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December 15, 2023
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In Financial Advice, Financial Planning, Goals, Investments, Latest Updates, Money

Common Investment Pitfalls to Avoid

Investing, a realm filled with potential opportunities and pitfalls, demands careful consideration to navigate successfully. Each misstep along the way can serve as a valuable lesson, contributing to a more refined and robust investment strategy. Here are 20 crucial investment mistakes to be aware of, each of which plays a pivotal role in shaping a sound investment approach.

  • Setting Unrealistic Expectations: Investors must maintain realistic return expectations to stay committed to their long-term goals amidst market fluctuations.
  • Lack of Clear Investment Goals: Without clear long-term objectives, investors risk being swayed by short-term trends or the allure of the latest investment trends, losing sight of their primary financial ambitions.
  • Inadequate Diversification: Diversification is essential for risk management, as over-relying on a single stock can significantly impact a portfolio’s overall value.
  • Short-term Focus: A fixation on short-term market movements can lead to doubts about the original strategy, resulting in impulsive decisions.
  • Buying High and Selling Low: Emotional reactions to market volatility often harm overall investment performance.
  • Excessive Trading: Studies show that highly active traders typically underperform the broader stock market by an average of 6.5% annually.
  • High Fees: Ongoing fees can significantly eat into investment returns, especially over extended periods.
  • Overemphasis on Taxes: While tax strategies like tax-loss harvesting can enhance returns, making decisions solely based on tax implications may not always be beneficial.
  • Infrequent Investment Reviews: Regular portfolio evaluations, preferably quarterly or annually, ensure alignment with investment goals and highlight the need for rebalancing.
  • Misunderstanding Risk: Striking the right balance between too much and too little risk is crucial, as excessive risk can lead to discomfort, while insufficient risk may yield inadequate returns.
  • Unawareness of Performance: Many investors are not fully aware of their investment performance. Regularly reviewing returns, accounting for fees and inflation, is vital to assess progress towards investment goals.
  • Reactivity to Media: Short-term negative news can trigger fear, but it’s essential to maintain focus on the long-term trajectory.
  • Ignoring Inflation: Historical inflation averages around 4% annually, which can significantly erode purchasing power over time.
  • Attempted Market Timing: Trying to perfectly time the market is exceptionally challenging and often less profitable than remaining consistently invested.
  • Insufficient Due Diligence: Verifying an advisor’s credentials using online resources to review their history and any complaints is critical.
  • Incompatible Financial Advisor: Finding an advisor whose strategies align with one’s goals is crucial for a successful partnership.
  • Emotion-Driven Investing: Maintaining rationality during market fluctuations is essential to avoid emotional decision-making.
  • Chasing High Yields: High-yield investments often come with higher risks. It’s important to align investments with one’s risk tolerance.
  • Delaying Investment: Starting to invest early can lead to greater potential returns, as exemplified by comparing the outcomes of investing $200 monthly from different starting ages.
  • Not Controlling the Controllable: While market trends are unpredictable, investors can manage their contributions, leading to significant outcomes over time.

To avoid these common pitfalls, investors should seek financial advice, prioritise rational decision-making, and focus on long-term objectives. Financial goals, current income, spending habits, market conditions, and expected returns should guide portfolio construction. This approach helps investors steer clear of short-term market volatility and underscores the importance of consistent, long-term investments in wealth accumulation.

Designing and managing your investment portfolio can be complex; with our experience and understanding, we can help tailor an overall investment plan to suit your long-term goals.  Reach out to our financial advice team for strategic investment advice here.

Learn more here.

This information does not take into account the objectives, financial situation or needs of any person. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation or needs.

(Feedsy Exclusive)

October 4, 2023
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In Estate Planning, Family, Financial Advice, Financial Planning, Latest Updates

The responsibilities and challenges of an estate executor

Being named the executor of an estate is both an honour and a burden. Entrusted with this pivotal role, one carries out the last wishes of a loved one, but the path is often strewn with complexities and unforeseen challenges.

Navigating the Executor’s Terrain

At first glance, the executor’s role might seem straightforward. However, in practice, it’s a demanding role that requires interaction with a myriad of entities, such as banks, real estate professionals, utility companies, the deceased’s superannuation fund, and the taxation office.

Furthermore, an executor’s duties are vast and varied. They encompass everything from overseeing funeral procedures, securing the death certificate, and notifying friends and family about the loss. They’re also tasked with locating the will, identifying beneficiaries, gathering a multitude of documents, settling estate debts, documenting estate assets, and initiating insurance and superannuation claims.

Yet, the process isn’t without potential pitfalls:

  • Executors face personal financial risks. Any oversight during the estate’s administration might lead to personal financial liabilities.
  • They often encounter hitches in procuring superannuation death benefits and in coordinating with fund trustees.
  • Executors bear responsibility for any losses stemming from estate asset mismanagement. This can include failure in securing and judiciously investing assets or lapses in notifying creditors, settling the deceased’s obligations, and recouping debts owed to the deceased.
  • They can incur financial penalties for unduly delaying estate administration or for hasty distributions.

