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

I generally think a 40% domestic shares, 35% foreign shares, 15% property, 10% bonds is the basic starting point for working out a long-term investment mix, provided this weighting towards growth assets matches your risk tolerance. Since my retirement fund is definitely a long-term investment(20 years till retirement age, then maybe another 20 or so during retirement) this was my starting point. I did decrease my weighting in shares and increase the % in property during the bear market in 2001, and then weighted my asset mix more towards shares in 2003 when the market seemed to have bottomed out.

My current investment mix in my retirement account is as follows
BT Business Superannuation
Investment Option wt %
Colonial First State Diversified 1.91%
Westpac Australian Shares 19.68%
Colonial First State Australian Shares 25.53%
Westpac International Shares 1.93%
BT Core Global Shares 20.48%
MLC Global Share 20.13%
Westpac Australian Property Securities 10.26%
Westpac Australian Fixed Interest 0.06%
Intech High Opportunity 0.03%
Overall the asset allocation works out as:
Asset class wt %
Australian Shares 43.52%
International Shares 37.93%
Property 10.13%
Bonds 0.38%
Cash 8.03%
The cash component isn't really intentional - it's just that all the stock funds tend to have a cash float at all times. I've got less in bonds than my "plan" requires - but with interest rates still quite low the risk of capital loss with bond investments seems more towards the upside, and the coupon rate is nothing too exciting. If interest rates here go up another 0.25% or .50% and the economy slows down, I'll reweight from stocks to bonds. I think my "model" retirement portfolio is around 40% AU shares:35% INT shares:15% LPT:10% bonds:0% cash

Hopefully these Asset classes should return something like the following in the long term:
Asset class return %
Australian Shares 9.5%
International Shares 9.0%
Property 8.0%
Bonds 5.0%
Cash 3.5%
This would give my "model" portfolio an expected return of around 8.65% (after fees and charges)

personal finance, investing, investment, stocks, real estate

The latest Festival of Stocks (#7) is now available at Gold Stock Bull. It has 11 great posts ranging for individual stocks such as Apple and Microsoft, Sectors like Australian banks, all the way up to how to capitalize on China’s growing consumerism.

The lack of correlation between the stock market and the art market makes Fine Art a possibly attractive asset class to use to diversify a portfolio beyond the traditional stocks, bonds and real estate. However, while art can hedge against some of the movements in the stock market, it has a similar level of risk and, for most individuals, it is too expensive to invest in individual art works. Even funds such as the popular London-based Fine Art Fund require investors to hand over a minimum of $250,000 in order to play the art market. And those investors will have to be willing to wait at least three years before they can cash out of their investment.

How has Fine Art performed as an asset class compared to, say, stocks? The Mei/Moses Fine Art Index, the creation of NYU Stern School of Business finance professors Jiangping Mei and Michael Moses, tracks 9,000 pieces of art that were auctioned by Sotheby's and Christie's since 1950. The index measures the value of the art market by analyzing repeat sales of the different pieces of art that comprise the index. While it is generally considered a fair benchmark for art valuation, it excludes transaction fees, works that fail to sell at auction and certain styles of art, such as photography and prints.

Over the last 50 years, stocks (as represented by the S&P 500) returned 10.9 percent annually, while the art index returned 10.5 percent per annum. As can be seen below, there is a low covariance between the Art Index and the S&P500 index:



One of the problems of consideraing Fine Art as an investment asset class is that in the art market, only about 30% to 50% of the works that change hands in any given year do so on the open market, at auction, where the public can see the prices. In the contemporary market, that figure plunges into the single digits. In addition, access to the market isn't always easy or cheap -- the supply of contemporary works is controlled by dealers, for instance, while hefty auction fees make it hard to compare the art market to any securities market. Therefore, the entry fee and management fees of any Art Fund are likely to be high - similar to that of Hedge Funds, but with performance that has historically been more in line with the stock market.

How can you use gearing as part of your investment strategy? I hope to increase the returns of my portfolio with the least possible increase in risk by using borrowed funds to increase my investment. A simple example would be to invest a total of $200,000 in an index fund (eg. Vanguard) via a margin lending account, so that you've put in $100,000 of your own savings, and have borrowed the other $100,000 from the lender. The income from the $200,000 investment would cover part of the interest on the borrowed $100,000. Any extra I have to kick in from my cash flow to cover interest payments is tax deductible.

I prefer this approach (use of gearing) to that of boosting returns by including more risky assets in my portfolio because, theoretically, using gearing can provide more increase in return for an increased level of risk than just including a larger proportion of high-risk, high-return assets in your portfolio. Apparently it has something to do with the tangent of the line from the interest rate on the borrowed funds to the point on the efficient frontier corresponding to your asset mix having a steeper slope compared to just moving along the efficient frontier... Don't ask me to explain! As far as I can tell it looks something like the diagram below:


The idea is that you can increase the return of your "efficient" portfolio more by taking on extra risk through the use of gearing (ie. along the red line) than by changing the asset mix to include more risky assets (moving along the efficient frontier, assuming you have the right asset mix).

I don't worry too much about the details, as the entire concept of the efficient frontier seems fairly academic. In practice, you don't have precise data about all the assets in your portfolio (historic standard deviation, return, and covariance for all of the assets in your portfolio) or for determining the efficient frontier (such data on all possible assets mixes). Also, the usual problem of predicting the future using historic data applies. In practice, it seems that a sensible, well-diversified asset mix lies pretty close to the efficient frontier, and the use of gearing will be preferable to the inclusion of more risky assets in your portfolio (provided the interest rate on your investment loan isn't too high).

The other benefit of using gearing is that by having a larger total investment you are more able to make use of diversification.

Several things about the use of gearing (borrowing to invest) seem important to me:
1. You have to manage your risk - it is stupid (very risky) to borrow to invest in just one particular stock, or sector (eg. tech, oil, bio etc). I was amazed to learn that around 15% of margin loans are for accounts that have only one stock in them! The chances are you are not the next Warren Buffet (I know I'm not), so it's much more sensible to diversify - either via a portfolio of at least 10-12 stocks (not all in the same sector), or else via an index fund. Or a combination of both.
2. You have to borrow at the best possible interest rate - over time I've opened new margin lending accounts with lenders that offer a lower interest rate and that allow you to trade on your margin account via an online discount broker. Interest rates may be lower if you borrow a larger amount. I also have a margin lending account with the bank that provided my home and investment property loans - as a preferred customer I get 0.25% knocked of the standard interest rate. Most recently I used a "portfolio loan" secured against the equity in my real estate assets (similar to a HELOC?) to borrow at the standard home loan rate and invest in a portfolio of US shares (see my posts about my "Little Book" portfolio).
3. You should borrow less than the maximum so that you have a buffer against getting a margin call when the next market correction/bear market/crash happens. If the average margin for the stocks in your margin lending account is 70%, then you probably shouldn't get your loan-to-value ratio (LVR) above 50%.

