Enoughwealth's Personal Finance Blog

I originally started using savingadvice to mirror my blogger site, as it offered 'categories', which wasn't available on the old blogger. However, it did have some drawbacks, mainly less ability to customise the blog template, and the fact that savingadvice gets revenue from google adsense ads using MY content.

The new version of blogger (came out late last year) supported categories, so the only reason I kept this blog going as a mirror site was because it appears that I have different readers here than I do at my main site

enoughwealth.com. However, recently I became worried that having "duplicate" content on the two sites might be bad for my google pagerank, so I started only posting the first part of each post on savingadvice.com, with a link to the the full post on enoughwealth.com

Ever since doing that, the new posts have been getting deleted shortly after I've published them! I feel that this is a bit much, especially as there doesn't seem to be any stated policy against this, and I haven't been sent any notification that this is happening, or why.

So, I've decided to only blog on my main site from now on. I invite you to continue reading EnoughWealth at http://enoughwealth.com

Regards

ps. We'll see if this post survives, or gets purged by the mysterious SavingAdvice content police.

Besieged by the non-stop promotion of the consumer life-style everywhere we look and everywhere we go, many people are struggling to cope with consumer debt and the pressure to live a lifestyle that is, to be honest, beyond the means of their available income. However, if you look back at how our grandparents are earlier generations lived, we are currently living in a "golden age". To quote

an article in the SMH:

"A couple of decades ago, the language of prosperity was almost like a foreign language ... Now, phrases like full employment, stock market highs and the commodities boom roll off the tongue.

Across the board, jobs are plentiful, wages are high and individual wealth continues to rise. There's no doubt this is a golden age of prosperity - possibly the best of economic times Australia has experienced.

And there's no doubt, either, that the economy is surging. The latest figures for the June quarter showed annual growth of 4.4 per cent, the highest for three years. Non-farm GDP growth, which removes the impact of the drought, was at its fastest in almost 13 years at 5.2 per cent."

At the same time, looking forward there are problems with "the limits to growth" that could quite possibly make living conditions much more difficult for our descendants. The apocalyptic prophesies of Malthus and, much more recently, the "club of Rome" turned out to be wrong (or at least premature). But the more recent concerns about climate change (whether or not they are caused by human activity) could mean we run into problems supplying food and water at reasonable cost to everyone. And the commodity boom has some chance of turning out to be a supercycle (or a "peak" in production of many commodities, not just oil) which could lead to ongoing real price increases in resources.

Therefore, there is a least some chance the our current economic situation is just about "as good as it gets". If so, we'd better make the most of this opportunity to build up of families wealth so we have some store of wealth put aside to tide us, or our kids and grandkids, over where the hard times come again. Make hay while the sun shines, for there may be some hard winters ahead for our descendants.

Copyright Enough Wealth 2007

Trent, over at

The Simple Dollar has done three great post in succession:
1. Dealing With Professional Burnout Without Quitting Your Job
2. Revisiting The Happiness Scale
3. A Financial (and Personal) Commitment For November

The only trouble is I don't think I can apply his good advice myself. For example, I'm currently less than enthused at work, and Trent's post offers some great tips for recapturing enthusiasm for your current job. However, the aspects of my job that I find least enjoyable happen to be the ones my boss wants me to focus on! And my company isn't so large that there are any other suitable positions I could transfer to for a change of scenery. In this situation Trent's advice is to update my resume and look for another job. But, realistically, I couldn't get the same or higher pay if I changed jobs. I'm also not feeling energetic enough to want to start over at a lower paid position and put in the hard yards required to get promotions and pay rises. I did that ten years ago when I started at my current company, when I was still single, and I can't see myself working late evenings and coming in to work on the weekend for unpaid overtime now that I have a wife and two small kids. So, I think I'll just soldier on in my current position, focus on taking an overseas holiday with the family next year, and plan on eventually changing jobs when I complete my GradDipEd qualification and a suitable teaching position becomes available close to home (or in the area I'd like to move to for my retirement).

The second post (about the happiness scale) is also very interesting. But, unlike Trent, the three times I can recall my happiness state getting close to "10" were all quite expensive and not easily replicated:
1. on my honeymoon,
2. on a scuba diving cruise in the coral sea
3. on a cross-country skiing/camping trip in the Snowy Mountains.
Focusing on small daily pleasures and keeping my happiness score above zero is more my style.

The third post regarding Trent's commitments for November is more inspiring. We can all benefit from making "to do" lists, and posting them on a blog helps turn a wish list into a commitment. My list of things to do before the end of the year includes the following:
1. Get my tax return completed and lodged. And get my GST transactions log up to date so future tax returns will be easier.
2. Measure and order a replacement pool fence. Install it.
3. Do some garden improvements. And landscape the pool area. Maybe even build a garden pond and put in some Koi.
4. Complete the remaining assessment items for my current GradDipEd and DFS(FP) enrollments.
5. Lose 10kg and exercise more - so far this year my weight loss goal is the one that has given me the most trouble.