Guidance for a Smoother Transition

For those in the process of drafting a will and designating an executor, a few proactive steps can immensely assist in the estate’s efficient management:

Collaborate with a knowledgeable probate lawyer or solicitor specialising in wills and estate management. Their insights can be invaluable, especially regarding local family and inheritance laws.

Given life’s unpredictability, regular updates to your will, insurance policies, and superannuation death benefit details are paramount.

It’s crucial to note that superannuation doesn’t fall within your estate and isn’t addressed in your will. Still, you can specify your wishes and arrangements concerning your super death benefit nominations in your will.

Seek guidance from your financial adviser and super fund to establish death nominations, thereby streamlining benefit acquisitions for beneficiaries.

If feasible, contemplate liquidating your entire death benefit from the super fund while still alive. This proactive step allows for immediate distribution based on your directives or deposits into a bank account, providing easy access for the executor upon your passing.

If you’re ever nominated as an executor by a loved one, it’s prudent to discuss these considerations with the person who drafted the will (the Testator). Collaboration with their legal advisor (and financial consultant if available is also advisable to ensure a comprehensive understanding of the responsibilities and challenges ahead.

The role of an executor is multifaceted, rife with both honour and intricate challenges. However, with a well-charted roadmap and diligent preparation, the process can be streamlined, ensuring a smoother transition for all involved.

This can be a complex discussion and should be undertaken with a trusted advice professional. Reach out to the Sherlock Wealth team here to get started.

Source: Matrix Planning Solutions

This information does not take into account the objectives, financial situation or needs of any person. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation or needs.

 

September 26, 2023
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In Estate Planning, Family, Financial Planning, Latest Updates, Retirement

Farm Succession Planning: Balancing Financial and Emotional Aspects for Generational Transition

The Challenge Facing Farm Owners

The complexity of farm succession planning extends beyond mere financial transactions. For farm owners, navigating the transition of a generational asset such as a farm is both an economic and emotional endeavour. The process often grapples with uneven asset distribution, potentially leading to family strife if not managed well.

Addressing Inequality in Asset Distribution

A typical farm usually constitutes the lion’s share of a farming family’s assets. However, the farm’s income is often adequate to sustain just one family. Consequently, when the time comes to hand down the farm, usually, one child becomes the inheritor.

This poses multiple problems:

  1. Inequality in Inheritance: A single child ends up inheriting a substantial portion, if not all, of the estate, leaving other siblings potentially aggrieved. While the natural inclination for parents is to distribute assets equitably among all children, dividing a working farm is often impractical.
  2. Legal Disputes & Contested Estates: Siblings who feel left out may resort to legal avenues, leading to estate contests that might result in the division of the farm—precisely what parents aim to avoid. Such situations are emotionally and financially taxing, culminating in strained familial relations.

Strategies for Advance Planning

  1. Cultivating Off-Farm Assets: One way to address this imbalance is by accumulating assets unrelated to the farm, which can be bequeathed to the non-farming children. Investments and superannuation funds are good vehicles for this purpose, offering tax benefits and ensuring a financially secure retirement for the parents.
  2. Early and Collaborative Planning: A well-thought-out succession plan requires the input of multiple experts: an accountant, financial planner, solicitor, and possibly a bank or commercial finance broker. Early planning allows for structural implementations that ensure all family members are in agreement, facilitating a seamless transition.

Preparing for Unforeseen Circumstances

Life is unpredictable, and the untimely demise of a parent can throw succession plans into disarray. Here, life insurance can serve as a financial cushion, providing immediate liquidity to manage an unplanned succession.

Retirement Concerns for Parents

What sustains the parents after they step back? Ideally, they would live on the off-farm assets accumulated over the years. However, the reality is often a mix of income streams, such as leasing arrangements and continued payments from the farm. This is not always convenient for the next generation, who may prefer to invest in the farm rather than pay their retired parents. Moreover, assuming ownership may require the new generation to shoulder existing debts and potentially accrue new ones to buy out their parents.

Conclusion

Farm succession planning is more than just a financial transaction; it is an emotional and familial journey that requires collective decision-making. Initiating the process early and involving all family members can alleviate potential pitfalls. A balanced approach can help navigate the complexities and ensure the farm remains a generational asset while still considering the needs and feelings of every family member.

Reach out to our experienced advice professionals to discuss your unique situation here.

Source: Matrix Planning Solutions

This information does not take into account the objectives, financial situation or needs of any person. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation or needs.

September 25, 2023
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In ESG Investing, Financial Advice, Financial Planning, Goals, Investments, Latest Updates

Types of ethical investing plus the pros & cons

The investment technique known as ethical investing prioritises the investor’s moral, religious and social ideals over financial gain. This is because a growing number of investors have begun to demand social responsibility from the companies they invest in, primarily because of the rise in dubious and unlawful investment arrangements.

