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Archive for November, 2006

You Call That a Small Amount! THIS is a small amount...

November 30th, 2006 at 06:35 am

Consumerism commentary had a post today about getting a student loan refund cheque for $1.57 in the post. I can do better than that - for the past SIX MONTHS I've been getting a monthly bill from our Telecom company for $0.06 owing (This wasn't even due to a payment error - the charge was actually $0.06 for a particular service!). It also has a printed message that, due to the small amount, I don't have to pay it this month - but they keep sending a bill each month! As they don't charge any interest on such small amounts (well, maybe they do, but what is 6%pa of 6c each month?), I haven't bothered paying the bill. I could make the payment electronically via B-Pay, so it wouldn't cost me anything more than $0.06, but I haven't got around to it.

As a shareholder of this particular Telecom, I should ring them up and tell them what a stupid idea it is to mail out bills for less than $1 - especially ones that say they don't have to be paid! But I think I'll wait a few more weeks until after the T3 float goes through - at the moment the Telecom is still 51% owned by the Australian government, so I probably wouldn't get anywhere appealing to common sense.

Has anyone got a cheque, or bill, in the mail for less than six cents? (Bills that show a previous payment don't count).


Rental Property Blues (cont.)

November 30th, 2006 at 06:33 am

A couple of month after our last tenant moved out, and we're getting a bit desperate - with the wife on unpaid maternity leave, getting no rent will mean the mortgage payments eat through the extra that we'd paid off our mortgage at an alarming rate. Finally, the estate agent called today to advise that she has someone wanting to rent - but only on a short (4 month) lease with an option to then continue on a month-by-month basis at the end of the lease, while their new home is being built. She'd already rung the wife, but just wanted my OK to lease the property for this term.

With Christmas soon upon us (and hardly anyone moves house over the holidays), if we didn't take this tenant the rental property could be empty till the end of January. So, better to take a short lease and hope that the building takes longer than expected and they stay a while, than hold out for an "ideal" tenant.

Anyhow, the worst* that can happen is that we are looking for a new tenant again in four months time, and have to pay another week's rent to the agent to find us another tenant.

*OK, the worst is actually that we have a "tenant from hell", who trashes the place and then moves out without notice owing some back-rent, and disappears interstate. (I've had this happen before...)

A Word* a Day: "Dividend Yield"

November 30th, 2006 at 06:32 am

The rate of income generated by an investment is calculated by dividing the total dividend per share paid during the past one year period by the current share price, and expressing it as a percentage. Make sure you use the same unit for both dividend and share price (ie. cents and cents, or dollars and dollars).

*OK, this is actually two words Wink


Set for Life: Children's Retirement Accounts

November 30th, 2006 at 06:30 am

There is much to be said for starting an investment portfolio as soon as possible - compound interest works it's magic over long periods, and you can set your asset allocation to a much more aggressive "high-growth" mix if you have a very long time horizon. So, starting an investment portfolio for your kids is one of the best possible strategies, and is even more so with the proposed changes to superannuation tax in Australia - ie. that there will be no tax on superannuation withdrawals made during retirement.

This means that if you set up a child superannuation account into which you (or any relatives or friends of the child) can contribute up to $1000 each year. (There is a cap of $3,000 every three years PER ACCOUNT - if you wanted to save more than $10 per week you just setup several accounts for your child). There will be no tax due on deposits (as they are made as undeducted contributions), no tax on pension or lump sum payments over 65 years of age, and a maximum 15% tax rate on earnings (likely to be reduced below 15% due to the benefit of franking credits on share dividends).

For example, if you contribute around $10 each week ($250 per quarter) into a child superannuation account from birth until 18 years of age, and then no additional contribtions are made, at retirement age (65) the account would be worth $2,218,843 (or $317,898 in today's dollars) - assuming an average return of 10% pa for a high-growth asset mix (shares (preferably geared), some bonds and some property), and an average inflation rate of 3% pa.

For a total contribution of $18,000 your child's retirement fund will have added $300,000 (in today's dollars) by the time they retire - with no further contributions required after they turn 18. This will let your child concentrate on paying off a mortgage or investing outside of super when they start working.

personal finance, investing, money, saving, wealth, investment

A Word a Day: "Derivative"

November 30th, 2006 at 06:28 am

Derivative: A financial contract whose value is based on, or derived from, another financial instrument (such as a bond or share) or a market index (such as the ASX100 index, or Nasdaq Index QQQQ)


Frugal living: Recycling Calendars and Diaries

November 30th, 2006 at 06:23 am

Often you can buy "old" calendars and diaries for almost nothing when the year is half over - stores don't want to hold onto stock and there's little chance of selling a calendar that only has a few months of useful life left.

If there were no leap years, then every calendar would be recycled on a 7-year cycle, the first day of the year moving forward by one each year (because there's an extra weekday each year: 365 mod 7 = 1). Due to leap years making non-leap year calendars incompatible with leap-year calendars that start on the same day, the calculation of reusable calendars is a bit complicated - usually a calendar can be reused 6 or 11 years later. I've listed the reusability years for the next 10 years worth of calendars below.