Fortunately my financial goals tend to take care of themselves now that I have my savings and investment plans in place. I do spend a few minutes each morning updating a spreadsheet with my various account balances (I like graphs), but aside from the occasional bit of paperwork for a stock takeover or SMSF admin task my investments are running on autopilot.

Copyright Enough Wealth 2007

My net worth as at 31 October decreased by -$3,590 (-0.31%) during the month to $1,158,905 (AUD), largely due to a decline in the estimated valuation of our real estate assets. The real estate valuations bounce around from month to month, affected by what mix of houses were sold during the month, so it's only the long-term trend that matters. The balance of my half of the mortgage increased by another -$929 to -$363,063 as we continue to redraw some of our advance payments to cover the interest payments while DW is working part-time (until DS2 starts school in a couple of years). My leveraged stock portfolios increased by a net $2,816 (0.68%) to $416,955, but would have been around $5,000 (1.2%) higher except that my large block of IPE shares went ex dividend on Wednesday. My retirement account increased by $2,785 (0.85%) to $332,322. This figure is also a bit understated (by around $4,000) due to a delay in the processing of my employer's contribution for the month of August.

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I spent lunchtime at work sorting out what stocks had been sold during the last financial year, and it turned out that they'd only been a handful of them. Unfortunately two of them didn't have complete information in my capital gains transactions log (I only started back-filling all the missing data earlier this year). This meant that I had to wade through the paperwork files for my past seven returns this evening to find the information relating to DRPs over that period.

When I checked with my dad this evening he told me that his accountant hadn't been able to complete the tax return for the farm partnership, so I'll probably have to use an estimate when I lodge my return, and then lodge a ammendment request later on when the correct figure is known. This is a nuisance as my taxable income also has to be reported on DW's tax return as it affects the calculation of any family tax benefit she may be entitled to.

I didn't get my tax return completed this evening. I still have to work our the capital gain made on one US stock holding (in my "Little Book that Beats the Market" portfolio). And I also haven't pulled together all the income and expenses data for my sole trader business (it started out as a website design business but these days most revenue comes from this blog ie. not much). Which reminds me - once I've finished my tax return I also have to lodge the annual BAS statement for my "business". I'm having a day off work on Friday, so I'm hopeful that I'll be able to get everything finished off that day. If I'm really lucky dad's accountant might have the partnership tax figure ready by then. I'll probably have to pay a $110 fine for lodging a late tax return, but there won't be any penalty interest as I expect to be due a small refund (due to our rental property being vacant for a few months last Christmas time). Hopefully there won't also be a fine for DW's late return or my overdue BAS statement...

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Back on the 12th of August I

posted my thought that it might be a good time to buy some stocks for DS2. At that time the All Ords Index had dropped sharply to 5,965.2 - since then it has rebounded at today was at a new all time high of 6,808.2 (a gain of 14%). Goes to show that you never can tell which way the market will move in the future, but you can be 100% certain where it has been. Looking at a long term plot of the stock market accumulation index, buying when the market had dropped 15% below its recent long-term trend line would almost always turn out to be a good buying opportunity.



However, there are a few problems with this as an investment strategy:

1. When the market has rapidly dropped more than 10-15% you're always worried that it's the start of a bear market that could last several years. As in this case - I delayed buying any stocks for DS1, and could very well never get another opportunity to buy in at those prices.

2. You have to have some spare cash to invest when such opportunities arise - this generally would either mean that you've been sitting on a large cash allocation during a bull market (which would have cost you significant profits), or you'll need to borrow more to invest. And increasing your margin loans when the market has dropped is often very difficult, as it the time when you are most likely to be close to getting a margin call.

Looking at the chart the other thing that comes to mind is that I need to buy some more XAO put options when my current ones expire in December! Although the p/e of the Australian stock isn't out of line with historic averages, and company profits are continuing to grow, the chart does look remarkably similar to previous bubbles - and even just thinking "this time it's different" sends a shudder down my spine.

Copyright Enough Wealth 2007

We're in the last stages of transferring our retirement funds from our employer-sponsored fund (with BT) into the Self-Managed Superannuation Fund that we setup a few months ago. I mailed in the paperwork to BT at the start of last week and the funds had finally disappeared out of our BT accounts yesterday. Luckily that means that the withdrawal was probably processed on Friday using the unit pricing from COB on Thursday - that would mean that we just managed to escape the 4% drop in the Australian market that happened on 'Black Friday'.

So far only the funds from DWs BT account have appeared in our SMSF's bank account. As DW was closing her BT account the transfer was done electronically. I'm keeping a small amount of money in my BT account (enough to pay my life insurance premiums for a while) so I had to fill in a different withdrawal form which went to a different address at BT. The withdrawal appears to have been processed at the same time as DWs but will be sent via Cheque, so I probably won't receive the cheque until later in the week and have to deposit it into the ANZ bank account of our SMSF.

