in the relatively low savings targets for all but wealthier retirees.^*

Retirement planning rules of thumb

The SCA research is the latest attempt at a retirement planning ‘rule of thumb’. Rules of thumb are popular shortcuts that give a best estimate of what tends to work for most people, based on practical experience and population averages.

These tend to fall into two camps:

• A target replacement rate for retirement income. This approach assumes most people want to continue the standard of living they are used to, so it takes pre-retirement income as a starting point. A target replacement range of 65-75 per cent of pre-retirement income is generally deemed appropriate for most Australians.ⁱⁱ
• Budget standards. This approach estimates the cost of a basket of goods and services likely to provide a given standard of living in retirement. The best-known example in Australia is the Association of Superannuation Funds of Australia (ASFA) Retirement Standard which provides ‘modest’ and ‘comfortable’ budget estimates.ⁱⁱⁱ

SCA sits somewhere between the two, offering three levels of spending to ASFA’s two, based on pre-retirement spending rather than a basket of goods. Interestingly, the results are similar with ASFAs ‘comfortable’ budget falling between SCA’s medium and high targets.

ASFA estimates a single retiree will need to save $545,000 to live comfortably on annual income of $46,494 a year, while retired couples will need $640,000 to generate annual income of $65,445. This also assumes you are a homeowner and will be eligible for the Age Pension.

Limitations of shortcuts

The big unknown is how long you will live. If you’re healthy and have good genes, you might expect to live well into your 90s which may require a bigger nest egg. Luckily, it’s never too late to give your super a boost. You could:

• Salary sacrifice some of your pre-tax income or make a personal super contribution and claim a tax deduction but stay within the annual concessional contributions cap of $27,500.
• Make an after-tax super contribution of up to the annual limit of $110,000, or up to $330,000 using the bring-forward rule.
• Downsize your home and put up to $300,000 of the proceeds into your super fund.
  Thanks to new rules that came into force on July 1, you may be able to add to your super up to age 75 even if you’re no longer working.

While retirement planning rules of thumb are a useful starting point, they are no substitute for a personal plan. If you would like to discuss your retirement income strategy, give us a call.

*Assumptions also include average annual inflation of 2.5% in future, which is the average rate over the past 20 years, and average annual returns net of fees and taxes of 5.6% in retirement phase and 5% in accumulation phase.

i CONSULTATIVE REPORT: Retirement Spending Levels and Savings Targets, Super Consumers Australia

ii 2020 Retirement Income Review, The Treasury

iii Association of Superannuation Funds of Australia (ASFA) Retirement Standard

Six simple ways to protect your passwords

You use passwords to access your bank accounts, social media, email and more every day.

Passwords are the keys to our online identity. That’s why protecting them is so important.

Creating a strong password is the first step to protecting yourself online. This helps reduce the risk of unauthorised access by those willing to put in a bit of guesswork.

To help stay safe online, follow these password tips.

1. Make your passwords strong

Short and simple passwords might be easy for you to remember, but unfortunately they’re also easier for cyber criminals to crack.

Strong passwords have a minimum of 10 characters and a use mix of:

• uppercase and lowercase letters
• numbers
• special characters like !, &, and *.

Use passphrases

You may like to consider using a passphrase instead of a traditional password.

Passphrases are considered more secure than regular passwords, and easier to remember too.

A passphrase is used in the same way as a password, but is a longer collection of words that is meaningful to you, but not to someone else.

For example, the passphrase ‘CloudHandWashJump7’ is 17 characters long and contains a range of different characters. This is more complex than the average password.

Having complex passwords is important to deter ‘brute force’ attacks, in which a computer program cycles through every possible combination of characters to guess a password. These automated attempts at guessing passwords are not slowed down by numbers or capital letters, but depend on how long a password is.

Depending on the systems you access, you may be limited to a defined number of characters.

2. Make passwords hard to guess

Could someone who knows you guess your passwords? For this reason, it’s best to avoid using personal information such as your children, partner or pets name, favourite football team or date of birth as your password.

When trying to hack into an online account, cyber criminals start with commonly found words and number combinations.

So it’s best to avoid using:

• dictionary words
• a keyboard pattern like qwerty
• repeated characters like zzzz
• personal information like your date of birth or pet’s name.

Security companies publish lists each year of the most common passwords exposed in data breaches. Read the list from 2020. Make sure you’re not using them, because it’s likely criminals will try these passwords first.

3. Create new, unique passwords

If you need to reset a password, don’t just change one part of it.

Instead of changing a number at the beginning or end, create something completely new you’ve never used before.

If your original exposed password had a ‘1’ at the end, an attacker would likely try ‘2’ next. That’s why it’s important to change the whole password.

Get into the practice of changing your password often, ideally every few months.

4. Don’t share passwords, ever.

Never share your password with someone, not even with someone you trust.

What about family and friends?

Regardless of whom you share it with, once you share your passwords you lose control of how it’s stored or how and when it’s used.

What if a business or company I know asks for my password?

Reputable companies won’t ask you to give them your password over the phone or via emails or SMS messages. This might be a warning sign of phishing or a scam; you can read more about phishing on our security alerts page.