Therefore, if you find you have an unused calendar at the end of the year, and you have some spare storage space, just put it aside and you can probably reuse it in 5 years time. If you're really frugal you could wait for the chance to buy calendars for 80% off, and put them aside for 5 (or more) years until you can use them. Although you'd miss out on interest on the money paid for the calendar, the price of printed items tends to go up faster than the general inflation rate, so it's a pretty good hedge against inflation. Of course you have to be prepared for some odd looks when you use a calendar that appears to be half a decade out of date Wink

Calendar Re-use 1-JAN 1-MAR
Year Year is a is a
2006 2017 SUN WED
2007 2018 MON THU
2008 2036 TUE SAT - it's probably not worth keeping this one! Wink
2009 2015 THU SUN
2010 2021 FRI MON
2011 2022 SAT TUE
2012 2040 SUN THU - and you can toss this one out too Wink
2013 2019 TUE FRI
2014 2025 WED SAT
2015 2026 THU SUN

The Eight Best and Worst Money Moves You Can Make

November 29th, 2006 at 02:50 am

Here is a list of the eight best and eight worst money moves you can make, and why:

Eight Best Moves:
1. Pay Yourself First - no matter how much you earn, you should put aside a fixed percentage of your income as savings each pay day. This will develop good savings habits. You can start off with a small and painless percentage and build up slowly to a significant amount, for example when you get a pay rise.
2. Cut up your credit cards and pay cash for everything. This will ensure you never run up credit card debt.
3. Borrow against your home equity. You can borrow at very competitive interest rates and invest this money in high-growth assets, boosting your returns using gearing. Home equity loans also have an advantage over margin loans because they aren't subject to margin calls.
4. Invest in index funds. The market is reasonably efficient, and studies have shown that very few professional fund managers can "beat the market", after allowing for the higher fees compared to index funds.
5. Invest in managed funds. Some managers (Buffet, Lynch) have consistently produced superior returns, so it is worth seeking them out.
6. Diversify to reduce risk without reducing your returns. Your portfolio asset mix should be on the efficient frontier.
7. Put all of your eggs in one basket and watch the basket carefully. You should spend enough time and effort to identify a few excellent companies and buy them at the right price for the long term. This is what Warren Buffet does.
8. Borrow to invest. Also known as "gearing" this will boost your returns and can provide tax benefits if the interest on the loan is tax deductible and long-term capital gains are taxed at a lower rate than current income (dividends).

Eight Worst Moves:
1. Pay Yourself First - if you have any "bad" debt (loans for non-investment items such as clothes, toys, cars, holidays etc.) you should pay this off before you even consider a savings plan.
2. Cut up your credit cards and pay cash for everything. Several reasons you should keep your credit cards and learn to use them responsibly
- they can act as your "emergency fund" so you can be fully invested without having to keep an "emergency fund" in a low-interest cash account.
- they are much safer than carrying wads of cash around, and are especially convenient overseas.
- by paying off the balance in full each month you can get up to 55 days interest free credit on your day-to-day purchases, so you can keep an extra month worth of expenditure invested.
3. Borrow against your home equity. People who borrow against their home equity or against the 401K to pay of credit cards often run up the credit card debt again. Others use HELOC to spend more than they earn on things like cars, holidays and lifestyle. You can end up still having a mortgage when you retire, or, in the worst case could put your home at risk.
4. Invest in index funds.You are condemning yourself to mediocre (average) investment returns. Some managers (Buffet, Lynch) have consistently produced superior returns, so it is worth seeking them out.
5. Invest in managed funds. Although some managers (Buffet, Lynch) have consistently produced superior returns, you have Buckley's chance of picking who are the superior managers - last year's (or five year's) performance is no guide to next year's winners (but everyone can identify them in hindsight).
6. Diversifying your portfolio (also known as "di-worse-ification") will drag your investment returns towards back down to the average.
7. Put all of your eggs in one basket. If you make one or two bad calls you'll put your portfolio in the toilet. Do you really think you're the next Warren Buffet?
8. Borrow to invest. Gearing will magnify any gains or losses, but, if the market tanks you can get a margin call and be totally wiped out, so you never get to benefit from the magnified gains when the market recovers.

Confused? Well, it just goes to show that there are no "one size fits all" answers in personal finance. Some would argue that this is why you need to get help from a financial planner. My view is that you need to learn enough about yourself, your position, and available options to form an educated financial plan. The fees you'd pay a financial planner are high enough to eat into your investment returns, and, at the same time are too low to buy enough time and effort from a professional financial planner to really get to know you and your situation well enough to give an optimum plan customised for you. The best you'll get is a fairly vanilla plan that is "reasonable" for your situation.

OK, these probably aren't the top eight anyhow - I just wanted to make the point that in personal finance there are many shades of gray. If you read about technical analysis and want to try day trading, first read all the evidence supporting the weak version of efficient market theory, and, remember, in day trading it's a zero-sum game, so you have to be smarter than more than 50% of other traders (allow for trading costs) to hope to make a profit. If you like fundamental analysis, remember that companies makes honest mistakes in their reports, they sometimes obfuscate (or downright lie), and, even if the figures are correct, they are historic, so are a pretty poor guide to the future.

I spent a lot of time for my first decade of investing learning everything I could, and trying to find out the "truth" about investing - what is the "correct" way to invest, and the "best" strategy. What I've come to realise is that no-one knows - especially not what is best for YOU. So, just keep learning all the time, and remember, it's always just going to be your "best guess", so always evaluate and manage your investment risk.

At the end of the day, you've really got no-one to blame for your investment performance but yourself. On the bright side, at the end of the day, we're all dead, so it doesn't really matter anyhow Wink

A Shocking Way to Make Money

November 29th, 2006 at 02:49 am

Way back in the middle ages, thieves used to risk life and limb climbing onto church roofs to steal lead plate. It seems the recent commodities boom has brought this type of theft back into fashion, with a new shocking twist. A worldwide spike in metal prices has been blamed for a surge in the theft of copper and other metals, with copper fetching up to $10 a kilogram and brass about $4.50. Homes, building sites, scrapyards and even schoolground water bubblers have been targeted by gangs.

What's next, stealing gold fillings from people's mouths?

You can read the full story at SMH.

Baby Boomer Retirement Crisis

November 29th, 2006 at 02:48 am

Yet another article about the abyss facing baby boomers in retirement - there won't be enough tax payers to fund pension payments for everyone, and baby boomers haven't been saving nearly enough to have a "self-funded" retirement.

An article in the Sydney Morning Herald lays out the problem very clearly. Some of the points are universal, applying equally to baby boomers in the US, UK and Australia:

"To give you some idea of the challenge, to retire on 45 per cent of your pre-retirement income you need to have contributed 12 per cent of your salary every year for 40 years."