Some additional funds have also appeared in the SMSF bank account, so it looks like the compulsory SGL contributions from our employer are successfully being redirected into our SMSF. The amount doesn't reconcile with what I expected to be paid in for July, but I'll have to wait for the bank statement to try and work out exactly what has been paid in.

Once the cheque for my transfer has been processed I'll invest the entire balance of our SMSG in the

Vanguard Lifestages High-Growth fund. The asset mix in this fund is broadly what we want, and by having the entire balance in this fund we'll save a lot on management fees.

The target asset allocation for the High-growth fund is:
4% Australian Fixed Interest
6% International Fixed Interest (hedged)
48% Australian Shares
29% International Shares
10% Property Securities
3% Emerging Market Shares

Vanguard in Australia charges 0.9% fee on the first $50,000 invested in any fund, 0.6% on the next $50,000 and then 0.3% on the balance above $100,000. This is a lot better than the 1.3% or more growth-oriented funds were charging in the BT scheme. In addition the BT fund admin fee was around 0.75% (even after a hefty employer-rebate). The SMSF in comparison will only pay eSuperFund $599pa plus another $150pa to the ATO. The total admin cost for our SMSF ($749pa) is therefore only 0.23% of our initial balance and will decrease over time as our SMSF balance accumulates. While we will be missing out on the dubious benefits of active fund management, I think the net saving of fees will exceed the typical outperformance of fund managers compared to the relevant indices.

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With the 4% drop in the Australian stock market on Friday the "correction" is now about 8%. While there could be further drops in the coming weeks, even if this is just a correction rather than the start of a bear market, I think it may be time to start looking at stocks to buy for DS2's portfolio. DS2 turns 1 next month and I'd like to buy him a couple of stocks to establish an investment portfolio - perhaps some

CSL or COH. I'm looking for stocks that over the long term should have good growth prospects but don't pay out large dividends - getting too much "unearned income" results in punitive childrens tax rates.

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Apparently the biggest "

bank" in Second Life has frozen withdrawals and converted deposits into perpetual bonds that are trading at a steep discount to face value. The thought that avatars might be throwing themselves off virtual sky-scrapers in financial ruin would be funny, except that I'm sure that many people have spent lots of real hours accumulated Linden dollars with the expectation to eventually convert them into real USD. Where they ran into trouble was investing the Linden dollars with a virtual bank that was offering an interest rate equivalent to 44%pa. With the Linden:USD exchange rate fixed this was never going to be sustainable in the long term, and the recent "run" on the virtual bank was inevitable.

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The graph below shows how well my portfolio of around 30 Australian stocks has tracked the All Ordinaries Index since 1 June 2007. As you can see there is fairly strong correlation between my portfolio and the Index (red and blue lines respectively). The chart also shows the effect of gearing (via margin loans) to amplify gains and losses (green line).



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In response to my recent post about the effects of savings rate and ROI on the age at which you can retire and reasonably expect your retirement savings to last until age 85, Fern wrote a comment requesting a review of her situation as an real world example. As I'm not a financial planner I can't give personal advice, so instead I'll just look at a hypothetical situation using Fern's figures as a starting point and adding in a few extra assumptions.
Model Parameters:
Person "X"
CUrrent Age: 48
Current Retirement Account Balance: $289,133
PV of Other investments to fund retirement: $142,158
Lifespan: 90
Target Retirement age: 60
Assumptions:
Salary Income: current=$59K
Salary Increase: real 1%pa until retirement age
Retirement accounts savings rate: 15%
Other investments savings rate: 0% (assume paying off mortgage from now til retirement)
Risk tolerance: moderate
ROI: retirement account: 4% real ROI (after tax and CPI deductions)
ROI: investment account: 3.5% real ROI (after tax and CPI deductions). Lower ROI than 401K due to higher tax impost.
5 year p/t work yielding $15K pa income during early retirement years (age 60 to 65).
Investment account is drawn-down first during retirement until exhausted, then retirement account
Same investment mix held during retirement years as while working.
Outcome of model:
Plugging those figures into a spreadsheet it appears that Person "X" can retire at 60 (still working part-time until 65) and the retirement and investment accounts balances should be able to fund an income of 70% pre-retirement salary until age 90 ($46K in today's $). Indeed, there may some surplus remaining in the account at age 90 ($497K) if the assumed ROI were attained. Over the entire investment period one would hope that the ROI's average out to close to the projected values, but there will obviously be some better and some worse years. A string of bad years early on in the piece can significantly reduce how long the retirement savings will last, even if later years are better and boost the overall average ROI. However, in this case person 'X' expects to being living in a home with no mortgage during retirement, so if funds run short in the later years (or if lifespan exceeds 90) borrowing against home equity (a "reverse mortgage") would be a possible solution, given that no residual estate is planned. Another "solution" would be to save extra to make up any performance shortfall in the accumulation stage, or attempt to live off smaller pension amounts during retirement if the funds were being exhausted too rapidly.
The projected real ROI of around 3.5% or 4.0% after tax seem reasonable from a historical return viewpoint for an investment mix of 80% in stocks (eg. 70% domestic index funds and 30% foreign stock index funds) and 30% in bond funds. However, even a small decrease in actual ROI can cut into this "surplus" significantly. For example if both retirement and investment accounts attained an ROI of 3.5% the final balance remaining at age 90 is only $207K.
If, during retirement, a run of good returns had boosted the remaining funds above what was required, the investment mix could be shifted to a lower-risk, lower return investment asset mix. Alternatively the "surplus" could be withdrawn and invested in a fixed-interest account for a rainy day while leaving the retirement and investment account asset allocations unchanged.
If one was fortunate enough to attain an real after-tax ROI of 4.5% on the retirement account and 4.0% on the investment account, retirement age could be brought forward to age 56 (assuming part-time work undertaken until age 65). But this would depend on the unlikely prospect that the same above-average returns could be maintained all the way through until age 90.
It may be possible to aim for such a retirement age, but you'd want to track your actual retirement and investment account balances (allowing for accrued tax liabilities and adjusting for actual inflation rates) over the next 10 years and be willing to postpone early retirement if returns were lower than expected. For example, the model projects the values (all expressed in today's $) listed

