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2022 Continues: Bond Market Update

We have seen some volatility to start 2022. As the world is getting used to living with Covid-19 combined with the events in Ukraine, this is no surprise. The next challenge investors are facing is what is being described as the ‘Bond Bear Market’.

Endorphin Wealth works in collaboration with Oreana, to provide the best investment solutions for our clients. Oreana provide insightful market updates on such ‘Bond’ topics and how they impact investments.

Below is their latest update regarding the current Bond Market situation:

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One of the factors making a bad situation worse for investors at the moment is that returns in the so called ‘defensive’ part of their portfolio called fixed interest (or bonds) is going the same direction as the ‘growth’ part – down. This is adverse to the role they are meant to be playing. We have a look at the factors driving this dis-allocation and what it means for investors in diversified portfolios.

Global bonds have faced terrible start to the year. The 6.2% decline in the ‘Bloomberg Global Agg index’, is the worst start to the year since we have data from the early 1990s. It is also the third worst quarter on record since then. In Australia, the broad Australian Composite index has experienced its worse quarter, falling 5.9%.

Global central banks have started hiking rates in response to unexpectedly high inflation readings, pushing yields higher (or bond prices down). It is therefore a challenging time for the asset class many investors define as “Defensive”.

Firstly, it is worth reminding ourselves why we hold different types of bonds, and their role in a portfolio which also typically holds shares, and cash.

Capital preservation

Bonds repay principal at a specified date, called the maturity date. This feature is appealing for investors who do not want to lose capital or need to meet a liability at a particular time.

Income

Most bonds provide a fixed income, which is paid at scheduled periods each year.  A coupon payment which can be spent or reinvested is sent by the bond issuer. The income return of bonds becomes more attractive as yields increase.

Diversification

Different types of bonds – issued by governments or corporations – are impacted by macroeconomic and idiosyncratic risks differently to equities. The low and in some cases negative correlation with equities and other assets can help reduce overall risk within a portfolio.

Downside risk hedge

Some bonds – particularly high-quality government bonds like US Treasuries – can help protect against economic slowdowns. During recessions, when interest rates are cut and growth assets are subject to significant downside volatility, government bonds tend to see their yields decline and their prices increase, providing a hedge against the economic risk.

Capital appreciation

Bond prices can increase for many reasons – including falling interest rates or credit quality improvements. Buying bonds at prices below par and capturing the capital appreciation increases the total return of the bond, which is the combination of the income and the capital appreciation.

Where to from here?

Investors often think as bonds as defensive, or “safe”. But as described above, bonds play many roles in a portfolio. It is important to focus on those roles, and the outlook, particularly in a period where bonds have suffered capital losses.

From here we expect government bond yields to continue to drift higher over the coming 6-12 months. That will be a challenging environment for fixed income. But higher yields will provide higher income, more downside protection, and in time, more scope for capital appreciation.

Endorphin’s internal Asset Allocation views has meant we had already been moving away from government bonds and longer maturity bonds, in favour of shorter maturity corporate bonds. While that has helped, the overall bond market is in a bear market. It has been challenging, particularly over Q1 2022 which is the third worst performance for the asset class since the early 1990s.

We think it is important to avoid knee-jerk reactions within diversified portfolios, we have actively been adjusting bond exposures, and identifying alternative investment opportunities that may help achieve some of the objectives traditionally identified with bonds – income, for example, or diversification.

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Contact Endorphin Wealth for more assistance

Your advisor will be able to consider all possible scenarios and factors, all of which should help to ensure that your investment plans have a successful outcome.

For an obligation-free conversation about your financial future, please contact us on 03 9190 8964 or at advice@endorphinwealth.com.au.

The team at Endorphin Wealth are passionate about helping people achieve their life goals with great financial planning. We are not licensed or owned by big banks and financial institutions. So the financial planning and wealth management services we provide is always in our client’s best interests.

We have the advantage of being able to access a range of products from different providers. This means that our advice can be tailored to our client’s goals. We have offices located in Sydney and Melbourne, where you can find a financial advisor that is suitable for you.