"With the male retirement age averaging 58 years, drawing on retirement savings at 60 per cent of salary will see the money run out at age 72. But, if retirement is postponed for only two years (until 60), the money would last until 79. Working an extra two years funds a further seven years of retirement."

An interesting read, though everybody should be thoroughly familiar with all this by now, and have an action plan in place to look after themselves in retirement.

personal finance, investing, money, saving, wealth, investment

Net Worth Update: Nov 06

November 29th, 2006 at 02:46 am

The past month was very good for my finances:
* Average property prices increased a little bit, boosting my property equity $5,198 or 0.71%,
* Both Australian and International stock prices moving sharply higher during October (so much for the theory of typically "up" months and "down" months). My stock portfolio equity went up an incredible $24,700 (8.85%) and my retirement account also increased by $13,077 to $301,646 (4.53%).

My Networth as at 31 Oct now totals $991,006 (AUD), an overall increase of 4.58%. Just for fun you can annualise this to 55% pa and say I'm the "Sage of Sydney" - at least for this month Wink

It will be interesting to see if I manage to break through A$1,000,000 this month - although I suspect it may be a short-lived visit to the "millionaires" club, depending on how "mr market" is feeling.

I don't whether my next short-term goal should be a NW of AUD $1 million when my home is excluded, a total NW of US $1 million, or just focus on achieving net worth AUD $2 million...

personal finance, investment, wealth, stocks, real estate, saving

The Benefits of Compulsory Personal Retirement Accounts

November 29th, 2006 at 02:45 am

A major concern that has arisen throughout the developed countries in recent years has been in relation to the aging of the population, with the implication that unfunded pension schemes will become unsustainable as the number of tax-payers supporting each pensioner gets less and less. Some countries began to address this issue by the introduction of private pension arrangements many years ago - for example, in Australia, compulsory superannuation savings were introduced in 1992. Prior to this only 58% of full-time workers, and around 20% of part-time workers had a private pension account (1998 figures).

Although compulsory superannuation has now been in place for 14 years, the median superannuation balance of female baby boomers in 2004 was only $8,000 (males $30,700).

The picture would not be so bleak for baby boomers that have been working full-time, especially women. The following table shows the amount that baby boomers working full-time since the SGL was introduced would have contributed into their personal retirement account:
avg female average F/T male average F/T
FY SGL rate wage SGL amount wage SGL amount
92/93 3.75% $27,809.60 $1,042.86 $34,814.00 $1,305.53
93/94 4.00% $28,750.80 $1,150.03 $35,973.60 $1,438.94
94/95 4.50% $29,884.40 $1,344.80 $37,689.60 $1,696.03
95/96 5.50% $31,059.60 $1,708.28 $39,431.60 $2,168.74
96/97 6.00% $32,448.00 $1,946.88 $40,794.00 $2,447.64
97/98 6.00% $33,716.80 $2,023.01 $42,400.80 $2,544.05
98/99 7.00% $35,094.80 $2,456.64 $43,914.00 $3,073.98
99/00 7.00% $36,238.80 $2,536.72 $29,286.40 $2,050.05
00/01 8.00% $38,183.60 $3,054.69 $46,800.00 $3,744.00
01/02 8.00% $40,190.80 $3,215.26 $49,306.40 $3,944.51
02/03 9.00% $42,088.80 $3,787.99 $51,849.20 $4,666.43
03/04 9.00% $44,465.20 $4,001.87 $54,932.80 $4,943.95
04/05 9.00% $46,384.00 $4,174.56 $57,226.00 $5,150.34

If the fund had been conservatively invested (earning, say, 5% pa), then typical current balances for female and male baby boomers who have worked full-time since compulsory Superannuation was introduced would now be around:
Female: $31,628.53
Male: $38,212.73

The actual balance will vary for each person, depending on the fees charged by their superannuaton fund and what investment options they had chosen.

The main problem facing the baby boomers is that a) they didn't start work in 1992 - even the youngest boomers were in their 30's when universal private retirement accounts were introduced, and b) the SGL was phased in, so the first 12 years of compulsory super were only equivalent to 9.5 years at the current rate of 9%. SO the typical boomer who has worked F/T since 1992 only has a super balance equivalent to a 30 year old Gen X/Y/Zer. Some people think that the SGL rate needs to be higher than 9% over a persons working life to accumulate enough to self-fund a comfortable retirement lifestyle (say 12-15%)

Hopefully, the increase in average personal retirement account balances at retirement age over the next 30 years will match the necessary reductions in age pension benefits paid by the government. The fairest method would seem to be to restrict pension entitlements (via assets and income tests) and reduce benefits over time, with the new rules being 'grandfathered' so they phase in with age. This sort of restriction has already been done with the phasing in of raising the "retirement age" from 55 to 60, based on each persons date of birth.

Of course, in countries such as the US and UK where the move to personal retirement accounts has started later, there is going to be a much bigger "gap" to be be funded while state pensions are phased out self-funded retirement accounts start to accumulate meaningful balances.

Both the Rich and Poor got richer - but it's all relative

November 29th, 2006 at 02:44 am

A study by the National Centre for Social and Economic Modelling at the University of Canberra has shown that the average Australian was 25 per cent better off in 2006 than in 1996, after adjusting for inflation.

While the rich did get richer over the past decade, so did nearly everyone else. Both the richest 10% and poorest 10% of Australians increased their real incomes by about a quarter. However, for the poorest this meant $29 more per week, after inflation, compared to $256 more per week, after inflation, for the rich. The group that made the biggest gains was actually the "middle income" group which gained about 30% in real terms over the decade.

One group that did fall behind the rest was second poorest 10% of the Australian population, mainly age pensioners, who failed to keep pace with everyone else, but still managed a real gain of 14%. This is likely to be a persistant trend as the government struggles to fund aged pensions as the ratio of taxpayers to aged pensions drops with the aging population - the number of Australians aged oved 60 is projected to double by 2040.


