After endless gloomy forecasts, there was a glimmer of hope last month that the cost of living might be easing. Inflation fell in July to 4.9% from 5.4% in June, despite predictions by economists of a rise.
While housing prices are still rising, up by 7.3 per cent for the 12 months, and total dwelling approvals recorded a sharp decline in July, the next Reserve Bank Governor Michele Bullock believes prices in some areas will fall by five per cent or more by 2050 because of climate change.
Consumer confidence is continuing to slowly improve. The ANZ-Roy Morgan Consumer Confidence has now increased for a record 26 weeks in a row. Unemployment was up slightly by 0.2% to 3.7%, meaning an extra 36,000 people are now looking for jobs.
The ASX200 ended the month down, gains in financial stocks were offset by losses in mining and energy shares because of their dependency on China. The Australian dollar rebounded slightly based on improved confidence in the US.
How the Aussie dollar moves your investments
It has been a wild ride for the Australian dollar since the Covid-19 pandemic struck and that could mean good news or bad news for your investment portfolio.
In March 2020 the Aussie dipped below US58 cents for the first time in a decade. Since then, a high of just over US77 cents in 2021 has been followed by a rollercoaster ride, mostly downhill.
In October 2022 the dollar plummeted to US61.9 cents, bounced its way back up to US71.3 cents in February this year but by mid-August it had slipped to a nine-month low at under US64 cents.i
Many analysts agree that further falls are on the cards with some even predicting the dollar could fall to as low as US40 cents within five years.ii
What’s driving the dollar?
Given any currency’s susceptibility to changing economic conditions both at home and overseas, the Aussie has had quite a bit to deal with lately.
Rising interest rates can boost the Australian dollar by making us more attractive for foreign investors, providing our rates are rising ahead of the US and others.
If foreign investors buy more Australian assets because they can get a bigger return on their investment, more money flows into Australia which increases demand for Australian dollars. And if investors hold more Australian assets than overseas ones, less money leaves the country, decreasing supply. So, increased demand and decreased supply see the Australian dollar rise.
While the Reserve Bank of Australia (RBA) has increased rates by 4 per cent in Australia since May last year as it battles to get inflation under control, rates have also been rising in the US.
The US Federal Reserve has undertaken its most aggressive rate-rising cycle in 40 years with rates now at a 22-year high and signs of further increases likely. This has put pressure on the Australian dollar, narrowing the difference between the US and Australian rates, meaning foreign investors will look for better returns elsewhere.
Changing economic conditions
The value of the Australian dollar is also affected by changes in economic conditions as well as rises and falls in other financial markets. For example, in August news that the unemployment rate had increased slightly and an easing in wage price growth led to speculation that the RBA would put a hold on rates, putting a dampener on the Aussie.
Also affecting the dollar was a decline in US share markets in August, confirming the typical pattern of the Australian dollar falling when prices in equity markets drop.
Meanwhile, the performance of China’s economy plays a significant part in Australian dollar movements. China is currently battling soaring unemployment, particularly among young people, falling land prices and a housing crisis, among other ills.
As Australia’s largest trading partner, both in terms of imports and exports, any slowdown in China means lower sales of our commodities and other goods and services and less investment in property and business.iii
How the dollar affects us
There are advantages and disadvantages of a falling Australian dollar. On the plus side, our exports will be more competitive because our customers will pay less for our goods and services compared with those produced overseas. Conversely, imported goods will be relatively more expensive.
There could also be an increase in tourism – the cost of travel in Australia will be cheaper for those coming from overseas. Unfortunately, those planning an overseas trip will need to find a significantly greater pile of Australian dollars to pay for airfares, accommodation and shopping.
For investors, it is a useful exercise to review the currency’s effect on your portfolio.
For example, if you’re invested in Australian companies that rely on overseas earnings, look at how they handle their exposure to the currency risk. A lower dollar is good news for those with overseas operations and those that export goods. On the other hand, those that need to buy in components or products from overseas may suffer.
In any case, have a chat to us to look at the best way forward.
Australians need a retirement confidence boost
Giving Australians better access to high-quality and more affordable financial advice is imperative.
One of the fundamental principles for achieving long-term investment success is planning.
In fact, the importance of having a clear financial plan, whether it’s formal or informal, can’t be overstated. As is the importance of sticking to it.
Without a well-documented, detailed plan that incorporates specific goals, there’s a fair chance investors will miss out on key opportunities over time, potentially lose their long-term focus and not attain the financial heights they had hoped to reach.
The consequences of this can range from feeling demoralised to experiencing devastating financial impacts, and it’s evident there’s a strong link between having a plan and individual confidence levels, especially in relation to retirement.
The importance of planning
To this point, Vanguard recently released How Australia Retires study found that Australians with the highest confidence about their future retirement were following a financial plan.
After surveying more than 1,800 working and retired Australians aged 18 years and older, they found that people who have a financial plan are six times more confident about their retirement outcomes than those without one.
Australians with the highest retirement confidence have taken the most purposeful actions to prepare for their retirement. Many have accessed professional financial advice, they’re relatively likely to use budgets and prioritise their savings, and they make regular extra contributions into their super.
Broadly speaking, they know what they need to do to achieve the retirement outcome they desire and are optimistic about entering this phase of their life.
By contrast, they found that Australians with a low confidence about their retirement tend to be the least actively prepared.
