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Bitcoin is a volatile investment

The Crypto Craze

2020 was a rollercoaster ride for investors, as we experienced the most volatile stock market in decades. However, the 30-40% dip experienced by ASX investors in a mere matter of weeks is nothing in comparison to cryptocurrency investors and Bitcoin fanatics who can experience this on a daily basis. Bitcoin has been all over the news recently as it has surpassed the psychologically important level of US$50,000 per coin on the back of Tesla’s $1.5 billion investment. This leaves the question, what exactly is a Bitcoin and can we view it as a valid investment?

What is Bitcoin

Attempting an analogy to explain Bitcoin is no easy task as there is nothing quite like it. Even the best comparisons out there will be imperfect.

Bitcoin is a virtual currency created in 2009 as an alternative to government issued ‘medium of exchange’, which most of us know as physical money. It is designed to hold a similar function as a ‘store of value’ with the closest comparison being gold, this is why many refer to Bitcoin as ‘Digital Gold’. The major difference between Bitcoin, gold and cash is that you cannot hold onto a Bitcoin and you definitely cannot fashion it into a piece of jewellery, it only exists on an electric file. Transactions for Bitcoins are recorded and distributed via a decentralised ledger, which removes the need for government control in the regulation of money supply, and hence Bitcoin is referenced as ‘Decentralised Money.’

Is Bitcoin money?

There are generally three functions of money:

  • Money is a store of value: Consider it as a means of saving and allocation of capital. The issue with physical money is that inflation will erode the associated purchasing power over time.
  • Money is a unit of account: This allows it to measure value in transactions and facilitates a means of exchange. All financial terms around profits, losses, income, expenses, debt and wealth can be measured against money.
  • Money as a means of exchange: Put simply, you can buy things with it and it will be accepted almost anywhere and everywhere. Grocery shopping, buying a home or even lending services are all applicable with a universal understanding and acceptance of money.

Bitcoin has been surging in popularity; however, it is nowhere near being universally accepted as a unit of account or a means of payment. In light of recent events, some countries have even gone so far as to ban it entirely. Quoting billionaire Mark Cuban “Bitcoin would have to be so easy to use it’s a no-brainer. It would have to be completely friction-free and understandable by everybody first. So easy, in fact, that grandma could do it.”

Is Bitcoin like gold?

The common theme around Bitcoin and gold is that they are both speculative in terms of their valuations and are both viewed as a hedge to conventional monies such as the USD. The main reason Bitcoin is more closely aligned to gold as opposed to shares is that cash flow, revenue, earnings, interest payments or dividends do not determine the prices of these instruments. They are only worth as much as people are willing to pay for them as an alternative asset and as a ‘store of value’.

Bitcoin specifics

  • Bitcoin is a cryptocurrency; however, it is only one of the many thousands of cryptocurrencies available on the digital market.
  • A cryptocurrency is held electronically and can be used to buy goods and services online.
  • Cryptocurrencies are powered by Blockchain, which is a decentralised technology that manages and records transactions spread across many computers.
  • Bitcoin is not dependant on central banks or governments in control of the money supply. It also does not flow through the traditional banking system.

To put it simply, regular people like you and I can contribute to the record-keeping of Bitcoin transactions via our private computers, however in reality, it is not that simple. The key takeaway is that Bitcoin is decentralised which removes the need for central banks (such as the Reserve Bank of Australia) and retail banks (such as our Big 4, CBA, WBC, ANZ & NAB). For those with little faith in government regulation and a heavy distrust in our banking system, this is Bitcoins greatest appeal yet this same definition around unregulated monies is also why so many stay far away from the digital asset.

In summary, we are not able to conclude whether Bitcoin can be viewed as a valid investment. It is somewhat similar to money, somewhat similar to gold and the price volatility of late bears similarity to an extremely volatile stock market. What we can agree on is that the digital asset cannot be ignored, with over $1.5 Trillion in cryptocurrency assets, it will be interesting to see if Bitcoin is still around at the end of the decade.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. Bitcoin is not on The Investment Collective’s Approved Products List and will not form part of any client portfolios. If you would like more tailored advice, please contact us today.

