March 2009

2009 is already promising to be a very interesting year for the Self Managed Superannuation Industry (SMSF). The Government's Henry Tax and Harmer Pension Reviews are evoking significant discussion and consideration by SMSF industry participants. As the peak body representing the SMSF industry, SPAA (of which I am a member) will submit a comprehensive submission addressing key issues impacting our industry.

Kylie Wright

Partner

Market Update

It is likely that February will be remembered as the month that the Australian economy got a massive policy jolt. On the fiscal policy side, the Government followed up on the October Economic Security Strategy, worth $10.4 billion, with Tuesday's announcement of its Nation Building and Jobs Plan, worth $42 billion over the next three and half years. The stimulus is broadly split between a $28.8 billion spend on infrastructure and a further $12.7 billion of one-off cash handouts to low and middle income households, starting from March - April this year.

The $28.8 billion spend on various infrastructure initiatives, given the longer lead times for these projects, will be spent from 2009 - 2010 onwards, with $16 billion of the $28.8 billion projected to be spent during that period. The Treasury estimates that the total package will add around 0.5% to growth in 2008 - 2009 and 0.75% to 1% over 2009 - 2010.

On the monetary policy side, the Reserve Bank of Australia (RBA) today eased by 100 basis points in February, reducing the cash rate to 3.25%*; the lowest level in the modern monetary policy era. The RBA said today, “the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad”. The RBA left the cash rate unchanged in their March meeting.

*Source various, Brian Tomas – Perennial February 03/02/09

It appears that investor psychology is divided amongst those who are resigned to staying the course, having lived through their portfolio falling, and those who are more prone to panic. Cashing in growth assets at this point in the cycle (arguably close to or at the bottom) is not sensible, if history is anything to go by.

Example: If your equity portfolio has lost 50%, and you decide to move your funds into cash, with interest rates at 3.25%, it would take nearly 30 years for your portfolio to recover and with no tax relief through imputation credits / capital gains tax discounts (of course interest rates are likely to rise at some stage in the future).

On average during the last nine bear markets in Australia it has taken around three and half years for portfolio values to be restored. Part of the reason this is the case, is that once the sharemarket reaches a bear market or recession low, it typically bounces back reasonably dramatically in the first year after that (on average, 32% over the last nine bear markets). Your portfolio recovery can be significantly improved if you are able to invest new funds into your equity portfolio, particularly if you are able to average in, by investing more funds each month while the market is low.

Logic is on the side of staying the course; particularly with interest rates so low (even five year Government Bonds offer little relief at around 3.2%).

THREE BEST PERIODS TO ENTER THE U.S. STOCK MARKET SINCE 1926

Date	Event	Subsequent 5 Year return
May 1932	Great Depression	367%
July 1982	Worst recession in past 25 years	267%
December 1994	Bond Market Crash - Most dramatic Fed tightening in past 20 years	251%

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

U.S.

stock market returns represented by total return of S&P 500 Index. Three dates determined by best five-year market return subsequent to the month shown. Sources: Ibbotson, Fidelity Management & Research Company (MARE) as at 31/12/06.

S&P 500 peaks and troughs - the market turns before the economy, and usually recovers strongly

Peaks			Troughs			% change in S&P 500
S&P 500	Economy	Lead(Months)	S&P 500	Economy	Lead (months)	Previous 12 months	Peak to trough	Following 12 months
Dec 59	Apr 60	4	Oct 60	Feb 61	4	10.4	-9.0	26.6
May 69	Dec 69	7	Jun 70	Nov 70	5	6.9	-27.8	31.9
Oct 73	Nov 73	1	Dec 74	Mar 75	3	0.3	-38.9	32.3
Dec 79	Jan 80	1	Apr 80	Jul 80	3	12.1	-4.5	30.6
Apr 81	Jul 81	3	Jul 82	Nov 82	4	30.6	-18.6	52.6
Jun 90	Jul 90	1	Oct 90	Mar 91	5	11.3	-14.8	26.0
Aug 00	Mar 01	7	Feb 03	Nov 01	-15	11.9	-43.6	36.5
Oct 07	Jan 08	1	Sep 08	-	-	12.9	-22	-

Source: National Bureau of Economic research and the Wall Street Journal

Note: S&P 500 data reflect monthly averages. The peaks and troughs for the economy are designated by the National Bureau of Economic Research Business Cycle Dating Committee.

Compliance is Critical

For those with Self Managed Super Funds, compliance with the Superannuation Industry (Supervision) Act will be more important then ever. The Federal Government has announced that ASIC will be responsible for raising $545 million in fees and fine this year.

If you are concerned about your Trust Deed, your Investment Strategy all the overall workings of your Fund, please phone us to discuss.

Life Insurance

Your SMSF is able to own Life Insurance on your life. The Super Fund is then able to claim the premium as a tax deduction whereas if the policy was owned in your own name, the premiums would not be deductible.

Often, we can achieve cheaper premiums by restructuring the ownership of your policies and reviewing older policies.

Please call us if you would like to discuss your Life Insurance requirements.

Corporate Powers of Attorney

As mentioned in our last Newsletter, please don't forget to contact us if you require Corporate Powers of Attorneys set up for the Corporate Trustee of your Super Fund.

Turn off the news and don't read the papers

The media loves a good “crisis” and the current global financial crisis is no exception. Many clients are feeling disturbed after watching the nightly news. However I would ask that while you are going about your normal business you really see what is happening. When I visit our offices in Gladstone, Bundaberg and Hervey Bay and go to work in Bundaberg, I still see people eating out, and shopping, signing contracts to purchase property and purchasing larger consumer goods.

While this is a time to be cautious, review your personal debt levels, your portfolio’s asset allocation and your budget, it is certainly not a time for panic.

The good news is:

The Australian economy is in better shape than most of the developed world.
Although it looks like Australia may have a mild recession, the economy should bounce back, as it always has done in the past.
Recessions represent an opportunity for investors to buy good assets at great prices looking forward to the next boom.
Sharemarkets typically bounce back well before the recession is over.
The sharemarket has always bounced back to new highs, although this may take some time.
Most Australians have long-term superannuation assets that will grow over the long-term and are not forced to sell at rock bottom prices.

We have given advice to many clients over the last few years which has saved them substantial amounts in tax payable. It is important that you get advice early before making any decisions which could affect the outcome.

To discuss a new or existing SMSF and to review how best to utilise your SMSF so that you achieve all of the benefits you are entitled to, please phone (07) 4154 0425 to make an appointment.

Please note that Kylie Wright is on annual leave until Thursday 9th April. In the meantime, if you have any queries, please do not hesitate to contact Gemma O'Shanesy on (07) 4154 0426.