The process of using unrealised gains to partly or fully finance the purchase of additioal securities using a margin loan.

I'm currently enjoying my work and not too stressed out, but I can see a time in 2-3 years when I'll have been working for the same company for ten years, and with my 8 weeks "long service leave" then becoming fully vested, I could consider making another career change.

My first career, straight out of uni, was as a research scientist working on minerals processing equipment (with a bit of computer modelling and computer systems admin thrown in). This made good use of my first degree (in Applied Chem) but I actually found the programming of more interest than the chemistry (although playing around with the analytical equipment was a fun way to make a living).

After ten years my first employer laid off a large portion of the research staff in a cost-cutting drive, so I took the chance to change career into the "real world" of a private business-services company, and make use of my GradDip in Industrial Math & Computing. After taking an initial pay cut to get my foot in the door, I soon was earning more than in my old job, and had opportunity to progress up the "management ladder". But after 8 years I'm thinking of what I want to do for the next 20 years or so.

I'm currently half-way through a Masters in IT by distance ed, and I've just been accepted into a Post-Grad Diploma of Secondary Education course for next year. The plan is to finish of the MIT and the GradDipEd in the next couple of years, and then get put on the waiting list for a High School science teaching position. If I nominate only schools in the area we live (Sydney Northern Beaches) the waiting time for a position will be quite long (although they seem a bit short on Science teachers), so I probably wouldn't get a position immediately.

The plan is to accept a suitable teaching position (which will mean a pay cut of 50% or so), and treat the new job as a sort of "early retirement". The change of career should make the job interesting (at least for a decade or so), and the daily hours and amount of annual leave entitlement should make the hourly rate similar to what I currently earn - sort of like changing to a part-time job

I'm sure any teacher's out there will say that teaching is anything but a part-time job, but, at least on paper, it looks like a good idea.

What do you think?

A recent study by the Center on Budget and Policy Priorities in Washington reported that while the percentage change in average real household income between 1990 and 2004 was an increase of 57% for the top 1 percent of American taxpaying households (with a annual income of $940,000 in 2004), it was 85% for the top 0.1 percent, and 112% for the top .01 percent. That is, the richest are getting richer almost twice as fast as the rich.

An article in the NYT outlines how this is leading to resentment by the bigger and poorer group, the "lower uppers" which consists largely of professionals (doctors, lawyers, management consultants, most Wall Street execs), for hedge fund managers and some astronomically paid C.E.O.’s who are seen to be undeserving of the huge amounts they receive.

It's difficult to feel sorry for the "merely rich" though - in the same time period the percentage change in average real household income was an increase of 2 percent for the bottom 90 percent of American households.

money, wealth

I take bottled drinking water to work - although Sydney tap water is of good quality, I don't want to drink the tap water in my office because the building is an old converted factory building, and I'm not sure how good the pipes are. Having bought a couple of bottles of drinking water I now rotate the bottles and refill them each night with chilled filtered tap water. The filtered water costs a few cents a bottle, and the quality is just as good as your typical bottled water brand by all accounts.

If you want to impress your workmates you can spend it up on the initial purchase of bottled water and have "exclusive" name brand bottles for your home made bottled water

I usually also pop half a tablet of aspirin into the bottle in the morning - I happen to like the taste of aspirin, don't have any stomach problems, and the 150mg a day of aspirin might be good for my health.

saving

What's better than pfblogs.org? Why, the Carnivals and Festivals each week - get all the best posts and none of rest! Enjoy:

12 NOV: Carnival of Investing Week 48 included my Net Worth - PF Bloggers progress for OCT '06 post

14 NOV: Carnival of Wealth Building Ideas included my A Review of ReviewMe.com post

14 NOV: Festival of Frugality #48 included my Frugal living: Recycling Calendars and Diaries post

14 NOV: Festival of Investing included my A Word a Day: "Gearing" post

The ability of an investment to be converted into cash quickly and with little or no loss in value.

A lot of posts on the Personal Finance blogs have outlined the hows, whys and wherefores of doing a 0% balance transfer Arbitrage to earn interest on OPM. Lots of other blogs deal with those struggling to pay off CC debt, and who could benefit from transferring their current balance to a lower rate CC. But how do you find the best CC available?