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Piggy Bank

RBA cuts rates to record low

Philip Lowe, Governor of the Reserve Bank of Australia (RBA) announced a further cut to the cash rate down to 0.1% on 3 November 2020. This is a 0.15% reduction from 0.25%, which was held since March 2020. This is broadly in line with market expectations and brings Australia’s official interest rate in line with rates in comparable countries (which is around zero). For investors, it means lower rates for longer, with a rate hike unlikely in the coming years.

What is driving the latest easing?

Put simply, the RBA’s economic forecasts show that it does not expect to meet its inflation and employment objectives over the next 2 years and sees the recovery as being bumpy and drawn out. The RBA has been undershooting its 2-3% inflation objective for the last 5 years now.

Will the banks pass on the RBA rate cuts?

Passing all of the 0.15% cut will bring some downward pressure on bank profit margins as a significant chunk of deposits are already at or near zero rates. However, I believe the banks will pass most of it on as they will be under pressure from the RBA and the government who have been providing them with a lot of support (including cheap funding which is now 0.15% cheaper). If they do not, they will face public backlash.

Implications for investors?

There are a number of implications for investors from the latest easing by the RBA.

First, ultra-low interest rates will likely be with us for several more years, keeping bank deposit rates unattractive, so it is important for investors in bank deposits to assess alternative options.

Second, the low interest rate environment means the chase for yield is likely to continue supporting assets offering relatively high sustainable yields. This is likely to include Australian shares where despite sharp cuts to dividends, the grossed-up for franking credit dividend yield on shares remains far superior to the lower yield on bank term deposits. Investors need to consider what is most important; getting a decent income flow from their investment or absolute stability in the capital value of that investment. Of course, the equation will turn less favourable if economic activity deteriorates again.

Third, the ongoing decline in mortgage rates along with easing lending standards will help boost house prices, but bear in mind that high unemployment and a hit to immigration will likely impact throughout the year ahead. The housing outlook also varies dramatically between cities given the rising demand for outer suburban and regional houses over inner city units.

Finally, lower rates and increased quantitative easing will help keep the Australian Dollar lower than otherwise, but it is still likely to rise over the year ahead if global recovery continues and this pushes up commodity prices.

If you are not satisfied with the interest rates on your savings or require assistance in reducing the interest rates on your mortgage, please speak to your financial adviser or a mortgage broker.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Retirees looking over sunset

Aged Care – What’s the cost?

2020 has been an unconventional year, in which we have been faced with a once in a lifetime global health pandemic and our first recession in 20 years. A hot topic of late is the quality and safety of our aged care system, with the federal governments Aged Care Royal Commission well underway.

However, regardless of any flaws in our aged care system, it is still a key consideration for every Australian retiree and something that needs to be addressed as we get on with age and the need for ongoing care escalates. Below is a breakdown of the costs that you should expect if you are considering a move into an aged care facility.

Basic daily fee:

  • Payable by all residents as a contribution for day to day living costs such as meals, cleaning, laundry, heating and cooling.
  • Equivalent to 85% of the basic single person Age Pension.
  • Currently $52.25per day (residents in designated remote areas may pay $1.06 per day more).

Accommodation payment or contribution:

  • Cost of accommodation which may be payable depending on assets and income as well as choice of room. Also known as the applicable room fees, this can be negotiated with the aged care provider.
  • Payable by residents not eligible for government subsidy in respect of cost of accommodation, however, partial subsidy may be required depending on asset/income assessment.
  • Can be payable in either a fully refundable lump sum (RAD) or a daily accommodation payment (DAP) or a combination of both.

Means-tested care fee:

  • Contribution towards cost of care which may be payable depending on assets and income.
  • Income Component Thresholds – $27,840.80 per annum for singles and $27,320.80 (each) for a couple who are separated by illness. In a nutshell this means the tested fee will only apply to you if you earn above these income thresholds.
  • Asset Component Thresholds – There are three levels of asset thresholds which determine if you are low means, moderate means or high means. The asset free threshold for low means is $50,500, moderate means is $171,535.20 and anything above $413,605.60 is high means.
  • Subject to annual and lifetime caps with a current annual capping on fees of $28,087.41 and a lifetime capping of $67,409.85
  • Currently the maximum means-tested care fee payable is $256.44 per day.