here

Bear in mind that this is only a simple model - tax effects have been eliminated by use of after-tax returns, and no allowance has been made for any social security, company pension or similar retirement income streams.

I normally update the component figures (stock portfolio, retirement account) of my investments daily, but only calculate month-to-month changes in my net worth. Having had a couple of down months in a row I was interested in calculating where my net worth is in relation to my personal "All Time High" (reached on 20th June). I track my investments using an excel spreadsheet, so to calculate the current situation in relation to the "peak" value I need to know both the maximum value in a column of data (easy using the "MAX()" function) and the latest value in the column. The second figure isn't quite as easy to automatically calculate - there's no simple function (you might expect "LAST()" to do this, but no such luck), so you need to use a fairly complex function:
=INDEX(B3:B6500,MATCH(9.99999999999999E+307,B3:B6500))
This for numeric data in column B, where the data is in rows 3 to 6500. For example, today's data is in row 1408 and my spreadsheet is currently setup with dates out to my expected retirement in 2027 (row 6500).

To check how the current value compares to my "All time high" value I calculate:
=INDEX(B3:B6500,MATCH(9.99999999999999E+307,B3:B6500))/MAX(B3:B6500)

Using this calculation in my various spreadsheet tabs (one for each portfolio component) shows that my current situation is:
Current Property Equity = 98.23% of all time high
Current Retirement Account value = 94.84% of all time high
Current Stock Portfolio value = 88.85% of all time high

Overall, current net worth = 93.87% of all time high

Although I'm fairly sanguine about recent drops in the stock market and the post-boom slump in real estate prices (they've been stagnant in Sydney for the past 4 years, and the prospect of further interest rate rises means the recent mild recovery is likely to come to an end), it highlights the fact that I really haven't suffered a major decline in my net worth. Even back in '87 when I only had a tiny investment portfolio, mainly invested in stocks, the "crash" only wiped about 25% off my net worth at that time (I also had a "defined benefit" retirement plan which wasn't affected and I didn't count in my net worth calculations - just as well as my employer converted the plan to a defined-contribution scheme prior to laying off a large chunk of the workforce in the late 90's).

It makes me wonder how well I'd cope with a total melt-down across all asset classes (such as happened in the great depression). What if my stock portfolio was down to only 10%-20% of it's peak value, property was unsaleable (and valuations down 50%), and I lost my job? Hopefully the decline would be gradual enough to have some chance to unwind my geared positions - selling off shares to eliminate my margin loans and selling our investment property in time to pay off our home loan with whatever equity remained. The tricky part would to know when to "pull the plug" on debts. The temptation would be to first view a decline in asset values as a correction (10-15% down), and then as a bear market/housing slump if the decline extended to a 20-40% drop over many months or years. In such cases selling out would be the wrong move, while holding your position (or even buying more at the "bottom") would be a good long-term move. But, if such a recession turned into a full-blown depression then a buy-and-hold mentality could easily lead to bankruptcy.

One can only hope that the world's central banks know enough to avoid a global depression, just as one hope's there won't ever be another "world war" and that global climate change doesn't need to be factored in to personal financial plans! In the absolute worst case my "Plan B" is to move the family up to my parent's farm - they have a spare shed we could live in, a rainwater tank and bore water, so we could grow our own food. This is also the "plan" in case of WWWIII, SARS or bird 'flu

There are many retirement calculators available online, but it's interesting to look at the figures that pop out of a simple spreadsheet model to guage the effect of savings rate and return have on possible retirement age.