The table below shows what % drop in the market would trigger a margin call for different starting values of gearing:
Assumptions:
Average 70% margin
Margin Call occurs if loan > 105% of margin value

% drop to initial initial initial
Capital Loan Total get a call LVR MU DER gearing
$100,000 $ 50,000 $150,000 54.6% 33.3% 47.6% 50.0% 1.5
$100,000 $ 60,000 $160,000 48.9% 37.5% 53.6% 60.0% 1.6
$100,000 $ 70,000 $170,000 43.9% 41.2% 58.8% 70.0% 1.7
$100,000 $ 80,000 $180,000 39.5% 44.4% 63.5% 80.0% 1.8
$100,000 $ 90,000 $190,000 35.5% 47.4% 67.7% 90.0% 1.9
$100,000 $100,000 $200,000 31.9% 50.0% 71.4% 100.0% 2.0
$100,000 $110,000 $210,000 28.7% 52.4% 74.8% 110.0% 2.1
$100,000 $120,000 $220,000 25.7% 54.5% 77.9% 120.0% 2.2
$100,000 $130,000 $230,000 23.0% 56.5% 80.7% 130.0% 2.3
$100,000 $140,000 $240,000 20.6% 58.3% 83.3% 140.0% 2.4
$100,000 $150,000 $250,000 18.3% 60.0% 85.7% 150.0% 2.5

LVR = loan-to-value ration (amount borrowed / total value of portfolio)
MU = margin utilisation (amount borrowed / max. amount allowed)
DER = debt-to-equity ratio (amount borrowed / your equity)
Gearing is basically the "muplitplier effect" that will apply to any losses or gains made by the portfolio on your equity. For example, if the gearing used is 2.0, then if your portfolio went up 10% your equity will have increased 20%. Similarly, if the market "corrected" -15% causing your portfolio to drop -15%, your equity will have gone down by -30%.

As the loan amount stays constant, any drop in the value of your portfolio will decrease the margin value (eg. 70% of the portfolio value). This also means that your margin utilisation increases. Most lenders will give you a "margin call" if your margin utilisation exceeds 100%. (There's often a "buffer" of 5%, so you'd get a margin call if the MU was >105%). When you get a margin call you have to bring your MU back down to less than 100%. This can be done in several ways:
* put some cash into your account (ie. pay off some of the loan) - this is best
* put in some stocks (eg. if you had some unencumbered stocks you could add into the margin account) - this is second best, as only the margin value of the stock (say, 70%) counts.
* sell off some stocks - you may not want to sell at the price prevailing when you get a margin call.

The most interesting column in the table is the % drop required to trigger a margin call. Looking at daily closing price data for the Australian All-Ordinaries Index (similar to the S&P500), I calculated the maximum % drop ever experienced after buying on any particular date for the past ten years. This period doesn't include any once-in-a-lifetime crash like '87 or '29, but does include the major bear market of the early noughties. I then grouped all the maximum decreases into bands - for the 2,531 days studied (1996-2006) I counted how many times the maximum drop was 0-5%, how many times it was in the range 5-10 % and so on. The tabulated results are:
max drop count probability
0% - 5% 1,069 42.2%
5% - 10% 438 17.3%
10% - 15% 480 19.0%
15% - 20% 439 17.3%
20% - 25% 105 4.1%
25% - 30% 0 0.0%
30% - 35% 0 0.0%
35% - 40% 0 0.0%
>40% 0 0.0%

TOTAL 2,531 100.0%
This shows that, at least for this past ten year period, if you'd invested on any randomly selected day for had a small (4.1%) chance of experiencing a drop of 20-25% before things began to improve.

You had a much bigger chance (21.4%) of experiencing a drop of over 15%. And drops of less than 15% are quite common.

This emphasises why it is important not to use excessive gearing - you have a significant liklihood of getting a margin call if your LVR is much over 60% (remember, an 18.3% drop will trigger a margin call if your LVR was 60%). Using gearing conservatively (say less than 50% LVR) with a well-diversified portfolio reduces the chance of a margin call significantly.

My plan is to maintain an LVR of around 50%, giving me a gearing ratio of 2. Assuming I can borrow funds at around 7.5% on average, and my portfolio return averages around 9.0%, I would expect my return on equity (ROE) to be 9.0% + (9.0% - 7.5%) = 10.5%. Assuming inflation averages around 3.0%, this extra 1.5% return would mean my real (after inflation) return is increased by 33% using fairly modest gearing. And this would have a big impact on the final balance.

I just read the Fugal Duchess' "6 Ways I Scam Myself into Saving" and although it's an entertaining post I have to disagree with each one of her 6 ideas - I'll explain why.

1. Hide-don't-Seek: I do this occasional by accident, and any "found" money goes into the kids money box as extra pocket money (My eldest son saves 100% of his pocketmoney anyhow, so it's a good deal). I would NOT do this scam intentionally as a) you risk losing notes if you just stuff bills into your pockets!, and b) how are you going to learn GOOD spending behaviour if you just avoid the effort?

2. Break the Bill: I do the exact opposite - I try to never take out cash (I use my day-to-day credit card for grocery shopping at the supermarket, doctors visits, bill payments etc. so I earn points - an extra 1% or so saving). When I have to take out cash (to make a payment that doesn't take credit cards, or charges a surcharge for payment by CC) I will then keep all the bills unbroken for as long as possible. I've trained myself hate having to hand over a nice whole bill and get a measly handful of "shrapnel" back. Also, having a random mix of small notes and many coins makes it hard to track exactly what you have spent each day and I find the money will magically disappear over a week if I don't keep an eagle-eye on it!

3. The Break-the-Bank trick: I've nothing against using banks or credit unions that have few ATMs or branches so that it is hard to take out funds (although these days you can use electronic payments to pay bills, transfer to savings accounts etc. so this doesn't really impact me as I don't use much cash) but I think selecting a bank where "the rates may be lousy" is just plain stupid - I'm sure you can find an inconvient bank with lousy service and GOOD rates!