I've just had a look at a site which lets you compare the various features of Credit Cards - it even has a page listing cards that have a 0% balance transfer available! All in all this looks like a very useful site for my US readers.

PayPerPost

While asset allocation is probably the most important factor in your long term investment performance, and fees and charges the second mosst significant item, the interest rate you pay on any investment borrowings are also a major consideration. A few percentage points extra can mean the difference between the use of gearing adding to or reducing your ROI. There can be considerable differences in the interest rates charged by different lenders, so it pays to shop around. Also, there may be price breaks from larger loan balances, so this is a time when diversifying between different lenders can be counter-productive. My investment borrowings are a bit of a mish mash, due to changes in investment stratgey over time, and using new lenders (at cheaper rates) for new investments, while keeping the old accounts in order to not realise capital gains just by shifting assets between accounts.

My investment loans:
Property
$230,602.65 @ 7.37% - home loan (non-deductible) - variable rate
$118,250.00 @ 7.09% - rental property loan (deductible) - fixed rate (5 yr term)
Shares - AU - three margin lending accounts
$19,474.16 @ 8.85% - St George Margin Lending (St George Bank) - variable rate
$12,042.90 @ 8.90% - Commonwealth Securities (Commonwealth Bank) - variable rate
$82,065.38 @ 7.95% - Commonwealth Securities (Commonwealth Bank) - fixed rate (1 yr term)
$150,000.00 @ 8.25% - Leveraged Equities (Adelaide Bank) - fixed rate (1 yr term)
$5,607.76 @ 9.15% - Leveraged Equities (Adelaide Bank) - variable rate
Shares - US
$59,175.20 @ 7.09% - St George Portfolio loan (secured against property) - variable rate
Other
$ nil @12.99% - Citibank*
* This Line of Credit is used to capitalise margin loan interest prepayment in June, and is then paid off with my tax refund in November.

Overall, the interest rate on my property loans currently averages 7.275%, and the interest rate on my stock portfolio loans currently averages 8.041%. The use of 1-year prepaid interest fixed rate loans helped lower the overall interest rate, as the Reserve Bank has raised rates a couple of times since June. The opportunity cost of prepaying interest for a year can be ignored as prepayment brings forward the tax deduction for the interest payment.

I don't get it - how can W. Gates III still be "the world's richest man" with a NW around US$50b, when this appears to still count the $25b or so he donated to his charitable trust a couple of years ago?. Surely his net worth is now "only" $25b or thereabouts?. Either the money is still his, or else he's donated it to the trust and it isn't "his" anymore (even though he may have legal interest in the assets, they are for the benefit of the trust).

Year NetWorth (Forbes) in Trust (total)
2001 $58,700,000,000 n/a
2002 $52,800,000,000 n/a
2003 $40,700,000,000 $24,000,000,000
2004 $48,000,000,000 $27,000,000,000
2005 $46,500,000,000 $27,000,000,000
2006 $50,000,000,000 $29,000,000,000

A quick look at the Microsoft share price since 2001 shows that his net worth probably dropped from $52.8b in 2002 to $40.7b the following year - so he didn't suddently have an extra $24b to donate into his charitable trust - it must have come out of his net worth.

I must admit that the question of inheritance doesn't take up much of my time - I expect to have enough accumulated to fund my own retirement, and there's a good chance my parents will still be around when I retire - I have a Great Aunt still alive in her 90s, and two of my Grandparents lived to 94. So if I ever inherit anything I'll probably be too old to enjoy it anyhow.

However, for a lot a Baby Boomers who have been "living in the moment" and are only now starting to get concerned about where the money will come from in their retirement, the possibility of an inheritance bailing them out may have been in the back of their mind.

I had read that this hope was misplaced, with the current crop of retirees planning to spend their money, and possibly use a reverse-mortgage to spend the family home as well. So they'd bit little left for the Baby Boomer's to inherit.

But a new Citibank report contradicts this belief. Apparently most retirees are living within their means and around 85% plan on leaving a bequest to their children.