MODEL ASSUMPTIONS:

Start off retirement savings with $0 at age 20

Initially earn $30Kpa which increases 5%pa until hit $50K salary, then 1%pa increase until retirement

Retirement savings to be drawn down during retirement at 70% of final salary

Savings to last in retirement until death at age 85 - this is about the average lifespan for someone who has reached 65. The assumption being that you live long enough to retire!

Investment returns and salary rises are expressed as real, after-tax percentages. This avoids having to guess what inflation rate may apply.

No other retirement income aside from retirement savings eg. no government or company pension.

RESULTS: Table of possible retirement age where funds will last until death
SR = savings rate (% of salary put into retirement account each year)
ROI = avg return on investment

ROI --->
SR 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%
8% 74 72 70 68 66 64
10% 72 70 67 65 63 61
12% 70 67 65 63 61 59
14% 68 65 63 61 59 57
16% 66 64 61 59 57 55
18% 64 62 60 58 56 54


CONCLUSIONS:

Early retirement before age 60 is a big ask - you either have to save a huge % of your salary, achieve a very high real return on your investments (which means higher risk of missing you target), or be willing to live on less than 70% of your pre-retirement income as a pensioner. To retire much before 60 you'd probably have to have other sources of wealth beside your retirement savings - such as a successful business or an inheritance.

Typical savings rates (10%-12%) and ROI (4%-4.5% real) result in a typical retirement age of 65

Investing too conservatively (3% ROI) or saving too little (8%) mean you couldn't afford to retire until your 70's if you want your retirement income to last until 85.

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The car now been fixed - one reconditioned Japanese gear box and a new clutch installed for a total cost of around $1510. Hopefully the car will now last for another 5 years or so (by which time it will have done around 150,000 km) and we'll then replace it with a "new" 2nd-hand vehicle.

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Many parents give their kids education highest priority, and a lot will resort to expensive out-of-school coaching to help them get better marks and/or pass selective school tests. Things were different when I was in primary school - you just sat for the selective ("Opportunity Class") school tests in Year 4, and if you did well on the test you were offered a place. These days many parents spend a lot of money on professional "coaching" classes or computerised study assistance programs. But there isn't much evidence that this is money well spent - in fact some recent reports suggest that having kids spend too much time on repetitive "coaching" sessions after school can get them burned out and perform worse on selective school tests than they would have without any coaching at all!

I think a small amount of preparation for selective tests is probably worthwhile - knowing what sort of questions to expect in the test, practicing the exam format and getting used to the time allowed and exam technique can only help the child relax and do as well as possible "on the day". So, rather than spend a small fortune of coaching classes I've just bought a book of practice material and some sample tests which I'll work through with DS1 over the next couple of years (the exam is in year 4, but DS1 is only in year 2 at the moment).

Another fun activity which will help DS1 academically is spelling bee practice. Although spelling bees aren't nearly as big a deal in Australia as they are in the US, there has been a state-wide

"Premier's" Spelling Bee running in NSW for the past couple of years. Entries for this year's competition closed last month - the school DS1 attends wasn't aware of the Spelling Bee until we told them, and was quite pleased to learn about it. DS1 was keen to compete in the yr 3-4 group, so the school decided that he will be able to compete against the kids in years 3-4 for selection to represent his school. The spelling lists used for the early rounds of the competition are available online, so DS1 will be able to practice learning them. A good, cheap, fun activity that will help him academically.

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I checked through some of my email accounts yesterday and noticed that my assessment items for the DFS1 course had been marked and feedback emailed to me last Wednesday. The turnaround time for marking (3 business days) was very impressive. Three out of the twenty assessment items weren't quite right and will need to be ammended and resubmitted. That won't be any trouble as the feedback email explained what areas need to be improved and provides references to the relevant pages of the study guide to use as a reference.

Doing this course is a lot like the Certificate courses I've studied at TAFE (technical college) rather than the courses I've done at uni - everything you need to know to pass the course is provided in the printed course notes, and provided you work methodically through the course it's almost impossible to fail. Again like TAFE, doing the DFS(FP) course provides a sound foundation of the basics and the technical requirements (eg. rules and regulations), but, unlike a uni course, doesn't require much creative thinking or independent investigation to pass.

I've only completed the first one of the twenty assessment items for the DFS2 module (insurance) so far - I'd better get cracking on some more of it this weekend. My GradDip Ed course commenced last week and I don't want to fall behind in the readings for that course. Unlike the science and computing/math courses I've done in the past, the education course material isn't hard to comprehend and absorb, but does require a TON of reading. The assessment items are all essays, which means lots and lots of background reading and recording tons of quotes with referencing (in the approved "style").

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Figures

published in today's Sydney Morning Herald show while the disposbale income of low-income households rose by 31% in real terms over the past decade, high-income households saw their disposable incomes rise by 40% in the same period.

The popular assumption is that this is a "bad thing" - and it is when the increasing the gap between rich and poor causes social friction and reduces social harmony. But it can't be all that bad when the "poor" households have still seen their disposable income increase by a hefty 31% in real terms over ten years.

