The Melbourne Institute of Applied Economic and Social Research recently released the latest in a series of reports based on the Household, Income and Labour Dynamics in Australia (HILDA) study that is funded by the Australian Government and covers some 11,600 households in Australia. This research work is a longitudinal study which means it follows people's lives over time so we can see changes in income, whether they remain married, whether their attitudes and behaviours remain constant and it is providing rich insights into people's attitudes across a range of social issues which is just not possible from looking at data from the Australian Bureau of Statistics because it is a snapshot or cross-section in time.

The researchers define financial stress as not being able to afford to pay basic household bills like electricity and gas, not being able to pay the mortgage on time or having to sell something to raise the cash to meet the bills.
But even for people with considerable assets markets have a way of stress-testing portfolios. Last week the Australian sharemarket's leading index the S&P/ASX200 lost about 4%. Did that induce a financial stress attack?

Hopefully not but it might have served to give people a reality check about the risk they are running in their portfolio.

When it comes to investing financial planners and fund managers will talk endlessly about the risk and return trade-off. However, investors understandably focus more on the reward part of the equation - particularly in buoyant markets like we have enjoyed for the past three years.

So a fundamental question to ask yourself or discuss with a financial planner is what would it take to put you under financial stress? Would a 10% market fall do it or would it have to be more like 50%?  Perhaps it would be when the income stream from your investments is no longer good enough to fund your lifestyle and you have to start selling off assets - a common anxiety point among retirees.

One of the interesting findings in the Melbourne Institute research was that the median household owned assets in late 2002 of $288,000 but savings in the bank was only $4700. The question was asked: if you had to find $2000 for an emergency how would you find the money within a week? About 60% of households said they would have no trouble raising the money but about 20% said they would have to borrow either from an institution or a relative.

The answers on savings patterns are also illuminating. About 25% of people save regularly but a corresponding number say they save nothing at all.

But perhaps most alarming was the lack of saving discipline. About 40% of men and women say they save whatever is left over and have no planned savings.
That is a section of the population who are at risk of a financial stress attack - a stress attack that could probably be avoided if some simple savings disciplines were in place.

So taking a cue from the sharemarket's volatility perhaps it is a good time to put your portfolio and savings plans to the stress test.

Date: 26 May 2006
Robin Bowerman
Principal & Head of Retail, Vanguard Investments Australia
www.vanguard.com.au