The average amount expected is $427,000, but some are planning on leaving a lot more:
Expected size Proportion of
of Estate Retirees
$900,000 15%

wealth, retirement

The use of borrowed funds to purchase securities. It magnifies returns (losses or gains) by reducing the amount of capital an investor must contribute to the investment.

Inspired by MyMoneyBlog's post of his Net Worth progress since his College days, I decided to dig out some old quarterly Net Worth figures I had sitting around from the mid '90s and plot them out. I also remember that I had saved approx. $10,000 working part-time during Uni Vacations (which was spent on a telescope and accessories), so I know that my Net Worth when I started working after graduation in '84 was around $10K.

"Investing for your future" is a basic investing home-study course available online. The 11-unit home study course was developed by the Cooperative Extension system for beginning investors with small dollar amounts to invest. It is aimed at those who may be investing for the first time or selecting investment products, such as a stock index fund or unit investment trust, that they have not purchased previously.

It has some valuable information and some cute graphics, such as the "investment pyramid" (reminiscent of the "food pyramid"):

And it also has some exotic terminology that I haven't come across before, such as "loanership"!

All in all, a good read for a cold winter's night in front of the PC with a cup of hot chocolate.

personal finance, investing

I had an interesting phone call to my "non advisory" financial planner today. The company doesn't actually do any planning for me, I just use them to lodge mutual fund applications as they rebate 100% of the upfront fee (which is generally paid by the mutual fund to their distributors to get them to push product). They profit by getting the trailing fees on the investments (usually around 0.5%)

I'd bought a $50,000 hedge fund investment (Macquarie Equinox Select Opportunities Fund) back in June (using a 100% gearing loan) and prepaid the coming 12 months interest on the loan (so that it was deductible that tax year). As I'd only come across this investment a couple of weeks before the end of the Australian tax year (June 30), I decided to apply directly to the fund manager online, rather than print out the prospectus and mail it in via the "non advisory" financial planner. I thought I'd still be OK to get the entry fee (4%) rebated as the online form asked for your planner's details and what % fee they were to be paid.

However, I hadn't received any rebate yet, so when I sent in the application for my new son's "child super" account to the planner last week (to get the entry fee rebate, and, hopefully a rebate of the trailing commisions) I enquired about the missing rebate from June.

A couple of interesting things turned up - firstly, the fund manager claimed that they had no record of the planner's details from my online application, but that they were happy to send the planner the fee if I emailed them to that effect (I'd then be able to get 80% of the fee rebated back to me, so this was very good).

The second thing, and this is the funny bit, is that after confirming that I could get an 80% rebate of the 4% entry fee on my $50,000 investment made last June (which meant the "non advisory" planner was pocketing $400 for a couple of minutes paperwork, PLUS would get ongoing trailing fees of about $250 pa for doing nothing) he also confirmed that my son's super account application had been forwarded with the entry fee rebate approved (ie 4% of $1000) BUT they hadn't approved the rebate of the trailing commision (around 0.6% per year). I said that a few year's earlier they HAD approved a rebate of the trailing fees on my first son's super account, and as the amount was going to be trivial (around $6 per year!) I didn't think it was a big issue. The "planner" then commented that the trailing fee would just about pay for the express postage they'd paid for my son's paper work to be forwarded to the superannuation fund. At this point I just gave up - why argue about a $6 annual fee when they're going to be pocketing hundreds of dollars each year in trailing fees for my other investments placed via them?

On the bright side, there's another discount broker service that will rebate 50% of the next year's trailing fees if I fill in a form notifying the investment fund that I'm changing to them as my "advisor" - this would mean my current "non-advisory" planner would lose out on any further trailing commisions from my existing investments placed via them (probably worth about $400 a year to them) - all for the sake of not OKing a rebate worth $6 a year. So there!

My "Little Book that Beats the Market" Portfolio has progressed nicely this past month, with the gains by ASEI more than offsetting the drop in MOT. I was tempted to sell my Motorola shares when they'd gone up so rapidly and appeared to be dropping back - but my version of the "Little Book" strategy is to hold each stock for 18 months after purchase, then sell and replace with a new pick (unless its still in the short list).

