While headline inflation eased to 2.8% in the September quarter, the Reserve Bank remains unmoved on interest rates. RBA Governor Michelle Bullock says the drop in the cost of living may be welcome relief for most of us, but the Board’s measure to watch is trimmed mean inflation and that’s still not “sustainably” in the desired target range of 2-3%. It’s not likely to get there until late in 2026, the RBA predicts.
The sharemarket reacted sharply to the Governor’s comments in the last days of a month that had seen several all-time highs. US President-elect Donald Trump’s promise for 25% tariffs on Canadian and Mexican goods also contributed to the billion dollar shares sell-off. Nonetheless, the S&P ASX200 finished November 3.4% higher.
The Australian dollar is also taking a beating from the possibility of both the US tariffs and the RBA’s rates forecast. It hit a seven-month low below 65 US cents near the end of the month.
And, in good news the ANZ-Roy Morgan Consumer Confidence Index, while down slightly has stayed above a mark of 85 points for the sixth week in a row for the first time in two years. Commonwealth Bank projections expect a boost in sales for small businesses thanks to the Black Friday and Cyber Monday sales and the coming festive period.
Dollar cost averaging: can it work for you?
Australian share prices have seen record highs in 2024 after a sluggish couple of years.
The S&P ASX200 index added just under 7 per cent in the 10 months to October 31 closing at 8160.i It reached its previous all-time high of 8355 just two weeks before.
So, if you were invested in an index fund or a basket of shares mirroring the ASX200 for the entire period, it’s likely you would have added some value to your portfolio.
Over the course of the year, the index has ebbed and flowed, recording several all-time highs.
But, while 2024 has so far been a boon for some investors, there have been some jarring notes.
For example, there was the devastating drop in the first week of August when the index lost $100 million in the biggest fall since the COVID lockdown over concerns about falls in the United States and Asian markets.ii
Geopolitical tensions have also played a part in market skittishness as the wars in the Middle East and Ukraine continue and economists argue about the future impact on Australia of a Trump presidency.
US share prices surged the day after Donald Trump’s election in what many saw as a positive reaction to the returning President’s policies. Since then, prices have declined in a not-unexpected correction. Various analysts are predicting future volatility as markets respond to the proposed policies including tariffs and mass deportations promised by the President-elect.
These ups and downs in prices can have investors scurrying to hit the ‘buy’ or ‘sell’ buttons. They may be desperate to save further losses when share prices are falling rapidly or wanting to cash in on a rising market. Meanwhile, those with lump sums to invest may delay, trying to pick the time when prices are lowest.
Timing the market
To begin with, predicting the next market movement is extremely difficult – even for experienced investors – because of the endless factors that can influence the markets.
Emotion or sentiment plays a big part too, both in the way the markets react to events and in the times that individual investors choose to buy or sell.
Reacting to major market movements by selling or keeping a lump sum in cash until ‘the time is right’ means you run the risk of missing the market’s best days and reducing your overall return.
Countless studies show that better long-term results are achieved by consistent investing over time.
In the US, for example, US$10,000 invested in the S&P 500 over the 20 years to December 2022 would have achieved a 9.8 per cent annual return.iii But, missing the 10 best days over those two decades would have seen the return almost halved to 5.6 per cent. If an investor had missed 60 best days over the 20 years, they would have been left with just $4205 of their $10,000, a fall of 4.2 per cent.
Defying conventional wisdom, seven of the 10 best days took place during bear markets and, in 2020, the second-best day happened immediately after the second worst day.
In Australia, $10,000 invested in the ASX/S&P 200 during the 20 years to October 2024 would have increased to $60,777.iv But, if you had missed the 10 best days during that time, your total investment would be just $36,014.
How values grow over time
Here is how $10,000, invested in 1994, grew over 30 years.
Source: Vanguard Australia
Dollar cost averaging
One way of taking the emotion and guesswork out of investing is to consider investing fixed amounts of money at regular intervals over time, ignoring any market signals.
It is a strategy known as ‘dollar cost averaging’, which works best if you are investing over the medium to long term because it helps to smooth out the price peaks and troughs.
In fact, the compulsory superannuation paid by employers is a form of dollar cost averaging. Smaller, regular amounts are invested automatically, regardless of market movements and, over time, the investment grows. Alternatively, regular amounts from after-tax salary can be invested in a similar way.