4. Duck-the-Flyer: It's almost impossible to avoid getting bombarded with junk mail, so I've trained myself to look through them but never buy anything that I hadn't been already planning on (of course this means that you need to think about your needs and wants in a quiet corner - not when window shopping or reading through catalogues!). If you avoid advertising flyers completely you'll miss out on specials/discounts on the stuff you DID intend to buy - never buy at full price.

5. Cart-the-Check Around or Keep the Check in the Mail: Cash it and transfer the money immediately into your high-yield online savings account. You have to cash it eventually anyway (or lose the money entirely), so what's the point in missing out on interest in the meantime?

And as for her favorite trick:

Eat gourmet ice cream.

If you can only avoid over-spending when you feel "over-indulged" you need both overeaters anonymous and spenders anonymous!.

Over the years I've slowly grown out of the habit of buying "stuff" - mainly because I already have lots of cool "toys" that I don't have time to play with, and also because we really don't have any spare room to put more things. I don't count any of my "toys" in my net worth calculation as I don't intend to sell them, I don't know how much I'd get for any of them, and, if I sold them, I'd probably then have some room to buy new "stuff" so I wouldn't end up keeping any of the cash anyhow...

Some of my toys: [S=bought second hand, N=bought new, R=restored]
Item cost est. value (?= hard to sell)
A hovercraft $ 5,000 [S] $ 2,000
A boat $10,000 [S] $ 8,000
A 100 yr old steam engine* $10,000 [S] $ ? (* don't ask me why!)
Telescope, camera etc. $ 8,000 [N] $ ?
Family car, compact $12,000 [N] $ 5,000
Vintage car, restored $20,000 [R] $10,000
Computers, various $ 8,000 [N] $ 500 (the 1980 ZX80 isn't worth much nowadays)
Sports equipment $17,000 [N] $ 3,000
TOTAL $90,000 $28,500
As you can see, my "stuff" has lost over 2/3 of it's value. If I'd invested the money instead, I'd probably have around $200,000 extra by now! Thus the total cost of my toys is around $171,500 opportunity cost - or around $10,000 per annum... Hmmm - how much fun have I really had with all this "stuff" anyhow? The upside is that I have plenty of activities to do with my kids for the 20 years without buying anything else!.

ps. I'm not really that well-disciplined. After Australia qualified for the 2nd round of the football (soccer) World Cup I got carried away and ordered a team shirt signed by all the team members. When it arrived I found that the display case is so large I don't really have anywhere to hang it - so it's sitting in it's delivery box behind the couch. Meanwhile the "10 easy monthly payments" are appearing on my day-to-day expenses credit card each month.

I feel I am tracking nicely towards achieving a comfortable retirement, and have sufficient insurance in place to cover the usual "worst case" scenarios (death, T&PD, long-term partial disability). I also don't have any short or medium term "wants" or "needs" to use as short-term goals. Therefore the financial "goal" I've set myself is simply to achieve annual target values for my net worth.

I've based my projections of annual net worth targets on my current savings rate (36% of my gross salary), current net worth (should hit AUD$1M sometime in 2007), desired retirement pension (100% of my present salary, inflation adjusted), and what I hope is a realistic rate of return (9% pa) based on my continued use of gearing to a 50% LVR (100% gearing) and "aggressive" asset mix with a 50 year investment time period. I've also assumed that the relatively "low" inflation rate of the past decade (averaging 3% pa) will continue. For interest I've also projected outcomes if I attain a slightly better average rate of return, or inflation averages more than 3%, or I spend more than $80K pa during retirement.

Plugging these figures into an excel spreadsheet I get the following scenarios.
Baseline assumptions for Goal:
avg ROI 9.0%
avg CPI 3.0%
retirement @ 65
pension $80K in '06 $
end balance is at age 94
Model Results:
----model parameters--- RESULT
SCENARIOS earning CPI pension end
rate rate amount balance
9.00% 3.00% $80K $16,575,706
10.00% 3.00% $80K $27,887,622
11.00% 3.00% $80K $45,667,238
12.00% 3.00% $80K $73,398,333
higher 9.00% 4.00% $80K $ 9,143,582
inflation 10.00% 4.00% $80K $16,014,005
11.00% 4.00% $80K $26,875,435
12.00% 4.00% $80K $43,885,456
higher 9.00% 3.00% $90K $15,809,024
pension 9.00% 3.00% $100K $15,042,342
spending 9.00% 3.00% $110K $14,275,660
9.00% 3.00% $120K $13,508,979

ANNUAL GOALS in order to achieve planned outcome:
contribute $30K pa net to savings each year, indexed to CPI
achieve avg total return of 9% (eg. 8.2% ROI with 50% LVR at int rate of 7.4%)
Other assumptions in my planning:
I've assumed a 0% tax rate on my earnings. This is partly to simplify the calculations, but also is a reasonable approximation as my primary residence and superannuation savings have 0% capital gains tax rate under current tax rules. My annual investment income is effectively nil as I use the tax deductible interest on my gearing (margin loans and investment property loans) to effectively "convert" investment income into unrealised capital gains.

I have sufficient medical coverage through the Australian "Medicare" system, which subsidises visits to the doctor, pharmaceuticals and public hospital care. We also have basic private hospital cover in case we require any elective surgery (eg. hip replacements, heart bypass etc.), and because if I didn't have basic private hospital cover I'd have to pay the same (or more) as a tax surcharge.

As I'm currently already funding my own part-time post-graduate studies, I expect to be able to cover the costs of my two sons' education costs up to a first degree at university. It helps that our free public primary and secondary education system is quite good. One or both of my sons might qualify for entry to a selective high-school, or may get an academic part scholarship to a private high school. Our universities currently charge around 50% of the "full cost" - so a basic 3-yr business or science degree costs around $25,000 if you live at home.

A key component in deciding the asset mix you want to include in your total investment portfolio is "risk". In financial planning terms, market risk is defined as the variability of returns from an investment, or "the uncertainty of a future outcome". Although we are really only concerned by the likelihood of a LOSS, using volatility to measure risk is OK, as the standard deviation of investment returns is used to measure volatility, and this is directly related to the risk of an exceptional LOSS as well as the "risk" of an unusually GAIN.