Often they’ve never accessed financial advice and they have little understanding of how they can achieve their retirement goals. They also expect to be more reliant on the Age Pension after they retire than those with higher retirement confidence.
In addition, they don’t tend to make regular additional super contributions and are generally less optimistic and more likely to feel disinterested, anxious or worried about this later phase of life.
This is typically the case for older Australians who’ve taken less action to prepare over time.
The role of super
Interestingly, only half of working-age Australians consider super an important component of their retirement plan and they expect to rely on it less than existing retirees.
As part of this, more than half of working-age Australians (54%) estimate their super balance constitutes half or less of their total investment balance.
Indeed, one in four working age Australians highlighted investment property as being a big part of their retirement plan. That compares with only one in 10 retired Australians having investment property as an asset.
But of concern is the fact that while super is an important component of total retirement assets, relatively few people actively engage with their super.
In many cases, super is the second-largest asset people have outside of their home. Yet, one in four Australians don’t know what their current super balance is, and one in two are unaware of what they’re paying in super fees.
And most Australians haven’t had any contact with their super fund, often because they rely solely on their employer’s compulsory contributions.
This is an area that really needs attention, and there’s a great opportunity for the super industry as a whole to step up their engagement with fund members.
For example, most Australians don’t really understand all of their available options when it comes to making personal contributions into their super account each year. Even making small additional contributions on top of employer contributions can have a big positive financial impact over time.
So can reducing fees, because higher fees equate to lower returns. Understanding what you’re paying in investment fees allows you to do a comparison with other providers and to potentially switch to lower-cost alternatives.
This is where financial advice can play a crucial role. There’s a strong correlation between the use of professional advisers and retirement confidence.
The survey found that of the Australians who have received professional advice, 44% indicated they were extremely or very confident in funding their retirement. Of those who have never sought any professional advice, only a quarter indicated they were confident.
Which is why giving Australians better access to high-quality and more affordable financial advice, that’s relevant to their specific needs, is imperative.
Financial advisers have an important role to play in terms of recommending the most appropriate investment options to individuals based on their needs, but also in terms of behavioural coaching. Having peace of mind is invaluable.
And it’s never too early to engage a financial adviser to map out a financial plan that has the best chance of investment success over the long term, so contact us today, so we can help you on your financial journey.
Reproduced with permission of Vanguard Investments Australia Ltd
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The 1% rule – tiny changes add up to a BIG difference
Personal transformation can be challenging. We all have habits we’d like to break and behaviours we’d like to do more of. But when we do some self-examination and think about what is involved in navigating change, it can seem overwhelming to get to where we need to be, whether that is personally or professionally.
That’s where small incremental change can be a powerful tool.
The power of one per cent
Just a tiny shift of something like one per cent, does add up. A compelling example of the power of one per cent incremental change is the story about Sir David Brailsford and the British Cycling Team. The team hadn’t produced a rider able to win the Tour De France in its entire history. Brailsford felt that by improving in achievable one per cent increments in a lot of areas, the team could produce a cyclist who could win the Tour de France in five years.
They made one per cent improvements in obvious areas such as nutrition, bike aerodynamics, weight, and seat comfort as well as in areas others didn’t think about. They located a pillow that provided slightly better sleep and travelled with it and another gain was made through adjustments to sleeping posture. Then, someone found a massage gel that worked marginally more effectively, and so on. These minuscule one per cent gains added up to a win in two and a half years instead of the predicted five years, and the team went on to win six races since 2012.
Why incremental change works
While you may not be gearing up to win the Tour De France, you can apply this powerful method of incremental improvement to your own life, to improve your health, relationships, finances, career, or business.
Too often we convince ourselves that impressive results demand massive action and fail miserably as we have bitten off a lot more than we can chew. However, making tiny adjustments to your life are much easier to manage and much more likely to be sustained than a huge shift.
It’s also common to think of a big win or achievement as a single event but the reality is that it’s generally the result of a series of tiny moments that each propel us one step further toward our goal.
The one per cent rule is so effective, as it can be scaled. The method works because you are making many small tweaks and building on those tweaks as they become habits.
Applying incremental change to transform your life
The starting point is to think of an area of your life you want to improve. Then think of small ways you can tweak your life to achieve that objective. The tweaks obviously don’t have to literally be as tiny as one per cent, but the objective is a series of minor changes, which built upon on a regular basis, really add up.
For example, if you are wanting to improve your health you don’t have to overhaul your lifestyle to reach your health goals, go for small, achievable changes. Try drinking an additional glass of water when you wake up, take some fruit to work to snack on, take the stairs instead of the lift at work, or get off the train one stop early to walk a little further home.
Or if you are wanting to further your career, try spending 10 minutes per day on expanding your network, incorporate some small productivity tweaks into your daily routine like not checking your emails constantly, and commit to self-growth by asking a single question every day to improve your knowledge. Building upon little, easy tasks like these can help you on your path to success.
Reaping the benefits
It is important to build though. One small tweak alone will not make an enormous difference. The challenge is to continue to make one per cent changes, without dropping the changes you’ve already made.
The key to this method, is to be consistent; it takes around 60 days to establish a habit so make sure you hang in there. You might have to even put a pause on adding any more changes to your routine as you adjust at various points along the way but just make sure you persevere to establish the changes you’ve already made.
There is no better time than the present to get started, so make the first micro change to your life today and watch each one per cent improvement add up to success.
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.