However, the jury is out on whether dollar cost averaging is a useful strategy when you have a lump sum in cash to invest. Some advocates of the strategy argue that the principles of dollar cost averaging mean a better return by not timing the markets. In particular, you reduce the risk of making a large investment just before markets plunge.
Those opposed to the strategy for lump sum investing say that, with a lump sum sitting in a bank account as you chip away at regular stock purchases, there is a risk that you will miss the best of the market. It is also a form of market timing. The argument is that, by investing your lump sum all at once, you’re putting your cash to work immediately. In any case, stockmarket returns over the long term outperform cash investments.
A 2023 study found that investing a lump sum in the markets at once over the long term delivers a better return than a dollar cost averaging strategy.v
So, avoid the risks of timing the market and consider whether dollar cost averaging might be an appropriate strategy for you.
We’d be happy to discuss how best to ensure your regular investing strategy or investment of a lump sum, takes account of future market movements and volatility.
i Australia Stock Market Index | Trading Economics
iii Timing the Market: Why It’s So Hard, in One Chart | Visual Capitalist
iv Timing the market | Fidelity Australia
v Lump-sum investing versus cost averaging: Which is better? | Vanguard
Gifting for future generations
At this time of year, when giving is particularly on our minds, some might turn their attention to how best share their wealth or an unexpected windfall with their loved ones.
You might be thinking about handing over a lump sum to help them with a major purchase or business opportunity, or be keen to help reduce or extinguish their student loans. Alternatively, it might be about helping to solve a housing problem.
Whatever the reason there are some rules that it is worth being aware of to ensure both you and they are protected.
Giving a cash gift
You can give anyone, family or not, a gift of cash for any amount and, as long as you don’t materially benefit from the gift or expect anything in return, no tax is paid on the amount by either you or the receiver.i
The same applies if you’re planning to pay out your child’s student loans.
However, be aware that if the beneficiary of your cash gift is receiving a government benefit, such as an unemployment benefit or a student allowance, there is a limit on the size of the gift they can receive without it affecting their payments.
They may receive up to $10,000 in one financial year or $30,000 over five financial years (which can not include more than $10,000 in one financial year).ii
Helping out with housing
Many parents also like to help their children get into the property market, where possible.
It’s been a difficult time for many in the past few years in dealing with the COVID-19 pandemic, the rising cost of living and interest rates, and a housing crisis.
A Productivity Commission report released this year found that while most people born between 1976 and 1982 earn more than their parents did at a similar age, income growth is slower for those born after 1990.iii
With money tight and house prices climbing, three in five renters don’t believe they will ever own a home even though most (78 per cent) want to be homeowners, according data collected by the Australian Housing and Urban Research Institute (AHURI).iv
Just over half of those surveyed (52 per cent) were renting because they didn’t have enough for a home deposit and 42 per cent said they couldn’t afford to buy anything appropriate, the AHURI survey found.
So, in this climate, help from parents to buy a home isn’t just a nice-to-have, it’s becoming a necessity for many.
Becoming a guarantor
Another way to help might be to become a guarantor on your child’s mortgage. This might be the best way into a mortgage for many but before you sign, think it through carefully, understand the loan contract and know the risks.vi
Don’t forget that, as guarantor, you’re responsible for the debt. You will have to step in and repay if the borrower can’t afford to repay, and the loan will be listed as a default on your own credit report.
Any sign that you are being pressured to be a guarantor on a loan may be a sign of financial abuse. There are a number of avenues for advice and support if you’re concerned.
It’s vital that you obtain independent legal advice before signing any loan documents.
If you would like more information about how to provide meaningful financial support to your children, we’d be happy to help.
Tax update December 2024
New PAYG adjustment factor
Pay As You Go (PAYG) instalments – whether you pay quarterly or twice-yearly – has been increased to 6 per cent for 2024-2025 to reflect the latest GDP increase.
The change in the adjustment factor does not affect taxpayers who work out their own instalments or pay annually.
PAYG instalment amounts can be varied through the ATO’s Online services for business if you believe your current instalment amount will be more or less than your expected tax liability for the year.
i Tax on gifts and inheritances | ATO Community
ii How much you can gift – Age Pension – Services Australia
iii Fairly equal? Economic mobility in Australia – Commission Research Paper – Productivity Commission
iv Rising proportion of ‘forever renters’ requires tax and policy re-think | AHURI
v Coming home: 662,000 Australian households reunite with adult children – finder.com.au