Total risk = General risk + Specific risk
= Market risk + Issuer risk
= Systematic risk + Nonsystematic risk

The total risk of an asset is a combination of the many possible sources of risk.
Inflation risk - the chance the money you have invested will
decline in real value due to inflation.
Principal risk - the chance that your original investment will
decline in value or be lost entirely.
Credit risk - the chance a borrower will default on an
obligation.
Market risk - the likelihood that a broad investment market,
such as the bond or stock market, will decline
in value.
Liquidity risk - the possibility you won't be able to sell or
convert a security into cash when you need the
money.
Interest Rate Risk - the variability in a security�s return resulting
from changes in the level of interest rates
Regulation Risk - The risk of a regulatory change that could
adversely affect the stature of an investment
(eg. changes to the tax law)
Business Risk - the risk of doing business in a particular industry
or environment is called business risk
Reinvestment Risk - the risk that dividends/coupons will not be
reinvested, or cannot be reinvested at the same
rate, so that yield to maturity (YTM) isn't attained.
Exchange Rate Risk - the variability in returns on securities caused by
currency fluctuations (aka "currency risk")
Country Risk - the chance of loss due to stability and viability of
a country's economy (aka "political risk")
Valuation Risk - the chance that a an investment is overvalued
(eg. bubbles)
Timing Risk - the chance that other factors cause you to buy or
sell an investment at an inappropriate time
Forced Sale Risk - the chance that an investment is liquidated
involuntarily eg. takeover, fund closure
Some of these risks overlap eg. the principal risk may be a combination of market risk, business risk and regulation risk. It is not possible to measure of estimate some of these risks accurately, but it is still important to mentally run through this list whenever you are considering a new investment.

Standard deviation is a measure of the total risk of an asset or a portfolio, including therefore both systematic and unsystematic risk. For any investment, the "total risk" can be calculated from data on periodic (daily or monthly) valuations (prices) using the formula:

std dev = SQRT[{1/N}xSUM(Xi-mean)^2]
where;
N is the number of data points,
Xi is the ith measured value,
mean is the mean (average) of all the values,
and the SUM is for all values (for i=1 to N).

Standard deviation for many investments is available online or in magazines. If you have an investment and have periodic (eg. daily) unit prices you can caluculate the standard deviation yourself. A tutorial on how to calculate standard deviation for your investment data using excel is available here.
Typically, the standard deviation of the annual returns for various asset classes are as follows:
Money market (cash): 2%-3%
Short-term bond: 3%-5%
Long bond: 6%-8%
Domestic stocks (conservative): 10-14%
Domestic stocks (aggressive): 15%-25%
Foreign stocks: 15%-25%
Emerging Markets stocks: 25%-35%
A couple of points to be in mind are that
a) standard deviation is a measure HISTORIC risk - ie. if you use this in your planning, you are automatically assuming that risk in the future will continue at the same levels as in the past - this isn't always true (the collapse of several hedge funds provide examples of coming undone when risk levels suddenly change).

"Although standard deviations based on realized returns are often used as proxies for expected standard deviations, investors should be careful to remember that the past cannot always be extrapolated into the future without modifications. Historic standard deviations may be convenient, but they are subject to errors. One important point about the estimation of standard deviation is the distinction between individual securities and portfolios. Standard deviations for well- diversified portfolios are reasonably steady across time, and therefore historical calculations may be fairly reliable in projecting the future. Moving from well- diversified portfolios to individual securities, however, makes historical calculations much less reliable. Fortunately, the number one rule of portfolio management is to diversify and hold a portfolio of securities, and the standard deviations of well-diversified portfolios may be more stable." - Learing for Life.

b) you had to pick a particular period to use for calculating risk - did you use data for the past year, past 10 years, all available data?

If you have a figure for the risk level of a particular investment, and know its expected rate of return, and its covariance with the other investments in your portfolio you could then work out where your current/planned asset allocation sits in relation to the efficient frontier, and make any sensible adjustments.

Your Tolerance for Investment Risk

Each individual investor has a different level of tolerance for risk. This may depend on your age, salary and expenses, health, family, and personality.
Conservative investors are more concerned with safety of principal and minimizing risk, and can accept a lower rate of return in exchange for added peace of mind.
Aggressive investors prefer to maximize the return on investment with a more flexible strategy, and are willing to accept a higher degree of risk.

You should ask yourself the following questions to assess your risk tolerance.
- What Are Your Investment Goals?
- How much you can invest, and what rate of return on investment will you need to achieve these financial goals?
- When Will You Need the Investment Income? ie. What investment timeframe are you looking at?
- Are You Comfortable with the Possibility of Losing Money?

Once you know your own risk tolerance, you are in a position to evaluate any new investment in light of it's expected risk and return.

One school of thought is that it is best to be more aggressive and take more risks when you are starting out/younger as you will have more time to "catch up" if things go wrong. I personally think that even young investors should start out with more conservative investments and then start to add more risky investments into their portfolio over time. This way you'll get to know your risk tolerance based on actual experience rather than questionaires etc.

Some common mistakes people make when planning their finances:
Not setting measurable financial goals.
Thinking that only the wealthy need a financial plan.
Thinking that you can avoid starting to plan until you get get older.
Thinking that financial planning is the same as retirement planning.
Confusing financial planning with investing.
Making a financial decision without understanding its possible effects on other aspects of their finances.
Neglecting to review their financial plan periodically.
Waiting until a money crisis to begin financial planning.
Expecting unrealistic returns on investments.
Thinking that you can leave decision making to a financial planner.
Not understanding what a financial planner is advising.
Paying excessive fees for the sake of convenience.
Believing that financial planning is primarily tax planning.

OK, I admit this is more technogeek than personal finance, but as lots of pfblog.org blogs appear to be hosted by blogger.com I thought this might be useful to some readers.

Basically, you can register your website (xxx.blogspot.com) with the google Webmaster Tools sitemap service. This will give you useful info about when your site was last spidered, how many pages have been indexed etc. One option is to provide a SITEMAP listing all your pages. This may help with getting all your pages indexed by google asap, and therefore increase your traffic/readership.

While searching for how to save a sitemap.txt file onto my blogspot.com site, I found out that if you have your blog setup to provide atom RSS feeds AND you're using the "old" blogger.com (not the BETA version), then you can simply specify your atom feed as the sitemap file! ie. enter the sitemap URL as http://yourblog.blogspot.com/atom.xml

This ensures all my recent post permlink URLs are being indexed by google after they were published. Before I set up this sitemap URL Google had last spidered my site 9 days previously and had indexed 29 pages. After setting up the atom.xml page as the sitemap file, Google had reindexed my site and found 37 pages.

