Chances are you’ve seen lots of TV and newspaper advertisments over the last few years (well at least since Fund Choice and Fund Portability legislations were enacted) tempting you to change super funds. But before you decide to switch providers, make sure you consider some key estate planning features.
It amazes me how often I have heard clients say they are going to move north or south to a quieter area when they retire. Whilst a ’sea’ or ‘tree’ change may be desirable in some ways, it may not necessarily be the wisest move for all people. It is a great result for those who are able to realise their dreams … for others much heartache and distress. (more…)
This post is collated from a collection of research papers by various economists, chief financial officers, strategists and analysts. The key points taken from the many papers perused recently are:
When gearing is advocated it is always for the long term. Minimum periods of at least 5 years … consider 40 years if you can visualise a time period that far away.
There is no doubt that the twin corrections of August 2007 and January 2008 left all but the strongest feeling some degree of anxiety as the market fell sharply day after day. Some people had margin calls and had to supply cash, other assets or sell down their portfolios.
This presumably caused discomfort and possibly worse. But without trying to be wise after the event; were these investors properly prepared for the volatility we know unexpectedly impacts upon the market from time to time? Did those who were ‘called’ really have a well diversified portfolio.
Dollar cost averaging strategies, prudent management of Loan to Value Ratios (LVR’s) and any cash reserves at the ready would have averted a margin call for all but the extremely unlucky. The point is not what investors should have done - or have been advised to do - but what they might do now to be reasonably safe in the market and employing a gearing strategy.
To sit out in cash now with the view of rejoining the market when everything seems safe probably means lost opportunities and unnecessary CGT expenses. How far would the market rise (lost opportunity) before the investor felt it was safe to get back in?
Various commentators do not expect a precise result over a year but rather prefer to comment that the underlying characteristics are strong for long term investors. Most commentators appear bullish about resources and that is the back-bone of the Australian economy.
Some argue that if the market doesn’t go anywhere for as much as a year then cash at around 7% is a much better alternative. From that 7% you may only be left with an after tax and inflation real return of less than 1% pa. Alternatively, if the investor had the risk profile to stay geared within equities during a flat year, distributions or dividends and tax refunds could more than offset interest repayments after tax. Obviously the results of this comparison depend upon distributions or the relevant funds/stocks and the LVR.
Of course, the investor who is making a small after tax return on the income from a geared portfolio - or a small loss - is ready in the waiting for the next take off; and any CGT that may have been payable to switch to cash would be earning a return in the market in the next run. Long-term investment strategies are here to stay.
Conclusion: So, what should we do?
Is it a good time to start gearing? Again, with strong fundamentals it is as reasonable time as any to start a long term strategy. The USa economy may be weakening and may well be in recession, but with the Australian economy being strong, China still booming and India ready to fall in line, most commentators find it hard any more than fluff and froth standing in the way of long term growth.
It may well be a while before any significant positive returns are made - it maybe weeks, months or even a year before the next bull run starts. For new clients in geared investments, it is a natural progression that Dollar Cost averaging and gradually ramping up the LVR to the optimal level (for that client) be used as part of the implementation of their gearing strategy.
Gearing remains an appropriate strategy to consider as part of a balanced financial plan.
We have reached the final post in our series of six on Budgeting. Let’s take a moment for a quick review:
If you have done all of the above, congratulations. You are ahead of 99% of the population in that you have a very comprehensive understanding of where your money is going. Since knowing where your money is going is the most important step in managing your money, and since it is the hardest step to take, the rest should be downhill for you from now on.
You will now want to maintain your spending in the rest of your categories so that you keep the same average as before and then you will want to track your spending in your grocery category so that you don’t spend over your new goal that you have just established for yourself.
Monitor your progress for the month and then the next month, choose a new category to attack. Keep this up each month and by the end of 6 months, you should have your finances amazingly under control.
In another post, I’m planning to share with you an exceptional tool that will help you track your spending using a variation of the “old fashioned” envelope method (its an oldie but a goodie). But for now, we just want to get through the first month.
NOW…
Let’s take some time and talk about planning.
This post is the fifth of a series of six on budgeting and Cashflow management. While it builds upon the activities that you may have done from previous posts, it is also a stand alone post.
Another way to assess your budget is to focus first on your variable expenses. Analyse one category a month and look for ways to reduce those expenses by just 5-10% or whatever you think you can. Over the years, this will add up to a significant amount, which can be applied towards debt or invested. (more…)