Reach out today to speak to an Advisor who can guide and support you down the right path for success.

Three Simple Techniques to Reduce Your Tax

With the end of the fiscal year approaching sooner by the day, it is a better time than ever to start thinking about ways you can effectively save on tax. With our experienced advisors at Endorphin Wealth, we have come up with three simple tips that will help you minimise your tax.

1. Claim all available tax deductions

You may be able to claim a tax deduction for many of your expenses. These may include:

  • donations to registered charities or non-profit organisations;
  • self-education expenses;
  • premiums on income protection insurance;
  • work-related expenses.*

*The range of permissible work-related expenses varies widely from occupation to occupation.

Refer to the Australian Tax Office (ATO) website www.ato.gov.au for full details.

2. Contribute to superannuation

Superannuation contributions can reduce the level of tax you would otherwise have to pay on your investments.

Salary-sacrificed or pre-tax concessional contributions made into your super are generally taxed at 15%. If your assessable income together with concessional contributions exceeds the income threshold of $250,000, your concessional contributions may be taxed at a total of 30%.

You may also be eligible to claim a tax deduction for contributions made to super. To do this, complete and submit a notice of intent to claim or vary a deduction for personal contributions form (NAT 71121)[1] and receive an acknowledgement from your superannuation fund.

As there are also other eligibility criteria[2] that you must meet, it pays to seek advice smsf investment advice from your financial advisor.

3. Manage capital gains

Capital gains are made by selling investments at a profit. Assets acquired before 20 September 1985 are exempt from Capital Gains Tax (CGT) considerations.

When you sell an asset for less than you initially paid for it, you make a capital loss. When your total capital losses for the year outweigh your total capital gains, you will finish up with a net capital loss for the year.

If you have a potential CGT liability, there are a few strategies that you could consider to reduce the amount you need to pay.

Keep an investment for at least 12 months

Investors are entitled to claim a 50% discount on capital gains on assets that are held for longer than a year. By holding on to the investment for more than 12 months you will halve the CGT payable.

Delay any gains until the new financial year

If you are thinking of selling a profitable asset, such as shares or property, it may be worth deferring this sale until after the end of the financial year. By doing so, you will delay incurring CGT for another financial year. While you will need to pay the CGT eventually, freeing up short-term cash flow may be beneficial, depending on your circumstances.

Use carry-forward tax losses to reduce CGT

Capital losses incurred in previous tax years that have not already been offset against capital gains may be carried forward in future tax years. This can mitigate the effect of any CGT liability. Check your past income tax returns or ask your accountant to determine whether this is an option for you.

Where to learn more about reducing tax

The team at Endorphin Wealth have both the experience and knowledge to help keep your tax liability to a minimum.

For an obligation-free conversation about your financial future, please contact our financial planners in Melbourne on 03 9190 8964 or at advice@endorphinwealth.com.au.

The advisors at Endorphin Wealth are passionate about helping people achieve their life goals with great financial planning. We are not licensed or owned by the big banks and financial institutions, so the advice and solutions we provide is always in our client’s best interests. We have the advantage of being able to access a range of products from different providers to ensure that our clients’ needs are our primary focus. Our offices are located in Sydney and Melbourne, where you can find a financial advisor suitable for you.

[1] https://www.ato.gov.au/forms/notice-of-intent-to-claim-or-vary-a-deduction-for-personal-super-contributions/
[2] https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/claiming-deductions-for-personal-super-contributions/?anchor=Areyoueligibletoclaimadeduction#Areyoueligibletoclaimadeduction

Endorphin Wealth Welcomes Christian and Peta

We are pleased to announce the growth of our Endorphin Wealth family.

Welcome Christian and Peta!

Christian and Peta have joined our team from the 5th April 2022.

Christian is joining our experienced adviser team and is excited to get started and make a difference to all clients he meets.

Peta is also joining us with experience in the advice support. Peta is our newest inhouse paraplanner and will he supporting our advisers in creating our advice documents to ensure that all clients need and goals are met to achieve the best potential outcome.

We are very excited to work with both these great people and work together to create experiences for all Endorphin Wealth members.