Is Prosper.com a Ponzi Scheme?

November 29th, 2006 at 02:43 am

In today's post Tired But Happy commented that he had a couple of Prosper.com loans that are late, and he thinks that "the Prosper folks are making payments on one of the loans".

I sincerely hope that this isn't true, as using incoming funds to pay interest to existing shareholders at a high rate of return, so as to attract more new investors, is typical of a classic "Ponzi" type pyramid scheme. I've previously said I'd be careful about "investing" in unsecured loans via Prosper.com without doing a comprehensive evaluation of the risks.

Reading through the Prosper.com FAQs the following items stick out:

There are no guarantees that your loan will be repaid.


Prosper is not directly insured by the FDIC, but lenders' deposits are covered up to $100,000 by FDIC pass-through insurance provided by our banking partner, Wells Fargo Bank.

What exactly does this mean? How does "pass-through" insurance work? Just how safe is your money if Prosper.com went out of business?

I also find the published figures for default rates on existing Prosper.com loans unbelievably good. What happened to the normal risk:reward relationship? If the loans were really as low risk as these default rates suggest, the interest rates being bid for these loans would be lower.

Prosper's FAQ give an example of how the default rate would affect your returns if you spread your investment across several small loan amounts:

If you make 100 loans to B-rated borrowers at 8%, and B-rated borrowers have an expected default rate of 1.8%, then you might have 2 borrowers default, which would lower your return by 2%. After annual lending fees of 0.5%, this would give you an annual 5.5% return overall.

But, as Prosper says:

A credit grade is a measure of the likelihood that a borrower will repay his or her loan. We also provide the following table to lenders, which shows historical default rates by credit grade for borrowers with normal (

Update: My $683,127 Dollar Debt

November 29th, 2006 at 02:41 am

Debt Update: as at 31 Oct 2006

My updated debt data will be on NCN soon. My debt balances as at 31 Oct were:

property |- $199,813.62 Inv Property a/c #1
|- $350,577.18 --- $263,442.68 Inv Property a/c #2
| (x 0.5) |- $237,898.05 Home Loan
-- $685,362.34 --- $334,785.16 --- $ 52,937.16 Portfolio Loan
| "good" debt stocks etc |- $ 19,404.57 Margin Loan a/c #1
| |- $ 94,108.28 Margin Loan a/c #2
| |- $155,585.68 Margin Loan a/c #2
| |- $ 11,749.47 Line of Credit a/c
$683,127.44 --+ $2,234.90 ----- $ 15,765.10 -- +$ 1,724.90 Cr Bank #1 VISA
TOTAL CCARDS | |- $ 11,760.00 Bank #2 MasterCard
|- +$ 18,000.00 |- $ 5,730.00 Bank #3 MasterCard
0% bal xfer

Major changes in debt this month:
- increased Outstanding Portfolio Loan: $10,000 for purchase of T3, and $6,000 for monthly addition to "little book" US share portfolio
- increased Outstanding Property Loans by redraw of $6,000 to cover this month's property loan repayments while wife is on maternity leave
- increased Outstanding Margin Loans by regular gearing plan $100
- decreased balance xfer CC debt by min payment amounts of $375
- decreased Outstanding Citibank Line of Credit by $3,000 payment

Net change:
- total debt increased by $9,875.73 (1.47%)

personal finance, investing, money, debt

Update: AU Stock Portfolio - 1 Nov 2006

November 29th, 2006 at 02:40 am

My direct share investments in Australian Shares as at 1 October. The stock market performed strongly in October and my Portfolio has increased by $17,882.11, or 8.69% (after adjusting for a $5,000 share purchase during the month).

These shares are held in accounts with two margin lenders (Comsec Securities and Leveraged Equities). My overall gearing ratio decreased from 121.4% to 109.2% - I don't intend to borrow any more against the existing equity as it is important to have a more conservative LVR as the market gets overpriced and more likely to suffer a significant correction.

During the month I purchased an additional 1,112 shares in Australian Pipeline Trust for $5,000 through a company share purchase offer. This was an average
price of $4.50 per share - currently APA is trading at 4.60.

I also have paid for another $10,000 worth of Telstra shares via the T3 installment issue, but these shares haven't been listed yet. Allocations and pricing will be finalised during November.

personal finance, investment, stocks

Asset Allocation: Is There a Place for Gold in Your Asset Allocation?

November 29th, 2006 at 02:38 am

Asset allocation is the process of selecting an appropriate "mix" of asset classes to maximise expected return for a chosen level of risk, or alternatively, to minimise the likely risk (volatility) accepted in attempting to attain a desired rate of return. Some modeling by the World Gold Council showed that gold bullion can play a beneficial role in asset allocation. Although gold bullion produces a negative income (it costs money to store and trade, and pays no "rent" or dividend), it can produce significant returns via capital gains, and has the virtue of responding positively to events that generally have an adverse effect on the performance of other assets classes. By including a small amount of gold bullion in your portfolio (less than 5%) you can achieve significantly reduced volatility with only a slight decrease in performance.

It should be noted that how well gold adds to you portfolio diversification depends on what other assets you hold - as can be seen below, Gold showed much less covariance with the ASX300 Industrials Index that it did with the ASX300 Resources Index. So, including gold for diversification purposes would make more sense if your portfolio includes US or UK stocks, than, for example, Canadian or Australia stocks, where there is a greater exposure to the resources sector.
Gold vs ASX300 Industrial Index

Gold vs ASX300 Resources Index

It is possible to buy gold bullion or gold coins and store the physical gold - but storage costs can be significant. Although there's nothing stopping you burying some gold coins in a zip-lock bag in your back-yard, Europe is littered with caches of medieval gold that was buried for safe-keeping and never recovered by the owner!