Additional charges / Extra services fee:

  • Any other amounts agreed between the resident and the residential care facility.
  • Includes additional care or lifestyle options.

Furthermore, you will need to consider whether to keep or sell the family home and for couples a key consideration is to decide if you move into care together or become separated by illness. It is a very complicated process and every scenario needs to be assessed based on its unique circumstances.

Please contact one of our financial advisers if you need advice in this area.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Investment quotes to embrace during a crisis

Investing can be frustrating and depressing at times, particularly if you don’t understand how markets work and don’t have the right mindset. This is especially true given the rollercoaster ride we are currently experiencing due to the COVID-19 pandemic. The following investment quotes are extremely relevant and provide a great foundation which stays true regardless of market volatilities and uncertainties.

“If you fail to plan, you plan to fail.” – Benjamin Franklin

Having a clear understanding of your investment goals and a plan on how to get there when saving for a home, retirement or generating income to live on is critical. If you don’t have a clear plan you will be subject to all sort of distractions which can impact where you want to get with your investments. Having a financial adviser assist in setting up a plan and ensuring that you stay on track is a great way to help you achieve your financial aspirations!

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” -John Bogle

Successful investing is all about knowing yourself. Smart investors have an awareness of their weaknesses and seek to manage them. One way to do this is to take a long-term approach. If you want to trade day to day then you need to recognise that this requires a lot of effort, a rigorous process and a willingness to go against the crowd. Having an understanding of your own tolerance to risk and aligning your investments to that risk level ensures that you don’t get lost in all the noise and stay confident in your long term financial decisions.

“Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett

Beware of the herd! Buffet warns of buying irrespective of prices during a bull market and selling out of fear during downturns. When others are greedy, prices typically boil over, and one should be cautious lest they overpay for an asset that subsequently leads to anemic returns. When others are fearful, it may present a good value buying opportunity. Prime examples of substantial returns include; post Global Financial Crisis (GFC) in 2008/09 and the recent market recovery post the March COVID-19 sell-off. It is often emotionally difficult to make these decisions and act in contrary to the broader market which is why having guidance from a professional adviser can assist in making the tough yet profitable decisions in the long run.

If you can truly understand and take the above investment philosophies to heart then you should have no problem sticking to our own investment strategies, embrace risk and invest in alignment to our own risk appetites and last of all take advantage of short term market mispricing by going against the crowd which would have the greatest chance of securing fruitful returns in the long run.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Support Measures – COVID-19

Given the escalating numbers of COVID-19 cases in Australia, we have had to change our lifestyle very quickly to incorporate social distancing and more recently put up with state-wide lockdowns. The government has made a series of announcements on the 22nd of March 2020 which are designed to provide support to people impacted by the virus.

The new measures announced are predominantly in the area of Superannuation legislation and social security.

Summary of these measures;

  • Reduction in minimum pension
  • Early access to super benefits
  • Reduction in social security deeming rates for the incomes test

Reduction in minimum pension

Across the board, minimum pension drawdown rates for market linked income streams are reduced by 50% for the 2019/20 and 2020/21 financial years. The aim of this measure is to support retirees who are not required to draw the current pension minimums and can reduce pension drawdowns to avoid selling investments in a depressed market.

This will not affect you if you need the current minimums to survive, already drawing above the minimum pension or currently drawing an income from a complying lifestyle pension.

Early Access to super benefits

Access to superannuation benefits will be opened up from mid-April. The temporary access allows affected individuals to access up to $10,000 in each of the 2019/20 and 2020/21 financial years for a maximum of $20,000 of tax-free superannuation withdrawals.

You must meet the following criteria’s to qualify;

  • You are unemployed
  • You are eligible to receive a JobSeeker Payment, Youth Allowance for job seekers, Parenting Payment, Special Benefit or Farm Household Allowance
  • On or after 1st of January 2020, you were made redundant or your working hours were reduced by 20% or more or if your businesses was suspended as a sole trader.

This is designed to be a last resort for those with no other means of attaining funds to meet their current living expenses.