A recent survey conducted as part of the Fujitsu/JPMorgan Australian Mortgage industry Report (Volume 4) found that there are significant differences in attitudes towards mortgage lenders and awareness of interest rates between different age groups.

The survey divided respondents into four groups by age - Seniors (over 60 years old), Baby Boomers (between 45-60), Generation X (between 30-45) and Generation Y (between 18-30).

The survey found that:
* Significantly more Baby Boomers and Generation X prefer to use a mortgage broker, compared to Seniors and Generation Y respondents, who said they would prefer to use a bank for their home loan needs.
* Generation Xers are more aware of mortgage interest rates - with 88 per cent claiming they could quote the interest rate on their mortgage while only 22 per cent could quote the interest rate on their credit card.
* Baby Boomers were also considerably more aware of their mortgage interest rate with 55 per cent of respondents claiming they could quote the interest rate on their mortgage, compared to 28 per cent who could quote the interest rate on their credit card. On the other hand, only 32 per cent of Seniors and 24 per cent of Generation Y respondents were aware of the interest rate on their home loans. (Perhaps because most people in these last two groups don't HAVE a home loan!)
* Generation X showed the highest predilection towards fixed rate loans, with more than 51 per cent claiming they would consider a long-term fixed rate re-finance compared to 31 per cent of Baby Boomers, 13 per cent of Generation Y and one per cent of Seniors.
* Boomers were more likely to have investment properties than Seniors (67 per cent and 41 per cent respectively).
* Owner-occupied mortgages were most prevalent amongst the Generation X group (55 per cent) while investment mortgages were significantly more popular in the Baby Boomer group (59 per cent).
* Unsecured lending was most common in the younger peer groups, with 36 per cent of Generations Y and 22 per cent of Generation X with unsecured car loans.

personal finance
money
real estate

Lots of PF Blogs devote many posts to announcements of new online savings accounts, rate changes, joining bonuses etc. I'll simply provide a link to a comprehensive comparison of Australian online savings accounts, and provide some links to those that provide joining & referral bonuses:

Get a AUD$20 joining bonus for a new Easy Saver Account if you apply using the following referral details:
1. Apply for an EasySavings account (Australian bank account needed)
2. Answer the question: "How did you hear about EasyStreet?" by selecting "friend, family member or acquaintance"
3. Enter my name "Ralph Morgan" and postcode "2087" as the referrer
(Disclosure: I'll also get $20 for attracting a new customer)

Disclaimer: This information is general in nature and not tailored to your situation. It is not financial advice. More information is available in the Easy Street Savings Product Disclosure Statement (PDS). You should read and consider the PDS before deciding whether to apply for this product.
personal finance
money
saving

As I don't have a US SSN I can't invest in Prosper.com, but I've seen quite a lot of posts by PF bloggers considering investing this way. Although the idea is interesting, and I might be tempted to invest a few hundred dollars myself if I could (bear in mind this would only be a tiny % of my total invested assets), I have some concerns which I posted as comments on Fearless Money.

I think they have general application to anyone considering putting money into Propser.com loans, so I'll repeat my comments here:

Please review the concepts of "there'no such thing as a free lunch" and the trade-off between "risk vs. reward" before investing in Prosper.com

And remember that buying 11 small lots of a single risky investment class does NOT reduce risk, as you are not actually diversifying if you stick within a single asset class/sector. eg. if the economy tanks then ALL Prosper.com borrowers have an increased chance of defaulting.

Also, remember that they're lots of investors looking over the Prosper.com opportunities, so to "win" a slice of debt you have to underbid the others- ie. you were willing to take the LEAST return for the estimated risk.

You may luck out and have 10x$100 invested at 11% and get it all back with interest. But, based on the current "riskless" rate of around 5%, it's more likely that you'll not get paid the full interest due on several of these parcels.

There's also a risk that you might not get your $100 capital back either. Did you notice the following bits in the Prosper.com FAQs?

"There are no guarantees that your loan will be repaid"

and

"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."

The bit about NOT being insured by the FDIC is clear. I've no idea what FDIC "pass-through" insurance is - it might just mean you're insured against Wells Fargo losing your money during transit from your account to the borrowers! If you intend to invest in Proper you should know exactly what this means, and get confirmation from Wells Fargo in writing.

The first rule of investing is "if it looks too good to be true, it probably is". I'm not sure if that's covered in "Secrets [sic] of the Millionaire Mind" or "Millionaire Maker's Guide..."

It's probably also worth remembering that back in the good old days of "community lending" a run on the local bank often meant that the depositors ended up losing their entire life's savings.

Get Rich Slowly [link] has just done a review of his blog's progress over the past six months. Aside from being green with envy at his blog's success (and his writing ability), I thought that some feedback on my blog would be extremely useful. So I'm asking for your feedback. (With acknowledgement to Get Rich Slowly for the structure of this post - it hardly seemed worth reinventing the wheel).

Enough Wealth began three months ago (19 July to be exact). In that time, it has started to slowly build up some momentum:
Posts: 61 (1.0/day)
Comments: 3 (0.03/day) !
Spam: 1 (0.01/day)
Visitors: 553 (16/day) since 25/9
Page Views: 1,045 (53/day)
Subscribers: 2 (0 by email)
I'd love to get your comments (more, more!), suggestions, and contributions. To quote GRS "If you find something that other readers should see, send it in. If you have a question about personal finance, let me know. Your feedback (good and bad) will help to improve this site. Please let me know what you think, either in the comments or via e-mail."

Where my Reader's are from:
United States 68%
Canada 10%
India 9%
Romania 5%
Japan 2%
Poland 1%
New Zealand 1%
Ireland 1%
United Kingdom 1%
Germany 1%
Other 1%
As an Aussie blogging from Sydney, I'm thrilled that 78% of my readers are in the US and Canada (but a bit perplexed that I have no readers here in Oz!) I think this probably has to do with most readers finding me via links on pfblogs.org and a handful of PF blogs [thanks Free Money Finance, Living Poor, and 1stMillionAt33].

BTW - If any other bloggers have tips on increasing traffic, please let me know.

I recently had a chance to look through the training materials provided by a leading financial planning/wealth management company (it "fell off the back of a table"). It confirms my suspicions that the main target of most "wealth management" services is to manage as much money as possible from your account into their pockets - hopefully while providing you with sufficient residual return on your investments (after fees) that you don't take your business elsewhere.