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DS1 is quite interested in the financial topics I've discussed with him. He enjoys doing his banking, earning some money busking, and I showed him how to apply for a business number online and how I fill in his eTax return. He's also been keen on using the computer - drawing using MS Paint and has worked his way through the QBasic tutorial I gave him. It therefore seems quite logical to combine his interest in computers and money-making to start his own blog. I don't want him to be posting anything personal on the web, but blogging about his busking and other financial adventures anonymously should be OK. So today I registered a domain name for him to use - Dotster has a special on 1-yr rego of .info domains, so I registered jobsforkids.info and will show him how to setup a blog using blogger and to setup some adbrite banner ads and inline ads. If we can setup a PayPal account for him linked to one of his existing online bank accounts I'll do that, otherwise we'll use my paypal account and I'll just keep track of how much he makes and add it to his pocket money. Hopefully a blog using the domain name jobsforkids.info and some strategic use of suitable keywords in posts should generate some traffic from search engines.

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My net worth as at 31 July dropped by $23,420 during the month to $1,126,770 (AUD), due to a perfect storm of asset classes all declining simultaneously (so much for non-correlated asset classes). My leveraged stock portfolios decreased by a net -1.39% last month due to the overall weakness in the stock market. Whilst the estimated valuations for my share of our home and investment property also decreased slightly by -0.85%. The valuation of my retirement account decreased quite significanlty during July (-3.23%) as there were declines in both domestic and international stock funds, listed property funds and bond funds.

Given today's large drop in the Australian stock market I don't expect this month to turn out to be a net positive either...

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Our car is now 9 years old, although it's only done 78,000 km. Yesterday it developed an intermittent steering problem - every now and again when doing a LH turn it would "fight" against the left turn, before the resistence suddenly dissappeared with a bump. I took it in to the garage close to our workplace and during the day they changed the a ball joint on hte front LH wheel. Unfortunately the problem was even worse when the mechanic took it for a road test just before I was due to collect the car, so I drove it home and planned on dropping it back in for further work today (maybe an CV replacement?).

Driving home was very tense as the car would suddenly want to drift off to the right, and would then suddenly try to lurch to the left with a bit of a bang and a bump. Crossing the Sydney Harbour bridge was a white knuckle experience!

When we got home I decided to borrow my parent's car to drive to work today, and my Dad dropped our car off at a local garage for repair. It turns out that a couple of teeth were broken off the gears in the gear box, which will need replacing. $700 for a new gearbox, plus around $300 labour, plus maybe a new clutch (it still has the original clutch, which is probably quite worn out by now).

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I finished off the last of the 20 assessment activities for the DFS1 course at work during lunchtime of Friday and mailed them off for marking. This first module "Financial Advice" is mostly about the regulatory requirements and contains a whole lot of templates for the Fact Finder used to get relevant information about clients who want personal financial advice, a Risk Analyse to give a rough gauge of ow risk tolerant a client is, and sample Statement of Advice and a letter acknowledging the client has received all the relevant information, notifications and warnings. It very briefly mentions aspects of financial planning that should be considered when developing a financial plan for a client, but doesn't go into much detail about the various strategies and how to select the most appropriate one. Someone who passes this course will know what they are supposed to be doing, and how to dot all the i's and cross all the t's when providing advice, but whether or not they know HOW to do it well will depend on natural ability, background, and knowledge of the various strategies that can be employed for clients in different circumstances.

I'll start working on the next module DFS2 "Insurance" next week - it's likely to be the most boring and the one I know least about. The final two modules "Superannuation" and "Investment" are likely to be mainly revision and shouldn't take very long to complete.

I want to get all the DFS(FP assessment items finished as soon as possible as my GradDip Education course starts again next week and I'll need to start working on the assignments for that by the end of next month.

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I usually get a large dividend payment from my CDF holdings at this time of year, and use it to repay the margin loan interest pre-payment that I've made in late June. Most years I initially pay the interest using my Citibank Redicredit Line-of-credit account and then pay off the citibank debt using my CDF dividend, but this year I chose to capitalise the margin loand interest payment. This means that the $8,416.63 dividend that was paid into my Credit Union account yesterday can be used to make other investments.

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Yes, I know that's not news to anyone. So, why all the kerfuffle about a drop of a couple of percent? The Australian stock market even managed to out-drop the US market - falling 174 pts (2.8%). On paper this knocked $15,000.00 or so off my net worth in one day, but I'm a long-term investor with an "aggressive" risk tolerance, so I should expect this to happen once or twice every few years. If it keeps going down another 10% we might even have a genuine "correction".

I can't decide which headlines are more amusing - the ones that say that this is a market "bloodbath" and the start of a bear market, or those that think a 2% decline is a "correction" and a buying opportunity...