NAB will never ask you for your password or PIN, either by email, SMS, over the phone or at a branch. We may ask you to provide a one-time code to verify yourself when you call our contact centre. These messages will clearly state that we will ask you for the code.

You may not be covered for fraud

One of your responsibilities as a NAB account owner and user of internet banking is to protect your password. Sharing your passwords or PINs may affect a claim for any money lost due to fraud.

5. Use different passwords for each of your online accounts

Using different passwords means that if one of your accounts is breached, criminals won’t have access to other accounts that use the same password.

Make each of your passwords for online logins unique. This will help protect you from attacks like ‘credential stuffing’.

Credential stuffing

Credential stuffing is an automated technique used by criminals. They test a user’s known username and password combinations across multiple online accounts.

As many people use the same credentials for multiple sites, it can give criminals easy access to multiple accounts.

This gives criminals an opportunity to gather more information about you, which they might use to impersonate you online to access accounts under your name.

For example, it’s not a good idea to use the same password for an online pizza delivery website and your business email. If the pizza delivery site is compromised, you don’t want someone to also have access to your business email account.

6. Store passwords safely

Writing passwords down is never recommended. You could lose them, or someone else could see them and use them.

Password management tools

There are programs and apps known as password managers that will store all your passwords in a secure vault.

A password manager only needs one strong password to access it and has extremely strong protection to make sure that only you can access it.

This means you only need to remember one password to have access to all your passwords.

Password safes can even generate and store new, complex passwords for you when you create new online accounts.

Don’t allow web browsers to store your NAB password

Some web browsers may display a pop-up message, asking whether you want the browser to remember your login details.

For the protection of your personal information, NAB recommends that you select ‘Never for this site’ if you see this message when using NAB Internet Banking.

For more information, check out the Australian Cyber Security Centre’s guide on creating secure passphrases.

Source: NAB

Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/about-us/security/online-safety-tips/protect-your-passwords

National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.

© 2022 National Australia Bank Limited (“NAB”). All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

The trouble with intuition when investing

Knowing how your mind works can help you avoid the more obvious traps many investors fall into.

Cognitive bias has become a bit of an investing buzz phrase in recent years.

The theory is that the human brain predictably makes errors of judgment that can lead us to be emotional, short term and come to other incorrect conclusions.

Cognitive bias has been of particular interest to the investing community and long lists of biases – confirmation bias, anchoring, the recency effect and dozens of others – are now the stock-in-trade of beginner investors worldwide.

The Nobel-prize winning economist Daniel Kahneman first researched bias in human thinking, distinguishing two ways in which we think: an automatic, instinctive and almost involuntary style contrasted with effortful, considered and logical thought.

That original research has grown into an industry.

Researchers and psychologists have identified endless ways in which the human brain is prone to bias, errors and poor judgment – and the investing community has latched on.

But underlying it all is that original finding that we spontaneously seek an intuitive solution to our problems rather than taking a logical, methodical approach.

Kahneman wrote that when we are confronted with a problem – such as choosing the right chess move or selecting an investment – our desire for a quick, intuitive answer takes over.

Where we have the relevant expertise, this intuition can often be right. A chess master’s intuition when faced with a complicated game position is likely to be pretty good.

But when questions are complex and rely on incomplete information, like investing, our intuition fails us.

The very fact we find the concept of cognitive bias so appealing is simply another example of our innate desire for simple, intuitive answers.

Unfortunately, the world is complicated, and almost everything that happens in investment markets emerges from the combination of a web of unrelated, intricate and multi-faceted events.

Our bias towards simplicity is reinforced by the nightly news and the morning newspapers that persist in providing simple explanations for complex events. Each day, market movements are distilled into ‘this-caused-that’ explanations that obscure the true drivers of change.

It is our intuition that is reacting when we find ourselves excited that markets rose 100 points – and a little nervous when markets ‘wipe off’ billions. We experience these emotional reactions even though the effect on our overall wealth from either event is likely to be tiny.

Our understanding of history is similarly simple, reducing wars, recessions and pandemics into simple cause and effect stories that are easy to remember and teach.

These stories help us understand the past. But they do not help us predict the future.

This explains why investment opportunities that seemed certain at the time we made them so often go awry.

It is not bad luck or circumstances changing against us – it’s the fundamentally simplistic cause and effect model in our minds that doesn’t allow us to understand all the possible outcomes.

So how can we best use the science of cognitive bias to become better at investing?

It is certainly worth learning about the wide and growing range of cognitive biases scientists are identifying that can stand in your way of being more successful.

Knowing how your mind works can help you avoid the more obvious traps many investors fall into.

We can use the basic principles of successful investing to avoid becoming victim to our own cognitive biases. Stick to a plan and don’t react to market noise or your emotions. Stay diversified to reduce the risk of permanent loss. And ensure you do not spend too much money on unnecessary fees.

But it is also a trap to rely too heavily on the science of cognitive bias, thinking that it can provide you with the keys to investing success.

The serious research being done by psychologists has been co-opted to offer you yet another tempting short cut – and in successful investing, there is no such thing.

Source: Vanguard

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2022 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.