However, this could be a huge trap for those who utilise the withdrawals by meeting the above conditions but do not actually require the funds. Younger Australians in the early stages of building their super could be most at risk, as they could take funds out of super just for the sake of security. Given the power of compound interest, removing $20,000 from a super fund 20 or 30 years prior to retirement access could have a devastating impact on their final retirement balance.

Reduced social security deeming rates

A direct loosening to Centrelink’s income test, whereby the upper and lower social security deeming rates will be reduced from 1st of July 2020 to 0.25% up to the threshold and 2.25% above the threshold. This is an overall reduction of 0.75% from the default 1% up to the threshold and 3% above the threshold.

An individual with $550,000 in financial assets on the default deeming rates of 1% and 3% will have their age pension reduced by $65 each per fortnight. Under the new transitional deeming rates, their pensions will only be reduced by $32 per fortnight. The key to consider is that deeming is only a part of the incomes derived by the client, which is dependent on the level of financial/investable assets and the loosening of the deeming rates will not help if your prevailing test is the Assets test.

Further measures are set to be announced in the coming weeks, however, it seems as though these initial changes will provide relief to those who are impacted.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Credit Card 101

Credit cards have long been helping people pay for things they need or want. You may be very familiar with them or you may be a newbie in the world of credit who is contemplating applying for your first card. Effective utilisation or misuse of credit cards can make or break your financial well-being.

Before we go through the complexities of credit cards, you must first understand what credit is. Credit is the means to borrow money/access goods or services with the mutual understanding that you’ll pay later. Have you ever borrowed money from a friend for lunch or a colleague paid for your coffee because you left your wallet at home? That effectively is them giving you credit! Of course, with the intention and trust that you’ll pay them back later. We use credit all the time and credit cards are just one of many financial tools used to attain a set amount of credit, commonly via a licensed financial institution such as a bank.

One of the defining benefits of credit cards is the fees, charges and interest associated with using the card. Commonly there would be a fee to set-up the card which is generally charged annually, there are late payment and overdraw fees and also varying levels of interest depending on how you’ve spent the credit. There are often substantial fees associated with taking cash out using a credit card and in general, if you don’t pay off your card in full at the end of each month interest will be charged and backdated too!

Pros of credit cards

  • Easy to carry and use – Easily fit in your wallet, pocket or phone case!
  • Safer than cash – With the exception of contactless payments, it’s generally quite limited before you have to enter a pin for the purchase.
  • Buy now, pay later – Which is the one crucial benefit of a credit card. As of late, there have been a series of different options in the BNPL space but we’ll touch on that in a different session.
  • You’re protected – Fraud protection and monitoring are generally facilitated by the card provider and you’re generally not held liable if your card is stolen or misused.
  • Freebies! – Which to some is the one major benefit of using a credit card. Rewards and frequent flyer points are commonly associated with mid-top tier credit cards and the benefits can easily outweigh the associated fees if used correctly.

Cons of credit cards

  • High-interest payments – Credit card interest rates are applicable if you don’t clear the outstanding balance at the end of each month. These rates are generally much higher than a standard home loan or personal loan and it would be wise for any financial minded individual/family to avoid these payments at all costs.
  • The associated debt spiral – A common trap of the credit card is that you only have to miss one payment and interest will start to add up. Unless you pay off the FULL amount each month, interest will be charged on the FULL amount owing regardless if you’ve paid off half of the balance, 80% of the balance of 99% of the balance. If you get into the habit of not paying it off in full, your debt situation will quickly spiral out of control.
  • Additional fees – As well as interest there is generally annual fees, overdrawn fees or late payment fees. These can sting quite a bit and more importantly, you may have to pay interest on it!
  • Expensive to use abroad – Some cards are a bit friendlier and designed for travellers but most cards will charge excess fees when used in a different country than its origin. Often an additional 1-3% of fees on each purchase which can add up whenever you decide to go on a nice holiday!

To conclude, there are a ton of benefits in owning a credit card, such as flexibility with managing your cash flows and access to additional free benefits. But this can come at substantial a cost if not managed correctly and you can easily fall into financial stress if you get silly and spend on things that you cannot afford!

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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2020