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Most of us would have a mix of asset in our investment portfolio - ranging from the low-risk, low-return government guaranteed bank account, through stock and real estate investments, and up, up and away into the stratosphere of geared, high-risk, high-return investments. Rather than invest in just one asset class of investment product that matches my risk-tolerance and desired return I have a mix of different investments, accumulated over time via deliberate diversification strategies and a large dose of "it seemed like a good idea at the time" strategy. In this post I'll look at what is probably my highest-risk investment, track how it's performed so far, and establish a baseline for keeping an eye on it's long-term performance over the coming years.

Investment: Hedge Fund (Macquarie Equinox Select Opportunities Fund), 100% geared using funding from a Macquarie Structured Products Investment Loan and annual interest payments capitalised using a line-of-credit loan against my property portfolio equity.

Principal Loan: $50,000 borrowed for the initial investment @7.75%pa fixed, paid annually in advance each June ($3,875 pa interest)

Interest Capitalisation Loan: The $3,875 pa interest payment on the principal loan amount is borrowed each June using my home equity line of credit, @ current variable home loan interest rate -0.7% "professional package" discount +0.1% "portfolio loan" premium. Currently the interest rate is 7.33% pa. This interest is paid monthly from my credit union savings account. (I could have also capitalised this interest on interest, but I couldn't be bothered as the amount each month is quite small, and I'd be pushing my luck regarding the tax-deductibility of such interest payments).

Investment Performance:
14.46% in the first year

Tax Considerations:
In order to ensure that the interest on any loan used to purchase the investment is tax deductible, the Macquarie Equinox fund is designed to pay a small "dividend" each year - estimated in the PDS to be around 1% pa. The dividend for the year ended 30 June 2007 will be declared by the end of August. For the evaluation of the tax effects of this investment I've assumed a 1% dividend is declared.

Taxable income from investment: 1% x $50,000 = $500

Deduction for interest paid on investment loan:
7.75% x $50,000 = $3,875

Deduction for interest paid on capitalised interest:
7.33% x $3,875 = $284

Net effect on taxable income:
$500 - $3,875 - $284 = $3,659 reduction

Marginal income tax rate = 30%
Reduction in income tax payable for 2006/7 FY: 30% x $3,659 = $1,097.70

Unrealised Capital Gains for 2006/7: 14.46% x $50,000 = $7,230
Capital Gains tax rate = 50% x marginal income tax rate = 15%
Unrealised CGT due when investment is liquidated: 15% x $7,230 = $1,084.50
Net Unrealised Capital Gain: $7,230 - $1,084.50 = $6,145.50

Net after-tax profit calculation:
= Investment Value - Loan balance - interest paid + tax refunds - CG tax due
= $57,230 - $53,875 - $284 + $1,097.70 - $1,084.50
= $3,084.20

It's a bit hard to work out a ROI as I used OPM to fund this investment, but as a ball-park figure I assume that I "used" $3,875 of home equity that could have otherwise been invested elsewhere, plus I paid out $284 in interest on this home equity loan. So, ROI becomes $3,084.20/($3,875+$284) = 74.16%

On the face of it this looks like a great little money-maker, BUT the potential riskis huge. Worst-case the investment could become worthless, leaving me with a $53,875 in debt to repay. So, as nice as a 74.16% pa return is, I'll restrict my total investment in this high-risk asset class to the current $50,000 - which is around 4.3% of my net worth. This limits the potential maximum loss to around $88,750 after ten years, vs. a "likely" net profit of around $90,980 after ten years (assuming interest rates stay the same, tax rates stay the same, and the investment return averages 14.5% pa).

Break even requires an averaged investment return of 5.98% pa (It's less than the cost of borrowing to invest due to the tax effectiveness of the investment).

Best-case scenario would be a net profit of $191,674 if the investment return averaged 20% (a figure quoted in the PDS as a "projection" based on historical returns for the underlying investments used to value to investment). This best-case scenario is highly unlikely, with the "historic" return data for many of the underlying investments being only a couple of years!

Doing a back-of-the-envelop estimate of "probable" outcome, I get the following:
Outcome Probability Scenario
-$88,750 10% Stay invested for 10 years, then investment goes bust
-$ 6,930 20% Stay invested for 10 years, investment return avg 5%
$16,264 25% Stay invested for 10 years, investment return avg 8%
$90,980 25% Stay invested for 10 years, investment return avg 14.5%
$131,567 19% Stay invested for 10 years, investment return avg 17%
$191,674 1% Stay invested for 10 years, investment return avg 20%
The Weighted average outcome is a profit of $43,464. (As a reality check this equates to an average return of 10.77%, which seems realistic)

Overall, I estimate that the likelihood of losing my entire 4.3% of net worth that I've put into this high-risk is only around 10%, and that there's a reasonable chance that this investment could increase my net worth by an extra $100K to $200K in ten years time.

