Want to learn more about investing but you’re not sure where to begin? Here are a few key terms every investor should know.
If you’re looking to build wealth for the future, buying a lottery ticket probably isn’t the way to go. A far more reliable option is to invest – but, unlike hitting the jackpot, investing takes time, patience and knowhow. For many of us though, trying to understand investment-speak is like learning another language. But don’t worry – once you get your head around a few basic concepts, you’ll be on your way towards becoming an educated investor. Here are a few common investment terms to get you started.
Your portfolio is the collection of assets you’ve invested in, which might include cash, bonds, shares and property. You may hold different amounts of each asset and they’re all likely to have different values. As an investor, you can manage your own portfolio and choose which assets to buy and sell at which time, or else you can hire a professional to manage it for you.
Cash refers to money you have that isn’t tied up in other assets. It’s often easily accessible when you need it, and it has a clear, specific value. As well as the hard cash you have on hand, it may also include other forms of money that can readily be converted into cash if you need it, such as the balance of your savings account.
Investing in a bond essentially means lending money to the government or a company for a period of time, at either a fixed or variable interest rate. Then, when the bond expires, you get your money back with interest. Bonds are generally considered to be a more secure investment than shares because you know exactly how much you’ll earn and when – but the main risk is if the issuer cannot pay you back.
A share or stock is a portion of a company that’s available for investors to purchase. The amount of a company each investor owns is relative to the total number of shares available; for example, if a company has 100 shares and you buy one, then you become a shareholder who owns 1% of the company. If the company returns a profit and pays income to its shareholders, your dividend is based on the portion you own. Because shares are subject to stock market movements, their value is likely to go up and down in value over the short term – but they also have the potential to earn higher returns than cash or bonds in the long run. This means they may carry higher risk than these other assets.
The most direct way to invest in property is to buy residential or commercial real estate and rent it out to a tenant. Your investment can then pay off in two ways: firstly, through the rental income, and secondly via an increased asset value if you sell it for a profit. You can also invest in property indirectly through an Australian Real Estate Investment Trust (A-REIT). These enable investors to pool their money together in a shared portfolio of commercial and industrial real estate.
When you invest in a managed fund, your money is pooled together with the money of other investors. A fund manager is responsible for all the fund’s investment decisions regarding buying and selling assets. The fund can pay a regular income, but the amount can increase or decrease depending on how the assets perform. The value of your managed fund investment (eg, units) can also fluctuate over time. Although investing in a managed fund gives you less control than direct shares, it may also give you access to a wider range of investment opportunities than you’d have as a sole investor.
When deciding which investments are right for you, it’s important to understand the trade-off between risk and return, and know how to manage investment risk. All investments carry some risk due to factors such as inflation, an economic downturn or a drop in a particular market – even if you choose an investment that’s traditionally considered ‘safe’, such as high-quality bonds. Every investment carries the risk of not returning your investment, and assets with greater changes in their capital value and pricing will move around a lot more, especially in the short term. It’s therefore essential to know and understand the risks of every investment you make.
Asset allocation refers to the mix and value of the various assets and asset classes in your portfolio. The key to getting the right mix is to weigh up your goals, your appetite for risk and the length of time you’re planning to invest – which is different for everyone. Each asset class carries its own level of risk and return: generally speaking, ‘conservative’ assets like cash or bonds offer a safer but lower return than the potential returns on ‘growth’ assets like shares or property.
Diversification is a strategy for reducing risk in your portfolio by investing in a range of assets, with some likely to perform better than others at different times. That way, when one type of investment is underperforming, your other investments will likely still be earning returns. For example, let’s say you’re only invested in shares. If there’s a downturn in the stockmarket, your entire portfolio will be negatively impacted. But if half of your portfolio is invested in other assets, then that half may not be affected.
Return on investment
Your return on investment (ROI) is the amount you earn from an investment relative to how much it cost you. By applying this simple formula, you can compare the profitability of different investments:
ROI = (Gain from Investment – Cost of Investment) divided by Cost of Investment
For instance, if you buy a house for $500,000, earn $25,000 in rental income, and then sell the property for $600,000 – after accounting for $60,000 in total costs (stamp duties, loan interest, legal and agents fees, rates and maintenance etc.) your ROI would be $65,000 divided by the $560,000 spent, which equals an ROI just shy of 12%.
A capital gain is the profit you make when you sell an asset – or the increase in value between what you originally paid and how much the asset sells for. If you sell an asset for less than you bought it, this is called a capital loss. Because your net capital gain forms part of your taxable income, you generally need to report any net capital gain or loss in your tax return for that year. This is the difference between the total capital gain for the year and the total capital loss (including unused loss from previous years), less any relevant CGT discount or concessions.
