The golden rules of share investing + why we need better financial literacy

Hi everyone,

Lots of mixed signals when it comes to the economy and sharemarkets. But while everyone is doing it tough, the federal government is literally rolling in cash.

I’m sure that makes you feel better? Not.

This week Federal Treasurer, Jim Chalmers, revealed the last financial year’s budget surplus could be as much as $15 billion. In May, he forecast $9.3 billion and the previous May he forecast a 2023/24 budget deficit of $20 billion.

Remember when he forecast that deficit, I challenged him on Sunrise that he had massively underestimated tax revenue from iron ore and coal exports, and the reality, it would be a surplus not a deficit?

While that ended up being correct, the other reason the federal government is making so much money is that they are taxing you and me at record levels.

The Howard Government imposed a ceiling of how much the government could slug us in tax. That ceiling was 23.9 per cent of GDP (the value of the economy). It looks like the Albanese Government is now taking more than that.

It’s infuriating.

In this week’s newsletter:

• Big jobs growth, but where is it coming from?

• Should we be worried about the sharemarket’s record high?

• The best performing superannuation funds for last financial year.

• The rental market is starting to ease.

• Why we have to get better at financial literacy in school.

Unemployment stays low … for now

The June employment figures are in and while the unemployment rate rose slightly to 4.1 per cent, there were 50,000 new jobs created in the month which was a lot more than the 39,000 created in May and the 20,000 expected by many economists in June.

The reason the unemployment rate rose when there was such strong jobs growth was because the participation rate rose. That is, the number of adults in work. Australia has one of the highest percentages of adults in work in the world.

As you know, I’ve been a bit fearful that the unemployment rate hasn’t been reflecting how bad the jobs market is with record business insolvencies and big company retrenchments. Plus job advertisements are down and more people are applying for each job. All signs that the jobs market is softening.

But it’s not being reflected in the official figures. Is it because those who have recently lost their jobs are working through their holiday and retrenchment payout before they become eligible for JobSeeker and are officially counted?

CommSec has looked at where the new jobs are being created and found they are mostly in the government sector in health, NDIS, education and aged care. While there is a big downturn in jobs in business and industry.

An unemployment figure like this adds to the pressure for the Reserve Bank to lift interest rates at its August board meeting. I doubt that will happen based on yesterday’s employment figure. I reckon the RBA knows how weak the jobs market is despite the official unemployment number remaining low.

However, the June quarter CPI inflation figure is released 31 July and will now be pivotal for the RBA decision.

Why are sharemarkets at record highs?

Cost of living is biting, high interest rates are hurting borrowers, the economy is slowing to barely a crawl, retrenchments are running hot - and the sharemarket has been making a new record high this week.

WTF ... how can that be happening?

Australia’s All Ordinaries Index has smashed through 8000 points to a new record high this week. In the US, the Dow Jones index and the broader S&P 500 both jumped to record highs. The S&P 500 is up 19.5 per cent since the start of the year and 37 per cent over the last 12 months.

Over the last year the US market has mainly been driven by the ‘magnificent seven’ technology giants - Nvidia, Microsoft, Amazon, Apple, Alphabet (Google), Meta (Facebook and Instagram) and Tesla - because of the perceived benefits of AI.

The rest of the companies and sectors have largely been left behind by comparison, until this week. In just five trading sessions this week the Russell 2000 Index of US ‘small’ companies rose 12 per cent ... over just five days.

The Australian sharemarket has been dragged along by this euphoria and your superannuation fund performance will be a big beneficiary.

But is this euphoria justified or is it a bubble ready to burst? Is this as good as it gets? These are the big questions spooking many investment analysts.

And the big falls on Wall Street overnight is adding to those worries. Is this the start of the tech bubble deflating? It’s probably a bit early to make that call.

The weak economy doesn’t seem to justify the euphoria and the bond markets are signalling that the sharemarket is way overvalued. What makes me nervous is that bond markets were giving similar signals prior to the Global Financial Crisis.

The world’s best investor, Warren Buffett, has a famous investment mantra that investors should be, “fearful when others are greedy, and greedy when others are fearful”. Are we at peak greed?

Over 20 years ago, Buffett devised a formula for judging whether the sharemarket is overvalued or not. The so called ‘Buffett Indicator' measures the total value (capitalisation) of US shares and divides it by the value (GDP) of the US economy. 

The Buffett Indicator is currently at a record high of around 200 per cent. The previous high was November 2021 and the market dropped 25 per cent over the following nine months.

I don’t mean to hose down the sharemarket party. You just need to keep it in perspective, follow it carefully and keep in close contact with your investment adviser or broker.

The best advice I’ve received on what to do is from Henry Jennings of the Marcus Today investment newsletter:

• Nothing yet. Enjoy the ride.

