Tag Archives: Investments

What do young investors want?

For a while now, I have heard a few finance graduate friends in their early 20s say “I want to start investing, but don’t know how and where to start’’. When a finance student raises such queries, it’s comparable to a medical student entering an operation theatre and asking which instruments to use.

 

When us youngins hear about investing in stock markets, a mental image of men in dapper suits throwing out technical jargon (DRPs, Options, Hybrids, etc.) that many don’t understand comes to mind. All we know is they are talking money! So what do young investors really want?

 

Sharemarket Perception and what the young investors want

As per the ASX 2014 Share Ownership Study, in Australia 15% of the total youth aged 18-24 and just 25% aged 25-34 own sharemarket listed investments. One of the biggest reasons identified for not investing is that they don’t know much about the sharemarket. Another misconception is that a huge amount of money is required to enter the sharemarket. Post GFC, the inclination towards investing in managed funds has also reduced as the older investors suffered losses in those types of investments. So for the young investors it is a dilemma as to where to start and how to diversify.

 

Youth needsyoung-investors

Broadly, after graduation, there are 3 types of youth;

–  those who know exactly what they want to do in life

–  those who haven’t decided yet

–  those who ‘kind of’ know what they want to pursue

 

All of them have one thing in common, everyone wants to be financially stable or at least have regular cash flow to live the dream, be it travelling, paying off student loans, savings for a home, etc.

 

Today’s Gen Y, we want to have it all. Yes it may be wrong to stereotype all Gen Ys as one, but for argument’s sake let’s consider this assumption. We want fast results, we are go-getters and not afraid to take risks. However when it comes to investing and financial independence, our risk appetite stumbles a bit and I feel it should. These are not easy decisions to make but with the correct attitude, information and expert’s help, the risk level can be reduced.

 

So ideally, we want to save for the future, while enjoying the present and we want all of this, fast! All these wants contradict each other at some level. To save for the future, you have to sacrifice a part of your present income which means sacrificing a part of your present living unless you’re born with a silver spoon or have a billion dollar start-up idea!

 

Need for mixing it up

Historically, Australians love dividend paying shares and there has been a tradition of dividend payouts by the big companies. This is because of the tag of being a safer company and investing in them provides an income. However this does not mean you adopt a defensive strategy by investing in dividend paying stocks. The past few weeks of the reporting season saw 65% of companies increase their dividend by a small amount whereas 14% of the companies cut dividends by a large amount (The SMH, August 29, 2016).

 

Even if a person starts investing at the age of 25, there remains another 30-35 years of working life to save, invest and spend as well. A rough calculation of risk taking in investing is the ‘100 – Age’ formula. Say if you are 25, 75% of your investments should be stocks. Conversely, if you are aged 45, then you should have 55% in the share market. This is because when you are young and you lose money on your investments, you have less responsibilities to worry about and more time to build your wealth back up.

 

I recently read a book “Financial Passages” – by Mercantile Mutual Funds Management which truly said that ‘any money you set aside now has plenty of time to work hard for you’. The earlier you learn by taking risks, the better you will get at investing with time.

 

If you are thinking about investing however not sure where to start, contact the team at JBS today to discuss your personal circumstances.


Create | Protect | Enjoy – What are Franking Credits?

Ever wondered what a franking credit is? Well…it’s not what you get when you do a favour for your mate named Frank. (ha ha get it?) Franking credits are a useful little tool to help pay less tax or even boost up your investment returns.

What are franking credits and how do they work?
Franking credits, also known as imputation credits, are essentially credits representing tax that a company has already paid  (currently 30%) on its profits prior to a dividend being paid.

Basically franking credits stop double tax being paid on company profits as the tax paid by the company can then be passed to the shareholder.  So for example, your XYZ share that you own pays a dividend of $1.00 per share after tax. This means that they have already paid the 30%, so this $1.00 is actually $1.43 with $0.43 per share paid in tax. When you come to do your taxes, you get a credit for the $0.43 per share already paid so if your tax rate is 32.5%, you only need to pay the remaining 2.5% on the $1.00 per share dividend received.

Franking credits in superannuation franking credits explained white
In superannuation (accumulation phase), the tax rate is 15%, compared to a company tax rate of 30%. The 15% difference in tax payable, can be refunded to your superannuation account and further enhance the return achieved from your share investments.

Example
Michael holds his super through a SMSF. He has an investment of 500 shares in ABC company which paid a dividend of $3.30 per share. This equates to a lump sum dividend payment of $1,650. With this comes $707 in franking credits (30%). As he is in accumulation phase and only paying 15% on income earnt within the fund, his SMSF is eligible to receive a refund of $353.50.

Franking credits in pension phase
The other good news is that when you are in pension phase and paying 0% tax, franking credits received by your super fund are fully refundable even without taxable income in your superannuation. This means that your super can claim back all the tax already paid by the distributing company from the ATO.

With either a superannuation or pension phase account, you need to understand the structure of your superannuation investments as bundled share purchases like through a pool super trust may not necessarily give you the same tax credits.

Example
Sally has reached age 65 and retired. She now has a pension account with a retail pension provider. Within her balance she holds 1,000 shares in XYZ company that paid a dividend of $8.70 per share. This equates to a lump sum dividend payment of $8,700. With that comes $$3,728 in franking credits (30%). As she is in pension phase and paying no tax, her pension fund is entitled to a refund of the full tax paid ($3,728) which would be repaid into the cash account of her fund and will help to cover ongoing pension payments.

Franking credits can be a great added extra in returns alongside growth and income to boost the overall return. They should most certainly be a consideration when developing an investment portfolio for your retirement funds. If you want to learn more about franking credits or direct shares, don’t hesitate to contact one of the team members at JBS.