One alternative would be to buy and sell gold bullion online, for example through BullionVault.com. This company stores gold bullion in high-security Brinks vaults at various locations around the world (London, New York, Switzerland). Because the gold doesn't move it is safe, secure, cheap and easy to trade online. Client holdings are reconciled each day and published online using anonymous aliases. You need to fund your account by transfers from your bank account in order to start trading gold. New accounts get a "free" 1 g of gold credited to their account (worth around $15), but it only becomes "yours" once you fund your account and can start trading for real (you can trade your 1g for practice, but it will get forfeited if you don't fund your account within two weeks).

The main screen at BullionVault.com shows the current buy and sell prices for gold in any one of three currencies (USD, GPB or EURO) for the three vaults. The buy/sell spread seems to be around 0.4% and BullionVault.com charges a tariff of 0.8% for each buy or sell order. So the round trip cost of buying and selling bullion would be around 1.9% (There are lower tariff rates if you trade a large amount during the year).

This option may suit some investors in the US, UK or Europe. Personally I've previously bought 1 oz gold bullion "bar" from the Perth Mint and stored it at home. For larger amounts I'd trade the gold "warrants" issued by the Perth Mint that are listed on the Australian Stock Exchange (ASX code ZAUWBA) as you don't have the storage and security issues that relate to physical bullion. The only difficulty is that to trade warrants you need to have completed the required paperwork with your broker, as a normal share trading account can't trade warrants.

I personally haven't opened an account with BullionVault.com. If I was going to, I'd try to evaluate the risk of losing your investment if the company went out of business - the same sort of risk analysis you'd do before investing in, say, Prosper.com. I generally don't like funding internet purchases direct from my normal bank account, so I'd recommend opening a new bank account with just the amount you wish to invest, and use that account for use with Prosper.com, BullionVault.com etc.


Real Estate: Rental Squeeze predicted

November 29th, 2006 at 02:35 am

The Australian property research company BIS Shrapnel has predicted a 5 per cent drop to 142,500 new homes in 2006-07 following on from a 4 per cent decline in 2005-06. This is expected to lead to a surge in rents over the next five years because of a housing shortage across the country - rents in Sydney are forecast to rise 5 per cent this year and by as much as 40 per cent in the next five years. Higher interest rates and higher prices have impacted affordability and demand, and this has resulted in a decrease in new housing starts (to below the level of underlying demand). Eventually the increasing rent returns will coax investors back into the market and stimulate construction - and the next 'boom' will start.

Our rental property in Sydney has been vacant for a couple of months since the last tenant moved out, so obviously a vacancy rate of 2.5% overall doesn't necessarily affect individual properties. However, an overall increase in rents should make our property easier to rent out, reduce out personal vacancy rate, and allow us to increase the rent to keep pace with the overall rent increase. Currently the rent on our investment property is set at $410 per week. An increase of 40% over the next 5 years would provide us with an additional $8,500 per annum income, which will help us service our $68,600 pa mortgage payments. With the wife on maternity leave, and planning to work part-time until our youngest starts school, any decrease in vacancy rate and increased rent for our rental property will be helpful. With no tenant and only one income we have had to start making a $6,000 a month "redraw" (out of the extra payments we had made off our home loan) in order to meet the payments each month.

real estate

Will You Live Long Enough to Enjoy your Wealth?

November 27th, 2006 at 04:22 am

There's not much point in applying all the wonderful tips you learn reading PF blogs if you end up a millionaire but die at 50!. Aside from the obvious health tips - don't smoke, drink in moderation, drive carefully, avoid high-risk activities (unsafe sex, drug use, freestyle rock climbing, cave scuba diving etc.) the most important keys to living long (and healthy) enough to enjoy your wealth are getting enough exercise and maintaining a healthy body weight/BMI.

Personally I'm overweight and need to modify my diet to a more healthy one so I can get down to my ideal BMI in a healthy way (no crash dieting!) and then maintain it for the rest of my life. I've read up a bit on CRAN (calorie restriction with adequate nutrition) which basically means reducing the amount of calories you eat while watching out that you are still getting the optimal amounts of vitamins, protein, fat (yes, some IS needed) and carbohydrates. Up to now CRAN has been mostly theoretical, based on observations and experiments with short life-span animals. This research showed that when a test animal's diet was restricted to about 25%-40% less calories than would be eaten in a totally "unrestricted" diet, the average life-span was extended (up to 50%) and a more healthy old age resulted (although there's not much evidence that it increases the maximum possible life-span).

It now appears that longer-term experiments with longer-lived species that are more similar to ourselves are providing more evidence that CRAN is likely to be beneficial to humans wanting to live longer and healthier life-spans. See this article for a very interesting update that shows the very positive effects of CRAN on monkeys.

Personally, applying CRAN means reducing my average daily calorie intake from around 3,200 kcals down to a healthy 2,000 kcals by eliminating junk foods - I tend to snack on icecreams, sweets, chocolate, biscuits etc. which are all totally unnecessary (and expensive!). I'm hoping to reduce my BMI from 31.5 (100 kg) down to 22.1 (70 kg) by the middle of next year. I think I'll add this goal as another bar graph in my blog to help track my progress!

Tax time blues - Part 2

November 27th, 2006 at 04:21 am

Well, the Australian tax year runs from 1st July - 30th June, and the deadline for returns is 31st October. Way back on 14th August I wrote "Hopefully now that I've started using Quicken 2006 I'll be able to add in all the info for my current holdings over the next few months." - well, it never happened. What, with the birth of our second child in September, some uni assignments and doing too much blogging (!) I've never spent the time needed to enter all my expenses since 1 July as planned. What's worse is that I haven't brought my old share records in Quicken up to date, so I'm left with wading through my margin loan account statements to see what has been sold during the financial year, and then going through old records to work out the cost base.

Hopefully I'll get it all sorted out tonight and fill in the electronic eTax forms tomorrow so I can lodge it on time. As I'm owed a refund (I think) there probably wouldn't be a penalty for late lodgement, but I really want to get it over and done with. My new financial year's resolution is still to enter all my expenses into Quicken this year, and get my share records in Quicken up to date... we'll see how it goes.