The yield is the amount of income you receive from an investment, for example, interest, dividends, or rent. They’re usually calculated as an annual percentage based on the cost or value of the asset, and can vary depending on how the market and asset is performing or is expected to perform. But remember, a yield isn’t a guarantee of specific returns. It’s simply an indicator of how a particular investment is currently performing or is likely to perform in the near future.
Need more guidance?
While it’s good to understand the basics, it’s important to realise just how complex investment concepts really are. So if you’re new to investing – or even if you’re a seasoned investor – be sure to talk to your financial adviser to make sure your investments are in line with your lifestyle needs and goals.
This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Taxation considerations are general and based on present taxation laws and their interpretation and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 10 January 2018, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document.
When you’re exploring aged care options for a loved one, the process can seem overwhelming. Here’s how to make it a bit easier.
Choosing when to place an elderly relative into a retirement home may be one of the toughest decisions you have to make. And while you want your loved one to be as comfortable as possible in their final years, it’s also important to be financially prepared.
With so many choices available and so many decisions to make, it helps to break down the process into a series of steps. And remember, when the time comes to begin your own aged care journey, you’ll want to be ready – so the sooner you start planning, the better.
Step 1. Finding the right place
The first step is to have your loved one’s needs assessed to determine the right level of care – from semi-independent living to round-the-clock nursing. Free assessments are conducted by community- or hospital-based Aged Care Assessment Teams. You should also consider any additional services your
relative might need in the future, so they won’t have to move again if their health declines.
If you can, visit different retirement facilities together to find an environment your loved one feels comfortable in. Be sure to investigate the social activities and meal options on offer, to ensure they’ll enjoy a happy and enriched life there.
Step 2. Calculating the costs
Although the federal government subsidises aged care costs, there are still various expenses that need be covered. For residential aged care, these include:
Accommodation fees. Prices are set by the facility but may also depend on your relative’s income and assets. Fees can be paid either as a lump sum or in regular instalments.
Basic daily care fee. This covers daily living costs and is fixed at 85% of the maximum single Age Pension – currently $50.66 per day.
Means-tested fee. This may be charged on top of your relative’s daily care fees, and is based on their assets and income. It’s currently capped at $27,232.33 a year.
Extra service fees. Additional fees may be charged for a more comfortable standard of accommodation, or special services like hairdressing or pay TV.
A financial adviser can help you calculate all these costs so you know exactly what to expect.
Step 3. Managing the paperwork
Because the fee amounts vary, you’ll need to lodge a Request for a combined assets and income assessment form with the Department of Human Services. This helps determine how much of a government subsidy your relative will receive towards the aged care costs.
Next, you can start applying directly to aged care facilities to find a suitable placement for your relative. A facility will contact you as soon as a slot becomes available, and they may also require you to enter into a Resident Agreement and Accommodation Agreement.
Step 4. What to do with the family home
Moving into aged care accommodation isn’t cheap, and many people who go into care need to sell their family home to cover the costs. This process can take many months, so you might also have to sort out a loan to manage the initial expenses while the property is on the market.
An alternative may be to rent out the property and use the rental income to help cover your aged care fees.
Your relative’s choice of whether to sell, or keep and rent out their former family home can have significant consequences for the aged care fees they pay, as well as any social security entitlements they receive, so speak to a financial adviser about the best option before taking any action.
Step 5. Making the move
Packing up an entire house or flat and moving into a single room of a retirement home requires a lot of work. As space will be limited, you’ll need to prioritise the most important or valuable items (including those with sentimental value) for your relative to take with them, and then sell or give away the rest.
There will also be other practicalities to deal with, such as changing their postal address and advising Centrelink about the move. Finally, make sure you include your loved one in as much of the decision-making as possible, to help make the transition as painless for them as you can.
This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 20 September 2018, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted. by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Taxation considerations are general and based on present taxation laws and their interpretation and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
Colonial First State
By Carlos Cacho, Analyst, Economic and Market Research Colonial First State Global Asset Management
The Reserve Bank of Australia (RBA) Board met on 1 August and left the official cash rate on hold at 1.5%, as widely expected. There has been no change in the official cash rate since August 2016.
In contrast to the strength in business confidence, consumer confidence was weaker, falling 1.2% for August and below its long-term average.
The S&P/ASX 200 Index finished the month largely flat, for the third consecutive month. This return masked some considerable divergence in the performance of various industry sectors.