BOUGHT: 150 shares in PW EAGLE, INC. [PWEI] on 13 Oct @ $33.29 - total cost $5,024.29 [AUD $6,758.18] including $65 brokerage.

SOLD: No sale this month (portfolio is in accumulation phase - US$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 10.62% ($2,642.21) after deducting $65 for selling costs per stock. After deducting approx. $349.00 for interest paid on the loan to date (this portfolio is 100% geared) my total return is currently $2,293.21.



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.

personal finance, investing, stocks

Want to improve your personal finances? You risk tolerance is one of the fundamental issues to consider when planning your investment strategy. Start by taking this quiz from Kansas State University. Choose the response that best describes you - there are no "right" or "wrong" answers. Just have fun!

Take the Quiz

ps. I scored 33 - "a high tolerance for risk", which is what I expected. The score ranges are:

Score Risk Tolerance Level
0-18 Low tolerance for risk
19-22 Below-average tolerance for risk
23-28 Average/moderate tolerance for risk
29-32 Above-average tolerance for risk
33-47 High tolerance for risk


personal finance, investing, risk

1. Start when you are 20

2. Earn an extra $3 each and every day

3. Invest it via a regular savings plan with 100% gearing ($100 borrowed for every $100 invested) into the following asset mix:
40% Australian Shares
20% International Shares
20% US Shares
10% Property Securities
10% Australian Bonds
Based on the historic returns for the past 20 years, and typical margin loan borrowing costs of 3% above the cash rate, this would result in $3,687,250 by age 65 - or $975,000 in today's money (assuming inflation averages 3% pa).

OK, this may not work out exactly as planned, but finding an extra $3 a day should not be too hard for anyone. And, as this is "extra" money, there shouldn't be any problem using a geared savings plan and a high-growth, high-risk asset allocation. For those that are risk-averse, just close your eyes and don't check the balance on your annual statement until you turn 65. In practice you may have to save up the $21 a week into an online savings account until you have enough to start such a geared savings plan - probably an initial amount of $1000 and then regular contributions of around $100 each month. Also, if you don't live in the "lucky country" you should probably change to asset mix to include your local shares and bonds instead of the Aussie versions, and switch the others as needed eg. from US shares to Asian for US readers who would be including US shares as their "local" share component.

There may be some tax due when you cash in a 65, but there shouldn't be much tax impact along the way, as the interest on the gearing loan will consume all your dividend income (more or less).

The chance (probability) that an investment's value or return will differ from its expected value or return.

Our most recent addition to the family is now 7 weeks old - plenty old enough to start planning for his retirement

I had a look through the current superannuation (retirement) account offerings on the web, and found one (ING OneAnswer) that seemed to fit all my requirements - low initial amount ($1,000), low regular savings plan additions ($100 per fund) available monthly or quarterly, and a suitable mix of investement options (as the investment has a 65 year time horizon before it gets rolled over into a pension I'm going for high-growth asset mix with some gearing).

It will be a "child superannuation account" (so friends or family can make contributions into the account on my son's behalf), which means the maximum that can be contributed is $1000 per year (actually, it's $3000 every three years per account, and you could set up more than one account if you wanted to contribute more than $1000 per year per child). I made the minimum initial contribution ($1000) via direct debit from my bank account and set up an automatic direct debit from my bank account to contribute another $200 every quarter, starting from next June. This will mean I don't exceed the $3000 cap within the first three years of opening the account.
The asset mix I selected for the initial $1000 is as follows:
Geared Australian Share Fund 30% ($300)
Australian Shares Index Fund 20% ($200)
International Shares Index Fund 20% ($200)
Global Small Company Fund 10% ($100)
Global Emerging Markets Fund 10% ($100)
Property Securities Fund 10% ($100)
The regular savings plan contributions will be split:
Australian Shares Index Fund 50% ($100)
International Shares Index Fund 50% ($100)
At the end of three years this will mean the asset mix only contains around 3% Property and 3% emerging markets, so I'll probably top up the savings plan contributions after year three with an additional $100 into the Property Fund and $100 into Emerging Markets Fund each year to reach the $1000pa contribution cap. I won't bother rebalancing as the buy-sell spread is still an unnecessary cost, even if switching is free. I'll just change the weighting of the savings plan contributions to keep things roughly 50% AU shares, 30% Int shares, 10% Emerging market shares and 10% Property Securities.