Money Myths: #1 - Money can't buy you happiness

November 27th, 2006 at 04:20 am

Money can't buy everything, but there are lots of things that can be bought and which will increase your "happiness" level - for example, shelter, food, clothing, education and healthcare. Money is a tool, and it can be used to maximise happiness by spending on the things that are important to you. For example, if your kids getting a good education is important to you, you will be happier knowing that you are regularly saving in a college education fund, than you would be without. Similarly, if you want to provide for your family if anything happens to you, paying for life and disability insurance and having an emergency fund put aside will increase your level of happiness. And many people are happy to be able to afford charitable giving to those less fortunate than themselves.

When people say "money can't buy you happiness" they are generally thinking of people who are unhappy despite being "rich" - but they often forget that their current level of contentment relies on having sufficient money to satisfy their basic needs and some of their aspirations. A recent report issued by the
Pew Research Center found that of those surveyed 49 percent of respondents with an annual family income of more than $100,000 said they were happy, while only 24 percent of respondents with an annual family income of less than $30,000 reported that they were happy. (The findings are drawn from a telephone survey of a nationally representative, randomly-selected sample of 3,014 adults, conducted from Oct. 5 through Nov. 6, 2005.)

Once you have enough income to take care of basic needs, any excess can be used to maximize your happiness. But in order to do this, you have to know what's important to you, and set some realistic goals. It's often best to put these goals down on paper, with dollar amounts required to achieve them, and a realistic time-frame. If you put down some milestones along the way, so much the better.

investing, money, wealth

How to succeed with your budget!

November 27th, 2006 at 04:18 am

The mechanics of creating a budget are well-known, and, while not very enjoyable for many people, not hard to complete. The difficulty lies in implementing and sticking to your budget. You can greatly increase your chance of sticking with your budget if you give careful thought to the CHANGES that need to be made to get from your old budget (starting position) and the new budget you hope to implement. Each change should be classified as either a ELIMINATION or a SUBSTITUTION.

An elimination is when you have to totally get rid of a particular spending behaviour - for example, quitting smoking or cutting up your credit card. These changes are very hard, and should only be done if absolutely necessary. A lot of changes SHOULD be classified as a substitution - for example, drinking filtered tap water and tea rather than softdrinks and Starbucks. These are usually much easier to implement as you are not having to eliminate a behaviour pattern 'cold turkey', but are still able to follow your normal routine with minor changes. Generally, after a week of substitution it will become a habit and can be followed without any further effort of will needed.

Many people make the mistake of classifying intended changes as an elimination when they should be aiming for a substitution instead. For example, if you wish to save on entertainment costs, it is far better to substitute your cable TV subscription with borrowing DVDs and books from your local library, substituting gym membership with lunchtime walks and so on. Trying to eliminate spending without introducing a suitable alterative will leave you in a permanent state of "deprivation" and you are more likely to fall back into old spending habits.

money, saving

Update: Blog Monetization

November 27th, 2006 at 04:17 am

Well, so far my traffic is slowly building over at blogger.com, but not enough to generate any significant revenue via ad clicks. However, the PayPerPost experiment is going quite well so far - I haven't met the 30 day requirement to actually get paid for any of the sponsored posts so far (first payment due in 16 days, fingers crossed), but there have been enough "opportunities" that were relevant to personal finance and I felt happy to blog about.

So far I have had a total of $30.00 "credit" for 5 posts - 3 approved ($21.00) and 2 still pending the OK. Generally it takes a few business days to get a new post approved.

If anyone would like to give PPP a try, you can use me as a referrer (enoughwealth@yahoo.com) when you sign up, and I'll get a $5.00 referral bonus!

I'll let you know when the first actual payment hits my Paypal account.


Six Things I Really Hate About PF

November 27th, 2006 at 04:15 am

The six things I find most annoying in the realm of Personal Finance*:

1. Paying high fees and trailing commisions for mutual funds and insurance. The commision paid out of your first year's insurance premium is especially high (like up to 50%). And it seems that you generally can't even avoid such fees by buying "direct" from a fund or insurer.

2. That the "standard" fee structure for exotic investments such as Art Funds and Hedge Funds is 2/20 (2% MER plus 20% of any "surplus" performance, say above 6%) - since when does achieving a return of 7% justify a fee of 2.2%?

3. Mutual funds closing down when they perform badly for a few years (so that they can "bury" the bad performance figures). Often I'd like to have kept the investment open, and wait for an expected turn-around in the long-term (example: asian funds during the asian meltdown)

4. Small companies that need additional finance not giving their existing shareholders the opportunity to kick in more funds and retain ownership. eg. the company goes into administration/bankruptcy, sells out to a private investor for almost nothing, or accepts funding from a private investment company at an exhorbitant interest rate (often the interest is capitalised and eventually is paid out via a large issue of new shares to the investment company, which dilutes the existing shareholders stake tremendously).

5. Upper management costs - I've read that up to 10% of the profit of listed companies is spent on remuneration for the top 5 staff! I've nothing against reasonable payments, but there're too many examples of CEOs getting paid huge sums for mediocre performance, and then getting massive "golden handshakes" to terminate their contract "early". And don't get me started on payment of performance bonuses when a company is doing badly.

6. That 90% of what you read and see in the media about money and investments is absolute gibberish - and 90% of the audience has no idea.

* I haven't counted annoying things that were my own stupid fault, or just bad luck, such as investing in a stock that has lost money.

Frugal living: photography is a low-cost hobby!

November 27th, 2006 at 04:14 am

Wow, it's amazing how the "electronic age" has made some hobbies a LOT cheaper to indulge. For example, I bought my first SLR camera kit in the early 80s. Although the cost of the Pentax MX SLR and lenses was quite high, the real expense of this hobby was film and developing, not the mention negative slides, slide mounts, photo albumns etc. Although I enjoyed taking photos on holiday (after all, ten years after an overseas trip, the only thing you really have to show for spending thousands is a collection of photos and/or video) it was a bit too expensive to "practice" photography and experiment.