For example, due to increased competition reducing the margin available in the traditional stock-broking based model which focused on equities research and transactional fees (read "churning"), they are aiming to move to a fee-based "scaleable wealth management" model. The target is to move from having 200+ clients per advisor yielding $4K in revenue per client (from brokerage), to having fewer, high net worth clients - 100 clients yielding $30K+ revenue each (from fees). This is to be achieved by putting such clients into "high margin, high sophistication" products. (read "expensive and hard to understand")

The main driver for this move is a graph showing that the average brokerage rates have dropped below trailing commisions - so it is better for them to push managed products rather than direct equity investments.

An interesting part of the transition plan was how to eliminate current clients that are "small" and "unscalable" by shifting them to a discount broker or "other advisor" . And the methods for finding new "scalable" clients included:
* Internet Research
* Relationships with accounts and lawyers who focus on sales of businesses
* Look for ads of business sales in newspapers
* Relationships with Private Equity companies who will be buying businesses

I found it intriguing that the entire focus was on how to maximise fees from clients, and not a word about maximising returns for their clients, or any relationship between fees and performance.

In a similar vein, the Sydney Morning Herald recently had an article written a student financial planner. It gives a stark insight into just how much the financial planning industry is oriented towards maximising fee revenue, with just enough consideration of the clients needs and situation to avoid running afoul of the regulating bodies. Read Confessions of a student planner.

personal finance, investment, investing, wealth

Yes, Credit Cards CAN be good for you! I have one credit card that I use for all my day-to-day expenses (shopping, petrol, bill payments) but as I pay off the balance each month in full, it doesn't cost me a cent in interest - the only cost to me is the annual fee of $19.80

The card has a "rewards" program which gives you some points for spend, and one of the redemption options is to get a $100 credit onto your card for 13,500 points.

This past year I've made $75.46 net profit from using my credit card (no, using a card for payments does NOT change my shopping habits and encourage me to spend more - in my mind putting $10 onto the card is exactly the same as taking a $10 note out of my wallet):
Spend = $35,234.89
Points = 12,861
= $95.26 credit onto my card
fee = -$19.80 pa
profit = $75.46Of course, this only works if you have the self-discipline to
a) not spend any more using the card than you would using cash,
b) always pay it off in full each month,
c) the card has a low (or no) annual fee, and
d) there's no fee for participating in the rewards program.

Over the past 20 years that I've had this same credit card, I've forgotten to pay it off by the due date three times, and have then had to pay interest on all purchases for the current month and next next billing period. On each occasion it would have cost me as much in interest as I earn in points for the entire year! This makes me VERY careful to pay the balance off in full on time - these days its much easier as I can schedule an automatic payment from my credit union savings account to my bank credit card on the due date.

One other benefit of having a credit card is that the credit limit ($15,000 on my day-to-day credit card) would allow me to cover my basic living costs for six months in the event of an "emergency". So I can choose how much to keep in interest-bearing cash accounts, rather than having to keep six months spending money sitting there.

Of course I have some other credit cards that are only used to obtain a 0% balance transfer offers, which will earn me interest on the amount I've borrowed from those lenders at 0%.

And I have one credit card used only for making internet purchases - usually only $20 or so every couple of months. I use a separate card for these purchases so that if the card details ever got stolen and misused I could cancel the card immediately to avoid liability, and it wouldn't cause any problems with my scheduled bill payments coming off my day-to-day credit card as usual.

saving

Aside from the main part of my investment portfolio being in stocks and property, I have a minor portion of my portfolio (around 5%) invested in some "alternative" assets:
Hedge Funds - Ord Minnett OM-IP 220 series 1,
OM-IP 320,
OM-IP Strategic Ltd.
Agribusiness - Timbercorp Timberlots (1999),
Rewards Teak Project (2005),
Rewards Sandlewood Project (2005)
Other - Macquarie Film Investment Fund (FLIC)
While these are possibly good "diversification" assets, and, at least in the case of the agribusiness investements, assisted with tax planning, they have several substantial drawbacks:
* illiquid - the units in the hedge funds can be redeemed upon request, but it takes at least a month. The agribusiness units are "locked in" until maturity, unless you want to try to sell them privately (at a bargain price).
* difficult to value - the hedge funds publish a monthly "unit price". The others I just value at "cost" (except the FLIC which I wrote off ages ago) and hope for the best in the long term. There's really no way to guess what the prices for woodchips, teak and sandlewood will be in 5-10 years time (although the sales brochures have some really fancy looking graphs!)
* management fees - think of the worst possible combination of insurance "up front" sales commission, followed by the sort of on-going fees the hedge funds charge for "outperformance"! Boo, hiss.
* risk-adjusted return - the return (after fees) is probably insufficient for the amount of risk involved, although it's hard to evaluate with them being a part of a diversified portfolio. For example, my $5,000 FLIC investment provided an immediate tax deduction, but has since only returned around 15% of the amount invested and is being wound up with no residual value. At least I may be able to claim a capital loss on my tax return this year.

In terms of reporting, the hedge funds are held in one of my margin loan accounts, so I just include their value in my "equtities" total, along with a notional "value" ie. cost base) for my agribusiness investments.

So far, the Hedge funds have performed pretty well:
Fund Date Date Unit Price ROI
Issued Matures (Aug 06) pa
OM-IP 220 Aug '97 Jun '15 $3.9465 15.35%
OM-IP 320 Dec '98 Jun '07 $1.7648 7.43%
OM-IP S/L Aug '99 Jun '08 $2.1426 10.93%
and have a low co-variance with my share investments, thus reducing overall "risk" (volatility).

I bought them without any gearing (debt), and have since transferred them into one of my margin loan accounts to provide extra collateral. As I'm not using making use of the increased borrowing capacity, they act to greatly reduce the chance of getting a margin call.

I also have a tiny amount of other "alternative" asset classes like coins and gold bullion - but I don't bother trying to include these (or my cars/household items) in my net worth calculations as they're not really liquid.

personal finance
investment
investing

It's always good to get some "free" money from your employer. Yesterday I had my application for study assistance approved, up to a maximum of $1200 this year. I'm currently doing a Masters in IT by distance education and my employer has agreed to reimburse me for 50% of the course fees for the subjects I'm doing this year (paid when I pass each subject). As the course fees are tax deductible [as "work related self-education" expenses] the refund from the company will be somewhat offset by the reduced tax deduction, but I'll still end up ahead by about $900.

