Five years on, five big questions
Your finances weathered the GFC - just - but what, asks Alexandra Cain, do you do now.
What with the ASX 200 rising by more than 20 per cent during the past year, low interest rates and a high Aussie dollar, it's easy to ignore the scars from the last big market crash. But we do so at our peril. Five years after the GFC we explore the situation five investors have found themselves in and the recommendations financial advisers have for how they make the most of their battered investments from this point.
"I sank $500,000 into equities just before the market collapsed and almost immediately the value of the portfolio halved. I would now like to sell the portfolio to pay off my home loan - do you think this is a good idea?"
Greg Einfeld is a director of Lime Super. He says the good news for this investor is that the share market has recovered since the financial crisis. "If you bought a diversified portfolio of blue chip stocks and reinvested the dividends then you should have recovered your losses by now - even if you bought at the peak of the market," Einfeld says.
But he says whether this investor holds the shares or pays off the home loan will depend on personal circumstances. "If you are investing for the long term and can hold your nerve through the market ups and downs then shares are likely to be better for you. But if you're a nervous investor or need cash in the short to medium term, then paying off your loan will give you more comfort and certainty," Einfeld says.
If, however, this investor decides to keep the share portfolio then consideration should be made as to whether a tax deduction is available on the interest payable on the mortgage. Says Einfeld: "If that's not the case then it could be a missed opportunity. While tax should never drive investment decisions, some good advice might be able to assist you to reduce your tax bill. The key lesson here is that investment markets tend to recover in the long term. If you buy quality shares and hold them then you will do OK. But if you have dogs in your portfolio then it might be time to cut your losses."
"I bought a $500,000 investment property in Darwin at the top of the market in 2005 and sank $100,000 into it in renovations. The property is not worth what it was worth when I bought it, but the upside is that it's negatively geared. Should I hold onto it?"
Nicholas Pateras, a partner with the accountants Wilson Pateras, says tax-driven outcomes should never be the sole or dominant purpose for entering into a property investment or transaction.
"Negative gearing, as the name suggests, is when outgoings including bank interest finance are in excess of the rent a property earns during a financial year. The loss is offset against other income to give a tax refund, which helps fund the ongoing property costs. Negative gearing works well where there is a real expectation of a rise in the property's value that offsets the cost of the negative gearing loss," advises Pateras.
He says the decision to keep a property should not be based on whether the property is generating a tax benefit, but on whether it is a sound investment.
"If you form the view there is limited growth in the property, or in fact the value could fall further, you should consider whether the investment is right for you. You have held the property for eight years. If past history is any indication, then it may be the case that this is simply an investment gone wrong."
Pateras says the emotional aspects of realising a loss can be difficult, but this should not prevent investors from being objective and potentially realising the equity in the property and placing it into an investment that may deliver returns.
"I got out of equities just before the market crashed, giving me $1 million in cash and term deposits I have been sitting on. Is now the time to get back into the market? If it is, how much should I keep in cash and what should I invest in?"
"First, congratulations on being able to use your crystal ball perfectly," says Chris Magnus, a financial adviser with Ark Total Wealth.
"The timing on getting back into the market, what you should invest in and how much you should keep in cash really depends on your personal circumstances. You need to consider how long you are happy to invest for, whether your tolerance to market fluctuations has changed with your experiences throughout the financial crisis and what sort of expenses you have coming up and any debt you might have," he says. Magnus says some investors like to keep more conservative assets in their portfolio to smooth out any volatility in the markets over time. This also allows them to buy into the market when the inevitable "dip" occurs.
"This type of investor may consider tipping 70 per cent of the portfolio into shares and property and keeping the other 30 per cent in cash and fixed interest investments."
According to Magnus, a well-diversified, low-cost investment is frequently made up of an allocation to an index for both Australian and international shares as the core of the portfolio, with either some specialist managed funds or other direct shares making up the portfolio for more specific allocations.
"This can give the portfolio a bias towards either having more growth or income in the portfolio or, alternatively, an increased weighting to an emerging market theme," he says.
"I took out a $150,000 loan in 2006 to invest in a mix of blue chip equities. It's now valued at $100,000. Am I better off selling the shares and living with the debt? Or would I be better off holding on to the shares and the loan, in the hope the rising market will turn my losses into gains?"
Michael Miller, financial adviser, MLC Advice Canberra, says any decisions to do with this portfolio are difficult, given this investor has ridden through a serious downturn and has unrealised capital losses. He notes his advice is for general purposes only and investors should seek individual advice.
"When deciding whether to hold the investment or sell it, it's important to consider loan and asset values as they are today, rather than what they have been previously," says Miller.
"Assuming your loan was secured by equity in a property, the interest rate should be no more than 6 per cent a year, at variable rates. If you're earning more than $80,000 a year your marginal tax rate is 34 per cent, including the Medicare levy.
"What this means is that after tax, a $150,000 loan is costing you $5940 in interest every year."
He says if the portfolio is yielding 5 per cent a year in dividends, with an average franking level of 77 per cent, this means that after taking into account personal income tax and franking credits, the $100,000 portfolio is providing after-tax income of $4221.
"So you're down $1719 a year, which needs to be made up by capital growth each year, plus some extra to account for potential capital gains tax," Miller says.
"A comprehensive financial plan would also take a more holistic view of your finances - taking into account whether you have any non-deductible personal debt that you could otherwise be repaying."
"I was planning on retiring just before the market collapsed in 2008. At the time, my $800,000 portfolio was heavily weighted to equities, with a smattering of REITs and some cash. My retirement savings are now not at all what I was hoping they would be, but I've had enough of working and really want to retire. What's the best way to structure my portfolio to give me an income in retirement?"
David Hunt, from Adest Trading, says it's important to remember a portfolio is never static, because conditions change and sectors and shares flourish and fade at different parts of the cycle. "In my opinion, considered portfolio management with tactical shifts is the way to go. But a low-risk $800,000 portfolio is not enough to comfortably live on for 25 years in retirement," Hunt says.
"At the very least consider having a part-time income, be it part- time work or a business that you enjoy that you can work on from home."
He says investors chasing higher yields are often exposed to higher risks, so those nearing retirement should always protect the principal investment. "As a retiree it is your life blood," he says.
So what can this investor do with a reduced portfolio? "My advice is to ask quality questions and do an analysis of your current shares ... to assess if they are giving you a yield, have good businesses behind them and have the opportunity to grow. Sell out of the low-potential, low-yielding ones and replace them with something better. Then manage the shares you keep, studying ... their price-growth potential," Hunt says.