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September 25, 2023
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In Financial Advice, Goals, Investments, Latest Updates, Wealth

Rethinking Wealth: Beyond Money – The Evolving Concept of Prosperity

In today’s society, the notion of wealth extends beyond financial resources. As individuals seek a more balanced and fulfilling life, the concept of wealth has evolved to encompass various factors such as education, healthcare, job satisfaction, and social connections. This article explores the changing perception of wealth in contemporary Australia and highlights the importance of holistic well-being in defining prosperity.

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August 29, 2023
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In Estate Planning, Financial Advice, Latest Updates, Retirement, Self Managed Superannuation, Superannuation, Wealth

Trusts and the new super tax rules

Ensuring you’ve structured your finances tax-effectively is always a concern, but with new tax rules for super on the horizon, many people with large balances are considering alternative vehicles to save for retirement.

Unsurprisingly, this has sparked a renewed interest in an old favourite – trusts.

Trusts have always been popular in Australia, with the government’s Tax Avoidance Taskforce (Trusts) estimating more than one million were in place in 2022.

Separating ownership using a trust

The popularity of trusts for business, investment and estate planning purposes is due to both their flexibility and inherent benefits, particularly when it comes to managing your tax affairs.

At their heart, trusts are simply a formal relationship where a legal entity holds property or assets on behalf of another legal entity.

This separation means the trustee legally owns the assets, but the beneficiaries of the trust (such as family members) receive the income flowing from the assets.

A common example of a trust structure is a self managed super fund (SMSF), where the fund trustee is the legal owner of the fund’s assets, and the members receive investment returns earned on assets held within the SMSF trust.

Which trust is best?

There are many different types of trusts, with the appropriate structure depending on the financial goals you’re trying to achieve.

For small businesses and families, the most common trust is a discretionary (or family) trust. These vehicles are very flexible and can be used with immediate and extended family members, family companies or even charities.

In a discretionary trust, the trustee has absolute discretion on how both the income and capital of the trust are distributed to various beneficiaries.

This gives the trustee a great deal of flexibility when it comes time to allocate income to family members paying different marginal tax rates.

Advantages of a trust structure

Discretionary trusts offer tax, asset protection, estate planning and property holding benefits.

They can also assist with the accumulation of assets for younger generations within your family and provide opportunities for the discounting of capital gains.

For small businesses and farming operations, a discretionary trust can be used to provide valuable asset protection. If your business goes bankrupt or a beneficiary is divorced, creditors will be unable to access assets or property held within the trust as it is the legal owner of the assets.

Building wealth outside super

With new tax rules for super fund balances over $3 million being introduced, trusts also provide a useful tool to consider for continued wealth accumulation.

Unlike super funds, trusts don’t have annual contribution limits, restrictions on where you can invest or borrowing limits. Money can be added and removed from the trust as necessary, providing significant financial flexibility.

Discretionary trusts can also be used with vulnerable beneficiaries who may make unwise spending decisions. The trustee can decide to provide a spendthrift child or a family member with a gambling addiction regular income, but not large capital sums.

Holding ownership of assets within a trust is useful for estate management, as the assets will not be part of a deceased estate, avoiding the possibility of a Will being challenged.

Trusts aren’t always the solution

Although trust structures provide many benefits, there are also tax issues that need to be considered. For example, any trust income not distributed to beneficiaries is taxed at the top marginal rate.

Distributions to minor children are taxed at higher rates and a trust is unable to allocate tax losses to beneficiaries, so they must remain within the trust and be carried forward.

Trusts can be expensive to set up, administer and dissolve when they are no longer needed and the trustee’s actions are restricted by the terms of the trust deed.

If a family dispute arises, running a trust can become difficult and making changes once it is established isn’t easy.

If you would like to find out more about trusts and whether one is appropriate for your business or family, reach out to our experienced advice team here.

View Andrew’s website profile here or connect with him on LinkedIn.

Andrew Sherlock is the Owner & Head of Advice at Sherlock Wealth.

A Sydney-based financial planning firm, Sherlock Wealth has been helping successful families, business owners and individuals with their wealth creation and wealth protection needs for more than two generations.

A Chartered Accountant with a background in funds management, Andrew’s career spans more than 30 years. Andrew was one of the first people in Australia to obtain the Self-Managed Superannuation Specialist accreditation and is one of only a few advisers in Australia to be a Certified Investment Management Analyst. He is a lifetime member of the international MDRT Top of the Table and holds a BA Economics degree from Macquarie University with majors in accounting and finance.

Helping clients achieve their lifestyle goals through smart investing and asset management, wealth structures, and strategic planning are the cornerstones of what Andrew and the team at Sherlock Wealth provide.

Andrew can also be contacted at ask@sherlockwealth.com.

 

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