• Don’t sell anything until it starts (the best bits are the frothy bits, don’t miss them by being pious about “value”. This is about exploiting the herd not assessing value).

• Don’t buy anything up here.

• Don’t predict the top ahead of time.

• When it does start, do something. Make a decision. Even if you’re wrong to sell, your only risk is not making money. I think you can handle that.

It is a really sensible approach. And it’s a good time to brush up on the ‘golden rules of share investing’, which I’ve put together from talking to sharemarket gurus over the decades.

The sharemarket is really a great mixture of human emotions, hopes, fears, greed, enthusiasm, stupidity and even sometimes wisdom. So, you can see the benefits of having a basic set of principles to guide you. Remember these ‘golden rules’:

1. Do your homework before buying

Don't buy or sell on rumour, hunch or impulse. Get hold of broker reports and the company's last annual report, read the financial media and of course talk to your adviser. Buy shares that fit in with an investment strategy, such as for income, growth or both. 

2. Balance the risk and reward factors

If what you read and hear suggests that the share has more chance of falling in price than rising, don't buy. Look closely at past performance and future prospects. Remember the sleep test - if the worry of your shares falling keeps you awake at night, don't buy them. Unless you're a speculator (i.e. gambler), be satisfied with steady progress. 

3. Keep checking after you've bought

Investment conditions can change, company management can change, the company's objectives can change. Review shareholdings at least once every six months in consultation with your broker or adviser. 

4. Exercise patience

Don't expect to become wealthy overnight. Most shares will need at least a year to show some reasonable appreciation. 

5. Don't forget shares can bring income and capital appreciation

We often ignore the impact of dividends. Estimate both these factors and relate them to your personal tax situation. 

6. Be alert to trends

In your daily reading, try to put the news through an investment filter. Political, economic, scientific events may have implications for some companies. If you get any ideas, check them out further and talk to your broker. Being ahead of the herd can mean nice profits. 

7. Be prepared for unexpected events

If the event concerns any of your shares, don't panic. Review the situation promptly before taking any action. For instance, a sudden drop in a share price may well mean an institutional investor has sold a large parcel, and the price may rebound within a day or two. 

8. Don't try to back every horse in the race 

It is far better to hold a smaller portfolio of shares which you know well and are comfortable with than to invest in a larger number of companies in the hope of picking more winners. 

9. Timing can be important 

If the share you want is being actively traded, buy at "market price” - which is an order to the broker to get the best price possible. With shares that are beginning to attract interest, you can sometimes save money by waiting for a brief price dip. 

10. Take a loss quickly

Don't let pride or stubbornness prevent you from accepting a mistake and correcting it. One big profit makes up for a lot of little losses. So keep them small. 

11. Keep an eye on the ex-dividend date

When a company declares a dividend, all shareholders on the books at that date receive the dividend, and usually the price of the shares will drop by approximately the same amount. Sometimes, the price of the stock will move back up within a day or two. Naturally if you buy on the date it's announced, you won't receive the dividend. 

12. Follow the market

Don't try to beat the trend. In bear markets, be cautious. In a fluctuating market, think twice. In bull markets, take greater risks. 

13. Take profits

It is better to make a little less profit by selling too soon than to take the greater risk of overstaying the market in a stock which is overpriced.

Your superannuation fund returns have had a good year

Research group SuperRatings have reported their top super fund managers for the last financial year. Funds recorded another impressive year of returns with international technology and Australian banking shares driving above average returns over 2024. 

If your superannuation fund is not in the top 10 fund performers then you have every right to ask why. Use these results to benchmark your fund.

It was certainly a tricky year. Concerns over inflation caused a slow start to the year, with multiple negative monthly returns recorded until October 2023. Increased confidence in the outlook for inflation and ongoing developments in artificial intelligence led a market rally from November to March. While higher than expected, inflation data led to a stumble in April and returns recovered quickly to finish the year strong. 

Given the significant range of outcomes across different months it remains important to focus on longer-term outcomes, with funds continuing to prove they can deliver good outcomes over various market cycles. 

All balanced funds - those with a strategic allocation of between 60-76 per cent of their portfolio invested in growth assets - are expected to deliver positive returns to members. While the top-performing funds provided members with double digit returns over the financial year. 

Of the balanced funds, Hostplus’ Indexed Balanced option was the top performing option returning 12.2 per cent, closely followed by Raiz Super’s Moderately Aggressive option and Colonial First State’s Enhanced Index Balanced option with returns of 12.1 per cent and 11.4 per cent respectively.

In a repeat of 2023, funds with a higher exposure to shares and listed assets generally outperformed for the year, while those with greater exposure to unlisted property reported more subdued outcomes. As a result, members who were invested in index funds generally outperformed more actively managed options - given the strong focus on, and allocation towards, listed shares.