The account will automatically come under my son's control when he turns 18 - but as he can't withdraw the funds until he reaches retirement age (60) it will be a good tool to teach him a bit about investment management.

I lodged the application via a financial planner who will rebate 100% of the initial application fee (which is around 4% for the front-load option) as additional units. Hopefully, he will also OK the rebate of the on-going trailing commision (0.6%) - he did this when I set up a child superannuation account for my first son five years ago. [As he has processed several of my other investment applications (on a non-advisory basis) he earns enough trailing commision from me to make it worthwhile processing the odd "freebie".]

The trailing commision rebate will add quite a lot to the account's performance over 60+ years - if it earned 10% pa on average (after fees), the trailing commision rebate would add another 0.6% to this - a boost in performance of 6%! This will basically mean an extra 6% in the final value of my son's retirement account (maybe $20,000 in today's money) - just by processing the initial application in the best possible way.

Of course all this planning is highly speculative - who knows what changes to superannuation rules will be made over the next 60 years. Also, I'm being optimistic and assuming my sons will both be around to enjoy their retirement. Although there will be some benefits to them much earlier on - when they start work they won't have to worry about making extra contributions to their retirement account (probably just the 9% SGL minimum will suffice), so they can concentrate their savings on buying a home etc. Also, having a significant balance in their retirement account will mean they won't need as much life insurance.

retirement

Investments that provide evidence of a debt or of ownership of an asset, or the legal right to acquire or sell an ownership interest. Hence a "direct investment" is where an investor directly (personally) acquires a claim on a property or security. An "indirect investment" is where the investment has been made via third party portfolio eg. a managed fund or property trust.

Argghhh! POP! There goes the bubble (again).

I knew it was too good to be true when the mean house sale prices for the suburbs where my home and investment property are (in Sydney) went up 3.8% back in July - so I was more or less expecting the -1.3% drop in Aug, and relieved by the more reasonable 0.7% increase in Sep. The bubble appeared to have finished deflating, with prices being fairly stable since Jan '05, and a small rate on increase (3%) seemed quite likely for the next couple of years, followed by a pick up again to the long term average of around 6% (for Sydney since the 1930s) as lack of new construction pushed up rents and made property investment returns more appealing again...

Not so! The Oct price estimate for my properties (based on the Sep sales median prices) is down -2.6%, and the long term graph looks more like prices are bumping along the bottom, than any sort of modest recovery. Yet another 0.25% interest rate rise was announced last Wednesday, so things are looking decidedly grim for Sydney real estate at the moment, with buyers expecting another 0.25% increase early next year. It's just as well that we don't intend to sell our investment property until the next peak in the property cycle at the earliest - maybe 5-7 years away.

Looks like I won't be hitting NW A$1m this month, or soon, but the culprit seems to be "Mr Property Market" rather than his more manic relation "Mr Stock Market".


personal finance, real estate

The current value of a listed company, as measured by the number of issued shares in the company multiplied by the current market price for a share.

I decided to give the Mechanical Turk (run by amazon.com) a go the other day. The concept is good - people with some free time and/or skills can take up offered "piece work" via the internet. An article about it gave an example of an software engineer who had made $1,400 in his spare time in front of the TV.

Unfortunately, when I had a look at the site, most of the work listed was either worthless (1c to create a link to a site), or a rip-off (a few cents to "test a script" - which turns out to be clicking on some and registering for some information, which obviously will earn the "test script" writer more than he/she is paying you, and is basically click-fraud). The few legit tasks seemed to be transcription of audio files.

A simple enough task I thought - just download a 5 minute sound bite and type the conversation into word... So I "took" the job, thinking that the 60 mins allowed should be plenty of time, after all the task only paid $2.00. The audio file download took 5 mins (I have a cable connection) and I had no trouble playing the file. So far, so good. However, after a few minutes of listening to a few words, hitting pause, tabbing to Word, typing in the words, tabbing back to the audio player, rewinding and checking I'd typed the correct transcription - it became obvious that this would be a s-l-o-w process.