This has totally changed since digital cameras came out, and, especially now I have a digital Pentax *ist DL SLR (it may not be the best digital SLR, but it can be used with my existing collection of lenses and my telescope adaptor), I can take LOTS of photos, and it costs me practically nothing. In fact, being able to email pics to my relatives means that I'm saving money compared to having to get duplicate prints to mail.

It's also nice to be able to grab the digital SLR and take some quick pics and immediately see what they look like. For example, a frilly lizard has taken up residence in our yard, and is quite photogenic:


AU shares: T3 share float

November 27th, 2006 at 04:12 am

No, it's not the Terminator. Here in Oz the big investment buzz at the moment is regarding the government sell-off of their controlling stake in our telecom monolith - Telstra. They'd previously sold off chucks in the "T1" and "T2" offers several years ago. Unfortunately, T2 was sold at the peak of the dot.com bubble, so all the "mum and dad" investors who had made money buying T1 (at $3.30 a share in 1997), then lost a bundle buying T2 (at $7.40 a share) - unless they managed to sell at the peak of around $8.00. With Telstra currently around $3.65 a share, it'll be interesting to see how successful the T3 float is. The government isn't selling off it's entire remaining 51.8% stake in T3 - the base offer is 2.15 billion Telstra shares, or one-third of the Government's remaining 51.8 per cent stake, with the remainder to be dumped in the Future Fund (setup to eventually pay for unfunded public service pensions).

I bought T1, and then skipped T2 (I'd read enough about Dutch Tulips to avoid the dot.com frenzy). I've now applied for $10,000 worth of T3 shares. The first installment will cost $2 per share, with the remainder (based on the institutional book-build price, minus a 10c per share retail discount, plus a 1 per 25 bonus share issue when the 2nd installment is paid...) due in 18 months time. Telstra is currently paying a large dividend, so the ROI on the initial $2 installment is around 14% pa (plus tax credits due to dividend imputation). With the 10c discount and bonus share issue, the final cost of T3 shares should be around $3.25-$3.50 a share, although the final price won't be known until after a three-day institutional book-build set down for November 15 to 17.

Telstra is currently rapidly losing revenue as customers abandon the old landline phones in favour of mobile phones, and the mobile phone business is highly competitive. Whether T3 is a "cheap" buy at even $3.25 a share will all depend on how Telstra's cost cutting program works out, and how well they funnel cash flow into new business areas.

ps. It's interesting to read some of the misinformation that gets printed in the mainstream press - The Australian newspaper (one of our major national papers) printed on 10 Oct that T3 retail customers "will receive loyalty shares - a bonus issue of 25 shares for each 100 shares they retain". A pity that the prospectus actually states that the loyalty share issue is 1 share for each 25 shares retained until then final installment is paid. Just a little difference of a 4% discount vs. a 25% discount! Wink


Frugal living: Watch out for shopping trolley junk

November 25th, 2006 at 03:59 am

While clipping petrol discount coupons off my "weekly" shopping dockets I decided to analyze my spending based on the dockets sitting in my wallet. Generally I just put the total amounts into Quicken, and track the total spent on "groceries" against my budget. But I realised that this doesn't really tell me WHAT I'm spending my grocery shopping budget on. I knew that I buy the odd snack/junk food or drink items, but I was shocked to find out exactly how much money I was wasting on these items:
Analysis of my last 8 shopping dockets:
Total spend $351.86
Avg. spend per trip $ 43.98

Category Amount % of total
Household cleaning/laundry $20.07 5.70 %
Basic foodstuffs $190.06 54.02 %
Snack/Junk foods $50.78 14.43 %
Snack/Junk beverages $48.74 13.85 %
Medicines $10.82 3.08 %
Baby care $29.10 8.27 %
Toys/gifts $2.29 0.65 %The first thing that jumps out is that I'm shopping way too often (I tend to drop in to the supermarket nearly every second day while I'm collecting my mail from my post office box - this is NOT a good habit. I really should stick to one major shopping trip each week, and only get items that are on my shopping list).

The second thing is that spending 28% of the total on junk foods and drinks is ridiculous! I'm the one in our household that eats and drinks most of this junk, so I've no reason not to just eliminate this completely. This would save me around $2,500 a year AND be much better for my health. I think I'll add a new target to my blog - spend less than 5% of my grocery shopping on snack/junk food and drink.

money, saving

Income: Is higher education a good investment?

November 25th, 2006 at 03:56 am

One of the fundamental tenants of wealth creation has always been to invest in your education. Latest figures (released Thursday by theUS Census Bureau) confirm this. The figures show that the average bachelor's degree is worth about $23,000 a year - that is the average gap in earnings between adults with bachelor's degrees and those with high school diplomas. College graduates made an average of $51,554 in 2004, compared with $28,645 for adults with a high school diploma, an average of $19,169 for those without a highschool diploma, and an average of $78,093 for those with an advanced college degree.

Of course, this study didn't determine how much of the increased earning power is due to having the intelligence to obtain the qualification, and how much is due to the education/qualification/networking of getting the further education.

