Good afternoon all

Well the good news, my eldest daughter has gotten a job in Perth and my eldest son has a job, has bought himself a car and is paying for his own petrol. I know right…. the feeling of not having to argue with my daughter about long showers or leaving stuff lying around, is really good. The bad news is that you miss them when they go! But for now it’s a sigh of relief on many fronts, especially when you see them getting back on their feet. The most expensive daughter is still in school and heading towards ball dresses and makeup and shoes and who knows what else girls need. The boys are just the best, not to be biased, but all you have to do with boys is tell them to go have a shower and keep feeding them and they are more than happy.

It’s a very interesting time on the markets at the moment with a few of the fund managers talking of a slow down on the Australian market due to the recent run of profits that we have all been enjoying. It’s the old swings and roundabouts, we have had some good solid gains so you can expect a bit of a slowdown for the moment. The tax on the Banks has not helped because they will eventually pass it on to the consumers regardless of what the government tell us. Just another tax in a different form I guess with the general population taxed out at the moment, even small increments will cause more debt problems. Keeping on the investment theme it has been a strong year on the markets with the ASX 200 and All Ordinaries doing very well, both making around the 14% mark for the full year which has helped grow your portfolios nicely.

The coming year will have some challenges and you will hear a lot of noise from the media talking up recessions and crashes and the end of the investment world as we know it, but we have certainly heard all this before on many occasions. I read an article today about a fund manager who sold up his entire portfolio and returned the cash to the investors because he thinks the east coast property market is overheated and is ready to have a big correction that will cause everything to drop in price including, the share market. I was certainly surprised at this and looked hard at the data he was talking about to understand his reasoning for selling the entire portfolio. As we know once you sell an entire portfolio you crystallise all gains and losses and everything is converted to cash. You also lose all your position, whether good or bad and you are out of the market. I have to say I certainly agree with him regarding the property market as I have been talking about the problem for a while of over inflated prices. However, just because property prices on the east coast are due for a big fall this will only affect property prices and will do no harm to general business in Australia, so I am at a loss as to why he would sell everything. If you have a look at the attached All Ordinaries chart you will see we are nowhere close to being overpriced on the stock exchange. Look back to March 2015, we were at the same highs as back then and remembering we peaked at 6800 in 2008, we are still 900 points off that mark some 9 years later.

I have been in contact with various fund managers over the last couple of days to hear what they are thinking and how their portfolios are weighted. Many are saying they have taken profits off the market and are sitting on cash ready to buy bargain prices if the market becomes volatile, which it does on a regular basis. When they say they have spare cash they mean about 20% of their entire portfolios, so in reality that is what most of you have in cash and fixed interest within your own portfolios. Just remember we have you invested according to your risk profile, so the more conservative you are the higher the cash and fixed interest portion within your portfolio. So, when the market does go down your portfolios go down in proportion to what you have invested in the market. Please also remember one other thing, which surprises me about the fund manager previously discussed, that the market will always go back up. Historically not only will markets always go back up, but they will also go back passed the highest point at some time and we have not gone passed 6800 on the All Ordinaries Index, so the market has plenty of upside.

Another thing to remember is that various parts of your portfolio being either fixed interest, cash, Australian shares, property, International shares and alternative funds, will act independently of each other in a normal market. Each will rise at different times and when one may go up another may go down and so what you will receive is the average. We talked about property portfolios on the east coast going down sooner rather than later and the reason is that they have produced excellent returns over the last 5 years (in the 10% plus range) and these gains do not last. We agree that property is under pressure so most of you will have seen that we have switched most property to infrastructure over the last couple of months, as we believe over the coming 3 years this sector will outperform property. Another area we have moved funds into is emerging markets and an alternative futures fund, but these two are only a small portion of portfolios. In conclusion, we are of the opinion that your portfolios are in strong areas, well diversified and currently performing well and if property goes down this will not have a big effect on your investments. Australian shares will get volatile at some stage but because of your diversification this will cause a slow down to your gains but the fall in you funds will be minor.

I would like to draw your attention to the superannuation changes that become effective from the 1 July 2017 -

• For those of you who are aged 49 or over at the 30 June the concessional contributions cap for investment into your superannuation will lower to $25,000 (down from the current $35,000). Concessional contributions include: employer contributions, any amount you salary sacrifice into super and personal contributions you claim as a personal super contribution deduction.
• For those of you who are under age 49 at the 30 June the concessional contributions cap for investment into your superannuation will lower to $25,000 (down from the current $30,000). 
• Regardless of age, the non-concessional contributions cap will be changing from $180,000 down to $100,000. So if you can afford to top up your superannuation the more the better. 
• Pension account balances are being capped at $1.6 million dollars. 
• There has been a change to personal super contributions deductions - from the 1/7/2017 employed taxpayers, not just self-employed taxpayers, will be able to claim a tax deduction for personal super contributions. Though a Notice of Intent to Claim a Deduction must be lodged and accepted by the superannuation fund before the tax deduction can be claimed. 
• Currently, individuals with income and concessional super contributions greater than $300,000 will trigger a Division 293 assessment. From 1 July 2017, the government will lower the Division 293 income threshold to $250,000. An individual with income, and concessional super contributions, exceeding the $250,000 threshold will have an additional 15% tax imposed on the lesser of the excess, or the concessional contributions. 
• The earnings within Transition to Retirement (TTR) Pensions will be taxed at 15% (currently earnings within TTR pensions are tax-free). Members will also no longer be able to treat super income stream payments as lump sums for taxation purposes. The intent of this change is to ensure that TTR pensions are not accessed primarily for tax purposes but to support individuals who remain in the workforce.
• And - from the 1 July 2018 you may be able to carry forward, and use in a later year, up to five years of your unused concessional contributions cap. The first year in which you can use the carry-forward for any unused amounts is 2019–20. To be eligible, your total superannuation balance must be under $500,000 at the end of 30 June of the previous financial year.

Finally, and I know I speak a lot on this topic, but changes are coming regarding pensions and the eligibility to receive a Centrelink Age Pension, due to the retiring baby boomers and the inability of the government to meet pension and other social security payments. The debits don’t meet the credits when it comes to the Australian budget and something at some time is going to give. You will have seen that they are raising the Medicare Levy to 2.5% and are now reeling in HECS debts, so things are dire when it comes to trying to balance the budget and ensuring the required cash flow gets through the federal accounts. This will only get worse so please be forewarned, changes to the Aged Pension and the assets vs income test will only get stricter in the coming years. What we all need to do is plan for changes and work on a budget that includes paying down/off debt and having a reasonable retirement fund, so when it is time to leave the work force, you are less reliant on a Centrelink Aged Pension.

That’s it for this month. I hope you are all doing well. Please take a look at the two articles by Dr Shane Oliver as they are worth the read. Until next time happy investing and I hope you are doing far better at footy tipping than I am.

Regards

Allan Butson