As usual the process of applying for study assistance is extremely bureaucratic - I'd previously had an application to be reimbursed for the entire cost of the degree approved - unfortunately the approval was only "valid" for that particular financial year budget, and as the degree will take about 8 years of part-time study by distance education this ended up meaning I got nothing refunded for the subjects I completed that year. Working out how to submit an application worded in a way that means I'm entitled to get some money back within the current budget period took some doing!

As I'd already budgeted for paying my course fees, when I get the refund money I'll probably use it to by some shares for my new baby boy.

personal finance
money
saving

In keeping with the "open wallet" philosophy, I'll track my progress monetarizing this blog.
income expense
Jul 06: $ 0.00 -$ 0.00
Aug 06: $ 0.00 -$ 0.00
Sep 06: $ 0.00 -$ 0.00

ps. In case anyone is wondering why I've included Amazon.com and AdSense links in the "body" section of my blog, it's simply that my template currently only lets my post content start to appear after the end of any sidebar material - so including all sponsored material in the sidebar would mean a huge amount of whitespace appearing between the posting date (which does indent correctly for some reason) and the start of the actual post content! If I work out how to fix my blogger template I'll move all the "ads" into my sidebar.
monetization

The National Information Centre on Retirement Investments (NICRI) has just launched a website full of basic financial advice.

The site provides basic advice, plus calculators to help you see what you can achieve when you start investing or saving.

Six Tools are provided online:
1. Budget Sheet.
2. Assets and Liabilities tables.
3. Needs and Objectives - learn about and prioritise investment objectives.
4. Risk Profile – determine your attitudes towards risk.
5. Choosing Investments – access to information about 30 investment types and investment related topics.
6. Calculators.

personal finance
investing
money
saving

NCN is an interesting blog that gathers and reports the progress of various bloggers that are attempting to pay down their debts. Most of the participants have student loans and/or credit card balances that wish to eliminate as quickly as possible, but there are also a few reporting on home loan and business loan balances. I thought I may as well track the total quantum of debt I am carrying using this site to keep track of how much I ower and my progress paying off my home loans.

While I have no student loan balance* and pay off my "day-to-day expenses" credit card charges in full each month. I have some other credit card accounts which I recently opened and have taken out 0% balance transfers to invest in an online account and earn some interest on OPM^ [see previous posts link, link, link, and link] . I also have home loans for my house and an investment property which I aim to pay off in 10-15 years. My other main debt is margin loans from several lenders for my Australian and US stock investments, some mutual funds, index funds and hedge fund investments. These are generally "interest only" loans - indeed I generally capitalise a "pre-payment" of 12 months interest at the end of each tax year (to bring forward the tax deduction on the interest) and then pay off the capitalised interest over the following 12 months. I also expect to increase my margin loan balances over time as my stock portfolios appreciate - my aim is to keep the loan-to-value (LVR) ratio of my margin loans at around 50%-60%. As the stocks and funds in my margin loan accounts typically have a margin value of around 70%, this keeps my margin utilisation around 70%-85%. The margin lenders allow you to reach 105% margin utilisation before a margin call will result (when you have to reduce your margin utilisation back below 100%). This allows for an overall drop in the value of my portfolio of around 18% without getting a margin call.

I'll be sending updated figures to NCN each month and posting a link to the updated graph each month.

Debt info: (Sept)
|- $200,598.09 Investment Property a/c#1
|- $348,235.52 --- $258,020.14 Investment Property a/c#2
| (x 0.5) |- $237,852.82 Home Loan
|
-- $669,719.09 --- $321,483.57 --- $ 36,850.28 SGPL
| "good" debt margin loans |- $ 19,325.00 SGML
| |- $ 94,108.28 Comsec
| |- $155,592.50 LE
| |- $ 15,607.51 Citibank
|
$673,251.71 --- $3,531.62 ----- $ 15,532.62 -- +$ 2,332.38 Cr NAB
TOTAL CCARDS | |- $ 12,000.00 Virgin
| |- $ 5,865.00 Coles
|- +$ 12,000.00
invested Cr


* In Australia we pay only a portion of the total cost of our studies, known as HECS (higher education contribution scheme). It can be accumulated as a debt to the tax office, and gets automatically paid off via a tax surcharge once your income reaches a threshold level. Alternatively you can pay the HECS "up front" and get a 15% discount on the amount you have to pay. I've always paid my HECS "up front" so I have no debt from my studies.

^ Other peoples money - I love credit card companies lending my their money at 0% for 6 months.

personal finance
money
saving

As mentioned previously, the "estimated value" of my properties dropped back towards more realistic values this month. It's best to view the trend data in a plot of prices over time to spot any such "spikes" or "dips". Nearly every suburb has areas with a few unusually expensive houses (water views or large blocks that can be sub-divided), which push up the median sales price when several of them get sold in a month. Similarly, sales of a new release of "town houses" will push the median sales price down for the month that a development is completed.

Overll the price plot shows that the housing bubble seems to have finished "bursting" in the suburbs where my properties are situated - I now expect that prices will track between the inflation rate (~3%) and the typical long-term rate of house price appreciation (6%) over the next few years.

New housing construction has been below demand for the couple of years (see previous post here), so I expect some upward pressure on prices to appear in 2-4 years time (the start of the next "boom").





This chart from Quartile Property [link] shows the past 25 years of median house prices in Sydney including two market peaks seen in 1989 and late 2003.

My "Little Book that Beats the Market" Portfolio has progressed nicely this past month, although the particular stock I added this month has had a rough start.

BOUGHT: 100 shares in AMERICAN SCIENCE AND ENGINEERING, INC. [ASEI] on 15 Sep @ $47.94 - total cost $4859.00 [AUD $6470.90] including $65 brokerage.

SOLD: No sale this month (portfolio is in accumulation phase - $5,000 purchase each month for 18 months)

When selecting which stock to buy I've been keeping clear of commodity (mining & oil) stocks as I think the "e" in their p/e rations may start declining within the next 18 months if commodity prices moderate as production increases meet demand.

PORTFOLIO PERFORMANCE:

I'm currently ahead by 5.62% ($1,204.90) after deducting $65 for selling costs per stock. After deducting approx. $236.52 for interest paid on the loan to date (this portfolio is 100% geared) my total return is currently $968.38.

nb. The average gain reported above is spurious as each stock has a different holding period. I'll start tracking net gain (capital gain + dividends - selling costs - interest) once I'm fully invested after 18 months.

