Few companies or investors expected the recent Coalition Federal election win but many were apprehensive about Labor’s proposed changes. So anxiety about franking credits, capital gains tax and superannuation policy stability has now eased. What does the next 3 years now hold for investors?
The election result reinforced some investing issues… like loss aversion – mostly we feel losses twice as much as gains (ask Labor). When something might be taken away from us, it has much more impact than when we’re given something (ask retiree voters). Labor may now understand this better as they review their approach to franking credits.
Investors tend to focus unduly on investments that have lost money, even when the rest of their portfolio does well.
In his book, ‘Common Stocks and Uncommon Profits’, Philip Fisher wrote ‘more money has probably been lost by investors holding a stock they really did not want until they could at least come out even, than from other single reason”.
We tend to feel the pain of a loss more strongly than we enjoy the pleasure of a gain.
2002 Nobel Prize winner for Economics, Daniel Kahneman wrote ‘the concept of loss aversion is certainly the most significant contribution of psychology to behavioral economics.
Of course, some risk aversion when investing is perfectly rational. For example, losing $10,000 of your savings may mean you can’t pay your monthly rent, yet gaining $10,000 lets you take an extra holiday. So it makes perfect sense to play it safe rather than risk the roof over your head. It’s also rational for investors to expect higher returns when taking more risk.
Electorally, Labor wishes it had better explained the benefits from losing refundable franking credits, negative gearing and increasing capital gain tax. Chris Bowen’s “if you don’t like it, don’t vote for us”… lacked empathy. On the other hand, marketing man Scott Morrison was doubtless amazed at the opportunity Labor presented. Political preferences aside, the class war aspect of the election was damaging to national unity.
Most of us keenly feel losses more than we value gains. To risk potential loss – we might hope to gain about twice as much as the possible loss. Such aversion is more dominant when we feel we’d lose something really valuable, as did those receiving franking credit refunds. Even though Ken Henry and David Murray’s previous reviews recommended action on negative gearing and capital gains tax, those already benefiting in these areas would have also felt some loss aversion.
In his time, John Howard tweaked the Australian dream towards a more aspirational American model. This election, voters again acted on the hope they’d become rich and were unmotivated by government redistributing wealth – preferring instead for concessions to endure till they (in the dream), make it to the top. Most don’t become rich, amplifying Labor’s failure to explain their policy benefits. But skillful Coalition electioneering may yet lead us into greener pastures.
Nevertheless, loss aversion for investors reveals itself in a tendency to sell stock market winners too soon and hold losers too long. It also encourages selling to cash to avoid more losses, when feeling panicked in a falling market.
Ways to manage this?
(If you’re already a client, your adviser will have covered the following matters… but here goes:)
- 3 buckets – have a low risk buffer so you can afford to be patient.
- Focus on long-term forecasts and block out the noise. Easier said than done… but accept you can’t rely on perfect market timing, then take a longer-term view using valuation tools to support rational decisions. This can involve being contrarian.
- Risk tolerance and managing within a suitable portfolio mix – keeping enough cash and deposits for peace of mind amid market distress to avoid selling at distressed prices.
Best strategies for investors
Buy all investments as if you’re a private owner, as you would when buying your home or an investment property. Focus on future earnings yield and less about short term price movements.
The market enjoyed a relief rally when anxiety about Labor policy evaporated. Offshore investors were cautious about Bill Shorten, so we may now see better flows from international investors.
Sectors to benefit
The threat of a bank levy is gone, as is the plan to cap private health insurance premiums, removing a headwind for insurers and private hospital operators.
There may be some market buying rotation from more defensive sectors investors sought before the election. Subsequent effects will take longer to emerge, particularly as Scott Morrison offered no specific policies, preferring to negate Labor’s instead.
Retaining negative gearing may stimulate investor interest in housing, creating more support for banks and housing stocks. But we’re cautious about this, particularly in view of the many bank problems ahead. Still, property investor trends bear watching.
Mining developments may rise, helping mining services and the broader economy, despite recent economic deceleration amplified in part by election uncertainty. Perhaps the government may accelerate their tax cuts for an economic boost?
Tax and Super outlook
Refunding excess franking credits will continue and the Coalition guaranteed no new superannuation taxes. So you can worry less about changing rules and just manage your financial needs. The Coalition offered more superannuation contribution flexibility as proposed but not legislated in its last Budget:
After 1st July 2020, if you’re age 65 or 66 you could make voluntary concessional or non-concessional super contributions, without needing to meet the work test. You’d also be able to use the bring-forward arrangements that let you make three years’ worth of non-concessional contributions to your super in a single year. Currently this can only be done if you’re under 65.
The age limit to receive spouse contributions will also rise from 69 to 74.
Red tape for super funds will be reduced with streamlined administrative requirements. The maximum SMSF members will rise from four to six and limited recourse borrowing arrangements (LRBAs) remain. Also, where multiple low-balance accounts have a balance under $6,000 with no contributions in 16 months, the ATO will soon consolidate them. Those super members risk losing default insurance cover if their account is inactive on 1st July 2019.
The need to meet the 10% income from employment activity was abolished. You can still contribute to super for a tax deduction regardless of your employment (Labor was to restore this 10% rule).
The catch-up concessional contributions where your super balance is under $500,000 will also continue. See our previous Budget blog here.
Contribution caps revisited
Non-concessional (after tax) contributions are limited to $100,000 for 2018/19 financial year and concessional (before tax) contributions are limited to $25,000 each.
If you’re under age 65, you can contribute up to $300,000 over a three-year period depending on your total super balance. Transitional arrangements also apply if you brought forward prior non-concessional contribution caps.
Take care when making large super contributions so you avoid excess contributions and hence save yourself time and money covering the excess penalties. Contributions are included in a financial year if they are received in your fund’s bank account by 30th June. As 30th June is a Sunday this year, make your contributions well beforehand.
Drawing superannuation pensions
We help our clients ensure your minimum pension is met this financial year. If not, 15% tax is levied on your pension investments, rather than being tax-free.
Personal superannuation contributions
Whether you’re employed, self-employed or not, you can claim a deduction for personal super contributions until you’re 75. If you’re between 65 and 75 you must meet the work test to claim this. After 1st July 2020, the work test should no longer apply if you’re 65 or 66 (see above).
If you or your partner earn less than $52,697 and meet the relevant work tests, you may be able to take advantage of the Government super co-contribution.
Managing the $1.6 million pension limit
If you’re heading towards or over the maximum pension limit, your adviser will have spoken to you about rebalancing pension accounts between spouses where possible, to maximise for each.
If you would like to discuss your investment options with one of our wealth management professionals, get in touch with Wotherspoon today!
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.