Hurricane Harvey led to widespread destruction in Texas that will require a significant recovery effort. This also saw a sharp increase in gasoline prices.
A downward trend in bond yields continued in August, as investors took shelter in safe-haven assets in the face of geopolitical unrest.
The RBA continues to balance three key risks in the economy for their monetary policy deliberations:
- the outlook for inflation,
- the strength or otherwise of the labour market, and
- Household financial
The RBA released its quarterly Statement on Monetary Policy (SMP). The key development in the SMP was a slight downgrade adjustment to the near-term GDP growth forecasts for Australia, and a slight upward adjustment to the headline inflation forecast. The GDP estimate for year-end 2017 has been revised down to 2%– 3%, from 2.5%–3.5% in the May edition. The June 2018 figures now have the mid-point for growth at 3.0%, down from 3.25%. These lower forecasts were driven by a weaker Q1 GDP result and tighter financial conditions, primarily driven by a stronger Australian dollar.
The headline CPI forecast for June 2018 and December 2018 was revised to 1.75%–2.75%, up from 1.5%–2.5%. This was driven by an upward revision to utility prices, despite the stronger AUD.
The NAB business survey for July showed business confide
UNDERSTANDING THE MEDICARE LEVY
Ever wondered why your EOFY tax bill was higher than you expected? It could be because of the Medicare Levy. So what does the levy pay for – and how is it calculated?
What is the Medicare Levy?
Medicare is Australia’s publicly funded national healthcare system. The federal government funds the system by charging taxpayers a levy on top of their annual income tax. Thanks to this levy, all Australians can enjoy access to quality health care.
What does it cover?
- Medicare provides access to a wide range of health care and hospital services, including:
- free or subsidised treatment when you visit a medical professional such as a doctor, optometrist or specialist
- free treatment and accommodation when you’re a public patient in a public hospital
- 75% of your treatment and procedure costs when you’re a private patient in a public or private hospital (not including accommodation fees and other costs)
- reduced costs for prescription medications in some cases.
How much is it?
For most eligible taxpayers, the levy is currently charged at 2% of their taxable income. However, the government has proposed to increase this rate to 2.5%. If this legislation is passed, it will take effect in July 2019.
When do you pay it?
If you’re required to pay the Medicare Levy, it’s automatically calculated against your taxable income when you lodge your yearly tax return.
You can use the Medical Levy Calculator on the Australian Taxation Office (ATO) website to work out how much you can expect to pay.
Is anyone exempt?
If you’re single and your taxable income was below $21,655 for the 2016–17 financial year (or $34,244 if you’re a single senior or pensioner entitled to the seniors and pensioners tax offset), then you don’t have to pay the Medicare Levy.
For families, you’ll be exempt from the Medicare Levy if your 2016–17 household income was below $36,541 (or $47,670 for eligible seniors and pensioners), plus $3,356 for each dependent child or student.
You may also be exempt if:
- you suffer certain medical conditions
- you’re a foreign or Norfolk Island resident
- you’re not entitled to Medicare benefits – for instance, you’re not an Australian citizen.
Keep in mind, there are specific requirements for each category, so you may need to check whether you’re eligible for an exemption.
Are some people charged a different rate?
There are instances when some people will only be charged a partial Medicare Levy. For instance, you’ll pay a reduce rate if you’re single without dependants and your taxable income for the 2016-17 financial year was above the exemption threshold but less than $27,069 (or $42,806 for seniors and pensioners entitled to the seniors and pensioners tax offset).
Families may be charged a partial Medicare Levy if their household taxable income is below $45,676 (plus $4,195 for each dependent child).
To be eligible for a reduction, you also need to meet certain conditions.
What is the Medicare Levy Surcharge?
If you don’t have the appropriate level of private hospital insurance, you may be charged an extra amount on top of the 2% levy. This is called the Medical Levy Surcharge (MLS) and only applies if your taxable income is over $90,000 for singles or $180,000 for families.
The MLS can range from an additional 1% to 1.5% depending on your income level. You can see a full breakdown of thresholds and rates on the ATO website.
What if you have private cover?
If you have an acceptable level of private hospital insurance, you won’t be charged the MLS. But first, you’ll need to provide information about your private health cover payments on your tax return.
For more information
If you’d like to know more about how the Medicare Levy might impact your financial situation, speak to your financial adviser.
General information only: The information in this message is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. It should not be construed as financial, taxation or legal advice. Before acting on the basis of this information, you should consider its appropriateness to your own objectives, financial situation and needs. Individual advice can be provided by contacting our office at email@example.com or by phone (08) 9330 8886.