Monthly Newsletter - April 2010

Editors Note

This edition includes an inspirational quote, a funny picture, a market commentary with the main index returns during March 2010 and the all new Financial Planning Q&A. I encourage you to make comments.

Both Australian and international sharemarkets performed strongly over the month of March to finish the quarter in positive territory.

Inspirational Quote

Learn to enjoy every minute of your life. Be happy now. Don't wait for something outside of yourself to make you happy in the future. Think how really precious is the time you have to spend, whether it's at work or with your family. Every minute should be enjoyed and savoured.

Earl Nightingale (Author and Radio Announcer)

Funny Picture

BIG DOGS! Other members of the animal kingdom can also struggle with obesity! 

Market Commentary

Sharemarkets have recovered strongly from the bear market depths of just over a year ago.

Performance scorecard to 31 March 2010  

Indexes used: Australian shares: S&P/ASX 300 Index, Australian listed property: S&P/ASX 300 A-REIT Index, International shares: MSCI World ex-Australia Index (net dividends reinvested), Australian fixed interest: UBS Australian Composite Bond Index, International fixed interest: Barclays Capital Global Treasury Index (hedged into Australian dollars), Cash: UBS Australian Bank Bill Index.

Both Australian and international sharemarkets performed strongly over the month of March to finish the quarter in positive territory. European credit concerns abated somewhat over March as the major sharemarkets in the region recovered from a shaky start to quarter. Positive employment data and improving business sentiment contributed to gains in the Japanese sharemarket over March.

While in the US, the labour market showed signs of improvement as jobless claims fell to their lowest level since 2008. Growth in the Asia (ex Japan) region remains strong with China expecting GDP growth of more than 9% this year.

Better than expected economic conditions in Australia prompted the Reserve Bank of Australia (RBA) to raise interest rates by 0.25% at its March meeting, taking the official cash rate to 4%. In his official statement RBA governor Glenn Stevens said: "The Board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average."

The Australian dollar followed interest rates up over the month, finishing the March quarter at almost 92 US cents.

The resource sector has led the Australian sharemarket's climb over the last 2 months with new quarterly pricing contracts and Chinese demand for commodities benefiting local mining companies. It was a positive interim reporting season for Australian companies with almost half of all results reported better than expected and almost 60% of companies growing profits over the year.

Australian REITs stagnated over March to finish the quarter down 1.6%. It appears the current dividend yield of 5.8%, which is well below the long-term average, and increased volatility in the sector is keeping investors at bay. 10 year bond yields have been stable over the quarter at around the 5.7% level, while corporate yields have fallen.

While credit issues continue to concern world markets, it appears sharemarkets have put the worst of the GFC behind them. Global growth is improving with world GDP expected to return to trend levels in 2010 and 2011. This together with improving corporate profits and low global interest rates suggest there is room for further upside in world sharemarkets.

As the local and global economic outlook improves, the RBA has signalled its intention to increase interest rates to normal levels. With the latest April 0.25% rise, official rates are now edging closer towards more average levels. Since the RBA introduced its target inflation band of 2-3% in 1993, the average cash rate has been in the vicinity of 5%. 

The Market Commentary has been sourced from Vanguard Investments Australia Ltd. 

NEW FEATURE - Financial Planning Q&A

Financial Planning Q&A includes the best question from the public each month and my answer, to give readers an introduction into the benefits of financial planning advice. If you would like a question about your financial situation answered, click Financial Planning Q&A. The best question will also receive a MOVIE TICKET.

Question

We are a couple with a single income of $82,000. We are currently renting and we have about $80,000 in superannuation. We have 3 children and about $6,000 credit card debt. We are rapidly decreasing the credit card debt and should have the debt paid off very soon. We are then thinking of putting our savings towards salary sacrificing as this looks tax effective and increases our retirement funds. Is salary sacrificing a wise investment or are there better options? 

Answer

It is great to see that you are taking an active interest in managing your financial situation. Reducing credit card debt is a great first step. Increasing your superannuation by salary sacrificing is a very tax effective strategy. However, the downside is that your savings will not be accessible until age 65 or until you permanently retire between age 55 and 60 (depending on your date of birth). You need to be comfortable that you will not require the savings you salary sacrifice until that time for another purpose such as buying a family home. Also, ensure your superannuation fund is cost competitive, has a good performance track record and provides an investment option that matches your tolerance to risk. Salary sacrificing to superannuation is a great strategy but there are many other strategies you should also consider. 

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Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.