The potential effect on your net worth is even greater than the raw salary figures suggest. There is a fixed "overhead" cost of living, so, assuming that you can exert some self-control and limit your spending as your salary increases, an increase in salary has a great effect on your ability to accumulate wealth. For example, if your basic cost of living is $30K pa, then a 50% pay rise from $40K to $60K has the potential to triple your ultimate net worth (saving and investing $30K rather than $10K pa).

personal finance, money, wealth

Medical Expenses

November 25th, 2006 at 03:54 am

I had to see the doctor twice last week. The first "long" consultation (about 20 mins) cost $80, and the follow-up visit (a "short" consultation of around 10 mins) cost $50. Because I'd registered my banking details with the practice, my Medicare rebate was paid electronically into my bank account the next business day after I'd paid each bill using my day-to-day credit card. I got $59.70 refund from Medicare for the long consult, and $31.45 back for the short consult - overall a refund of 70% of the total doctor's bill. It's nice to get some of my tax dollars back, but I'd rather not be sick in the first place! The presciption medications cost me a total of $88.50 - each item costing just the $29.50 PBS (Pharmaceutical Benefits Scheme) subsidised price. I'm not sure how much it each item actually costs the government, but I'm sure it's well over twice the PBS price.

Ending up around $130 out-of-pocket for half an hour of a GPs time and several hundred dollars worth of medicine seems like a bargain. While I can see that this would still be a large cost for a "working poor" family, I believe some small co-payment should be required from all patients - say, $5 from the bulk-billed patients for each visit to the doctor. Most doctor's still "bulk-bill" pensioner patients, in which case the patient pays nothing, and the doctor gets a slightly reduced amount from medicare. A small co-payment would discourage overservicing - such as lonely pensioners visiting the doctor just for a chat!

Gearing: Risk vs. Reward - the last 10 years

November 25th, 2006 at 03:52 am

Using gearing to increase your returns in the long term has a couple of problems:
1) The interest rate charged directly impacts on the extra return generated
2) The extra risk (volatility) generated by gearing is large compared to the extra return

To get a better feel for how good a strategy gearing is, I've first looked at the current interest rates available for margin loans (and how it depends on the amount borrowed) and the current spread between the margin lending interest rate and the target cash rate set by the reserve bank.

The graph shows that the interest rate charged on a margin loan varies considerably between the different margin lenders, so it pays to shop around. Generally, the interest rate is reduced for clients with a large loan balance, so it's probably worth having one large loan rather than spreading it between several lenders (this is something I need to fix over time, as I currently have three different margin loan accounts. The problem is the tax effect of realising capital gains when transferring holdings from one lender to another).

It can be seen that the current spread between the target cash rate (6.00%) and the typical margin loan interest rate on a $500,000 loan is about 2.5% - so I've assumed this was the typical spread during the past ten years or so.

I've then used the changes in the target cash rate over the past decade (see below) to calculate the average margin loan interest rate each year since 1997, and compared that to the change in the All Ordinaries Index each year:
Average ----with gearing----
Year cash ML XAO XAO % % gain w/out 50% LVR 67% LVR
rate rate start end change or loss ML 100% D:E 200% D:E
1997 5.48% 7.98% 2411.2 2609.1 8.21% 0.23% 8.21% 8.43% 8.66%
1998 4.98% 7.48% 2609.1 2832.6 8.57% 1.09% 8.57% 9.65% 10.74%
1999 4.79% 7.29% 2832.6 3124.1 10.29% 3.00% 10.29% 13.29% 16.29%
2000 5.93% 8.43% 3124.1 3205.4 2.60% -5.83% 2.60% -3.22% -9.05%
2001 5.06% 7.56% 3205.4 3384.5 5.59% -1.97% 5.59% 3.61% 1.64%
2002 4.56% 7.06% 3384.5 2996.2 -11.47% -18.53% -11.47% -30.00% -48.53%
2003 4.81% 7.31% 2996.2 3309.8 10.47% 3.16% 10.47% 13.62% 16.78%
2004 5.25% 7.75% 3309.8 4060.7 22.69% 14.94% 22.69% 37.62% 52.56%
2005 5.46% 7.96% 4060.7 4721.1 16.26% 8.30% 16.26% 24.57% 32.87%
AVG 8.13% 0.49% 8.13% 8.62% 9.11%

This table confirms that the use of gearing would have boosted your returns during the past decade - from an average of 8.13% pa without gearing, to 8.62% using 100% debt:equity (a 50% loan:value ratio), and 9.11% using a higher gearing rate of 67% LVR (close to the normal lending limit of 70%).

However, it also clearly shows that the use of gearing greatly magnified the ups and downs of a portfolio - the relatively modest 11.47% drop during 2002 would have meant a 48.53% drop in value of a portfolio using 67% LVR, and probably would have required more cash being added into the account to avoid getting a margin call.

In the long term, getting a return of 9.11% instead of 8.13% will have a large effect on your final net worth - if inflation averaged 3% this would result in a real return of 6.11% rather than 5.13% (an improvement of 19%).

It is important to watch your LVR when using gearing, be conservative when the market is setting new highs, and be prepared to manage your portfolio to avoid any margin calls. It is also very important to shop around for the best possible interest rate - possibly using home equity to obtain lower rates.

personal finance, investing, investment, stocks

Frugal living: getting paid to exercise

November 25th, 2006 at 03:50 am

I used to have a gym membership, but after the gym located on my route home from work closed down I didn't bother looking for another gym. I simply walked half an hour each lunchtime at work which saved me at least $10 a week in gym fees.

Later on I helped my son do a paper round before school/work. This involved a 2 hour walk (starting at 6am) 5 days a week, and earned my son around $95 a week - it's much better getting paid for exercising than having to pay a gym fee! I also found that I got more exercise that way, as we couldn't skip a session if I wasn't in the mood.

Also, because my son was earning an income, he was eligible to contribute $1,000 into his own retirement savings account (RSA) and receive a $1,500 superannuation co-contribution from the government. Hence the net benefit of getting paid to exercise was me saving $520 pa and my son adding $6,440 pa to his net worth.

I stopped doing the paper round just before the arrival of our second child last month - getting up a 5:30am doesn't fit in well with disturbed nights and dirty nappies! I'll now have to get back in to the routine of daily lunchtime walks, and swimming during the summer months. Later on we'll look for some weekend work delivering flyers to peoples letter boxes - because our local paper has to be delivered before school each day it's not a viable long term job for a school boy and his poor, old dad!

personal finance, money, retirement

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