Signs the rental market is continuing to ease

Rents are a major contributor to inflation and, as many of you know, I’ve been watching it pretty closely over the last few months as there have been a few leading indicators showing the rental crisis could be easing.

According to SQM Research, those easing signs have continued over June with a rise in the number of vacant rental properties across the nation. 

Sydney recorded a rental vacancy rate of 1.7 per cent for the month which was up from 1.4 

Canberra has the highest rental vacancy rate out of any state or territory at 2.1 per cent while Perth and Adelaide have the lowest at just 0.8 per cent and 0.7 per cent respectively. 

Vacancy rates in the Central Business Districts of Sydney, Melbourne, Canberra and Brisbane all continued to record increases over the month of June, which SQM Research says is because student demand for rental accommodation has peaked for the winter months and may have peaked in this cycle given the expected slowdown in migration rates.

As vacancy rates rise, asking rents start to soften as well because there is more stock available. Over the past 30 days the capital city asking rents recorded a minor increase of 0.1 per cent. The overall national change was a rise of 0.3 per cent.

Sydney recorded the second consecutive month of rental falls; dropping by 0.4 per cent to $837 a week. Brisbane turned over from a rise in rents recorded in May to a slight decrease of 0.1 per cent to $658.85 in June. Once again, Perth recorded the fastest rental growth for the past 30 days at +0.9 per cent. 

The national median weekly asking rent for a dwelling is now $721 per week. Sydney continues to have the highest weekly rent for a house at $1,040 per week, while Hobart offers the most affordable unit rents among the capital cities at $468 per week. 

Let’s do something about financial literacy

It is a common concern that Aussie kids aren’t learning anywhere near enough about personal finances, with most Aussies receiving little to no money education at school.

In today’s difficult economic climate, knowing some budgeting basics could be the difference between saving for life’s small pleasures and sliding headfirst into debt.

And for a long time, we’ve been told that it’s a parent’s responsibility to teach their children about finances. But times have changed.

While parents still play a key role in transferring financial attitudes, behaviours and knowledge to their children, many people feel the school curriculum could be improved.

A recent Compare the Market survey revealed that 65 per cent of people said that ‘how to be smart with money’ is the most important topic that should be taught in school. This was followed by how the economy works (13 per cent), the taxation system (6 per cent), and debt (5 per cent).

Nowadays, it’s rare for one parent to work while the other stays at home to raise their kids. The rising cost of living has made it nearly impossible to survive on one income. In Australia, both parents often work full-time jobs to support their family.

This means they would only have weeknights, weekends, and holidays to teach their kids about money.

Remember though that children adopt their financial habits from observing their parents. So, we all have to set a good example in this area.

But more than 95 per cent of Australians believe children should receive greater education about managing personal finances and budgeting during school.

In the same survey, a startling 18 per cent of respondents said they were never spoken to about money, and 29 per cent said they were rarely spoken to about money. Meanwhile, over a third of people said they were sometimes spoken to about money (34 per cent). Just 19 per cent said their parents spoke to them often about money.

The thing is, money used to be such a taboo topic no one spoke about how much they earned or what their money goals were (if they had any).

Although it’s improved with the rise of the digital age and access to information, there’s still a lot of work to do to improve financial literacy.

According to a study from the University of Western Australia, 8.5 million Australians - 45 per cent of the adult population - don’t understand at least three basic financial literacy concepts: interest rates (especially compounding interest), inflation and diversification.

These basic financial topics affect everyone, yet none of them are taught in school unless you opt into an economics subject.

What can the government do?

A number of advocates, including the Ecstra Foundation and Your Financial Wellness group, have recommended the government reactivate the National Financial Capability Strategy.

This strategy used to be run by the consumer regulator ASIC, and has been recently transferred to the Federal Treasury, but we haven’t heard anything since 2022.  

Treasury should make financial literacy a compulsory unit in the school curriculum. Students need to be taught ways to manage their personal finances, budgeting, how to pay bills and the importance of saving money.

While it may seem like common sense to some, there’s a reason why Buy Now, Pay Later services have taken off. People don’t want to save up and wait for their reward, they want it now.

Which is exactly why Buy Now, Pay Later services, just like credit cards or loans, should be spoken about in school as well.

These are all essential life skills that many of us have had to learn on the go and, unfortunately, some people have suffered financially because of their lack of financial knowledge.

The government needs to commit to a national strategy that will provide funding for developing financial literacy and investigate where we have previously gone wrong.

Financial illiteracy can lead to debt, poor credit, bankruptcy, housing foreclosure and other negative consequences.

However, financial illiteracy doesn’t just affect individuals; it also increases the financial risk to the economy... which is precisely why the Treasury should be concerned.