TWO HOURS LATER -- after dealing with background interruptions (baby crying etc), and some parts of the audio where the two people on the tape were talking over the top of each other, I finally finished page and a half transcription of the 5 min soundbite. Then, when I tabbed back to the Mechanical Turk page open on my browser - the task had expired! All that time and effort for NOTHING.

Ah, well. Lesson learned. Being a Mechanical Turk might be a suitable job for an off-duty call centre worker in India, but it just isn't worth my time. No matter how much I like to earn a few bucks in my "spare time".

Gearing refers to the use of borrowings against equity to invest. It is calculated by dividing the total liabilities by the total assets.

I had a recent comment asking what level of gearing I thought was appropriate, especially for a 30 year old. Just to reiterate, I'm not a financial planner, so my thoughts are worth what you pay for them - nothing! And you should either make up your own mind after sufficient research, or go get some professional advice.

Having said that, many people have no qualms about borrowing 80% to buy a new home (gearing of 80/20 = 400%!), yet will be totally against any borrowing to invest in other assets such as shares. My views are
1. Gearing can be good to "convert" taxable income into tax-deferred capital gains when the tax-deductible interest you are paying on the loan is more than the investment income (eg. dividends) and IF it is deductible against other income (eg. wages), which is the case in Australia. Also, in case of Australia, capital gains get taxed at half your normal marginal tax rate if held more than 12 months.
2. Gearing should be against a diversified portfolio, NOT one or two "hot" stocks.
3. You must have a sufficient and secure income to cover the interest costs - don't just rely on dividends to meet the repayments (although if you only gear up to 50% or so your dividends may cover the interest costs - this is called "neutral gearing")
4. You should gear conservatively - for example if a share portfolio can be geared up to 70% LVR (about 225% gearing), you shouldn't gear up to the maximum. Generally I only gear up to 100% (a 50% LVR), so the market would have to drop considerably before I'd be worried about getting a margin call.
5. Have other assets and savings that you could use to meet a margin call. Ideally you should be in a position to buy more shares in the bottom of a bear market, not have to sell off your portfolio to avoid a margin call.
6. If you have lots of equity in your house you might consider borrowing against it to invest in a diversified share portfolio or, say, index share fund. This would be a viable alternative to using your real estate equity to borrow and buy a rental property (which many people do). I aim to balance my property assets (house and rental property) with my stock investments (direct stock portfolio, mutual funds and my retirement account investments).

This all assumes you have a high risk-tolerance like me. You really have to know your own risk tolerance before you can even consider gearing as an investment strategy. I'd suggest investing just your own capital to start with, and wait and see how you react to the first real bear market (-25% to -40% or more) before thinking about gearing. For many people gearing is TOTALLY INAPPROPRIATE as it doesn't match their personality, experience, knowledge, requirements or situation.

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 OCT 2006:

Blogger Age Net Worth $ Change % Change
Accumulating Money 2x $40,409.46 $2,284.37 6.0%
Consumerism Commentary 30 $63,922.06 $4,808.43 8.1%
Enough Wealth 44 $991,006.00 $43,435.00 4.6%
Financial Freedom 30 no Oct data no Oct data N/A
It's Just Money 32 $150,515.49 $2,101.65 1.4%
Make love, not debt ?? -$76,811.85 $2,201.65 N/A
Making Our Way 37 $608,465.24 $8,575.47 1.4%
Map Girl 32 $34,523.00 $701.00 2.1%
Money and Values 24 no Oct data no Oct data N/A
My Money Blog 28 $113,984.00 $4,123.00 3.8%
My Money Path 29 $100,260.00 $7,816.00 8.5%
My Open Wallet 37 $305,058.00 $7,058.00 2.4%
New Age Personal Finance 31 $133,184.27 $8,337.58 6.7%
Savvy Saver 27 $213,319.00 $4,507.00 2.2%
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.