The latest Festival of Stocks is now running over at Value Discipline. It includes my recent post about selecting US stocks to add to my US stock portfolio using Joel Greenblatt's Little Book methodologies, as well as one about selecting non-US stocks (for US investors) by Controlled Greed. Between the two of us we have the entire global stock market covered! Be sure to drop over and check out the festival.

A survey by Money Magazine and ICR was reported in CNN.money this week - and I think that the survey question has to win the title of "this week's most badly worded survey question":

"the amount of federal taxes paid by Americans is distributed appropriately across individuals of all income levels."

I find it absolutely unsurprising that most people, regardless of political persuasion, disagreed with that statement (85% of Democrats, 73% of Independents, and 60% of Republicans disagreed) given that you would have to disagree whether you thought the rich paid too much in taxes, or if you thought the rich should pay more tax!

The 69th Carnival of PF was held over at Carnival itself! This was my first Carnival and I loved reading through all the top posts that were selected...

The second new credit card account finally processed my 0% balance transfer request. Because Virgin Money decided to give me a $22,000 credit limit, I decided to do a balance transfer of $12,000 (rather than the $6,000 I had originally expected to be able to do). I didn't use the full $22,000 available as this will be the first time I've do a "cash withdrawal" from the destination CC account of the balance transfer. Theoretically (according the bank's call centre) I won't pay any interest on this "cash advance" as my account is in credit by more than the amount being "advanced". But I'll only believe this when I get my next CC statement from them confirming that no interest is due!

The current status of my balance transfers experiment:

Card #1 Coles Source MasterCard:

I transferred $6,000 at 0% for 6 months onto my day-to-day CC. I'll use this extra credit balance to cover my normal $2,000 per month living expenses for the next three months. This will allow me to save $2,000 each month into an online savings account earning 5.90% interest. $6,000 x 5.90% x 4 months = $118

Card #2 Virgin Money MasterCard:

I transferred $12,000 at 0% for 6 months onto my day-to-day CC. I then took a "cash advance" of $12,000 to remove the surplus credit balance created on this CC by the balance transfer. It may cost a $3 cash advance fee to withdraw the funds (this charge hasn't appeared in my online CC statement yet, so I'll see if it gets added in this months statement). I've deposited the cash into an online savings account with my Credit Union that will earn 5.90%pa for 5 months. This will earn me $295 in interest. BTW I was a very strange feeling walking out of the bank with $12,000 CASH in my wallet! Luckily I only had to go to another bank next door to make the deposit into my Credit Union account.

Total interest income from the 0% balance-transfer offers;
$118 (card #1) + $295 (card #2) - $3 fees = $410

Not bad for less than 2 hours filling in forms and switching funds between accounts.

ps. The online banking for Virgin is provided by Westpac - they have the cutest "virtual keyboard" for entering you login information:

It's interesting to see how the various PF bloggers who post Net Worth each month are progressing. Here's a summary of all ones I found.

Leave a comment if I've missed yours out!
Monthly Net Worth of PF Bloggers for SEP 2006:

Blogger Age Net Worth $ Change % Change
Accumulating Money 2x $38,125.09 $2,342.41 6.5%
Consumerism Commentary 30 $59,232.35 $5,235.74 9.7%
Enough Wealth 44 $947,571.00 $10,720.00 1.1%
Financial Freedom 30 $221,898.75 $7,326.06 3.4%
It's Just Money 32 $148,413.84 $2,935.96 2.0%
Make love, not debt ?? -$79,013.54 $2,467.05 3.0%
Making Our Way 37 $599,889.77 $17,687.01 3.0%
Map Girl 32 no Sep data no Sep data n/a
Money and Values 24 $23,336.00 $2,650.00 12.8%
My Money Blog 28 $106,044.00 $5,567.00 5.5%
My Money Path 29 $92,444.00 $11,267.00 13.9%
My Open Wallet 37 $298,000.00 no Aug data n/a
New Age Personal Finance 31 $124,846.69 $6,931.87 5.9%
Savvy Saver 27 $208,812.00 $8,479.00 4.2%

7:07 AM, October 09, 2006
nb. Some ages have been adjusted as follows:
exact age provided = listed as given
"20's" = listed as 2x
"early 20's" = listed as 22
"mid-late 20's" = listed as 27
and so on.

What causes house price "boom and bust" cycles? How do you pick the bottom? In "The Wealth Power of Property" Fred & Brett Johnson* discuss the underlying causes of the "boom & bust" housing cycle. Property prices generally oscillate (in real terms) with a period of between 8 and 11 years, and the cycle is driven by excessive construction (greater rate of increase in available housing than the rate of increase in demand) causing oversupply and a decrease in the real (inflation adjusted) price of housing until construction drops off and the surplus stock is consumed. The next "boom" commences when shortage of supply starts to drive up prices, followed by an increase in construction as it becomes more profitable for developers. While it can be obvious that a property boom has ended, it is harder to determine when the market is poised for another period of higher rates of growth. Generally the tail end of a "bust" is accompanied by loss of convidence in real estate investing, tales of woe appearing in the papers, and predictions that they'll never be another run-up in property prices...

Picking the bottom of the cycle is easier if we use objective data to plot the cycle and see where we are. The data needed are monthly median house prices, an adjustment for inflation (CPI data), and Quarterly building approvals. As an example here is such data plotted for the Sydney residential property market:



The housing boom of 1998 was very sharp, triggered by the stock market crash of '87. House prices in Sydney doubled in a couple of years, and then stagnated through the '90s.

The boom in 1999-2003 was longer, and had a slight "pause" mid-way through before gathering pace again. As repayments are more sensitive to interest rates than house prices, the lower interest rate environment of the late '90s helped prices reach a higher level in real terms and as a multiple of average weekly wage than in previous cycles.

The current slump in house prices appears to have now bottomed out, and, based on the very low level of housing construction, could start to pick up again sooner than many people think. Although house prices in Sydney are still high relative to the average wage, more home buyers are dual income families, and so can better afford higher repayments. The shortage of land available for development (based on Sydney's geography and lack of state government spending on infrastructure) could easily spark another round of price increases when interest rates start to trend down again.

* Fred & Brett Johnson own the property investment company "Quartile Property Network" which has been investing in Sydney real estate since 1953.