This is a good illustration of how slack my investment due-diligence and risk analysis really is. Checking through the PDS again I found that:
a) The 10-year historic return of the underlying investments is actually around 15%, not 20%
b) This investment is supposedly "capital guaranteed" - so worst-case I *should* get back the initial $50,000 at the maturity date
c) There is a "rising guarantee" that "locks in" a part of the increased fund value each year (if any) - this may mean that by the end of August the rising guarantee has increased to maybe $53,000 - which would then become my "worst-case" scenario
d) The investment matures after 8 years, not 10. But at that time the fund "rolls over" into an investment in the top-10 ASX listed stocks, so it won't trigger a CGT event at that time. I may need to refinance to $50,000 loan at that time though.
e) I really don't understand exactly what mix of underlying investments the fund performance is linked to and I don't know what fees are being siphoned off - probably a lot, as exotic investments tend to have high management fees, and capital protected products tend to be loaded up with hidden costs.

So I've violated the cardinal rule to "only invest in things you understand". Then again, although $50,000 is a sizeable investment in one product, it's only 4.3% of my total net worth, and an even smaller % of my total investment portfolio. And some of the benefits (income tax deductions, investment asset diversification into non-correlated asset classes) are pretty certain.

If I was a more risk-averse investor I'd not invest in this product in the first place - instead I'd make a "risk free" 7.33% after-tax ROI by not drawing down my home equity loan to pay the interest on this investment.

On the other hand, a more risk-seeking investor might add $50K or $100K of such an investment to their portfolio each year, using every bit of available equity to fund the investment borrowings. If things worked out, after ten years you could have made an extra $1m or so and be able to retire, or possibly write a book and teach seminars on how to make a fortune through speculative investing

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We're still waiting for our employer contributions to start appearing in the bank account of our Self-Managed Superannuation Fund. Apart from the intial $200 deposit I made last June nothing has appeared in the account yet. We notified our employer to direct our 9% compulsory employer contribution plus our "salary sacrifice" amounts into the SMSF from 1 July, and the payroll department has apparently made the change. The employer contributions still go initially to the company's superannuation administrator, who is then supposed to redirect it into the SMSF bank account within a couple of days. As no funds had appeared in the account yet I asked payroll in what timeframe I should expect the money to appear in our SMSF account. It turns out that although the superannuation contribution amount is printed on each fortnightly payroll slip the contributions are only sent in at the end of each month. So I should see the July contributions hit the SMSF bank account by the middle of August. As soon as I know that no additional contributions are going into the old fund we can send in the paperwork to close DWs account and "rollover" the entire balance into our SMSF. I'll also send in the request to rollover the bulk of my account balance into our SMSF, just leaving enough in the old fund to cover my insurance premiums. It's cheaper to get death & TPD cover through our company superannuation scheme as we get group rates and the premium is paid out of pre-tax dollars. Outside of superannuation life insurance premiums are generally higher, and aren't tax deductible. In contrast, income protection insurance is tax deductible, so it's generally better to obtain it outside of superannuation.

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Mum is OK - she had a tetanus shot and a diptheria booster for the wound on her hand, and is on antibiotics, but she was lucky and didn't break anything or get a concussion when she passed out and fell head-first into the bedroom wall. She was even feeling well enough to have us over for dinner this afternoon.

Meanwhile, my AUD/USD forex trading has been doing well - going long the AUD in the recent strong uptrend has made back some of my previous trading losses. I put a total of A$4,000 into my forex trading account and was down to A$1200 at one stage. My balance is now back up to A$2240 with the AUD at US$0.8847. If the Aussie dollar reaches 90c US I'll be close to break-even on my trading account. I've still managed to lose a bit of money every time I try to "day trade" the short term ups and downs, but the general uptrend has continued as I expected. If I'd just started out my forex trading with a smaller positions and thus allowed a larger margin buffer (so I didn't get liquidated on short-term dips in the AUD) I would have made a profit from the overall trend. Then again, any gains I make from my forex trading are really just hedging the currency losses on my US stock portfolio.

Today the Australian stock market was back up 40 points, more than making up yesterday's drop to close at a record high. So my stock investments and superannuation account balance are looking good.

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Today was a day for medical mini-crises. First, DS2 was awake all night with a nagging cough, and by 5am we weren't sure if he was suffering from asthma of just badly conjested lungs. We've all had the same lingering chest cold for more than a month, but DS2 is only 10 months olds so it's more of a concern. He already had one course of anti-biotics several weeks ago, which got him over the worst of it, but the slight "rattle" and cough never went entirely away. Then last week he developed another runny nose, and his cough got worse over the weekend. So at 6 am we were debating whether to take him to the hospital emergency department, or just to our local GP. As the wait in the ER would probably be at least 2-3 hours we decided to go to the GP first. We managed to see the doctor at 9am despite not having an appointment, and it seems that DS2 probably doesn't have asthma, just a bad chest infection - maybe a spot of pneumonia. We then dropped DS2 off at my parents place for baby-sitting along with the first dose of new course of anti-biotic, and managed to get to work only a couple of hours late.

When we collected DS2 this afternoon he was looking well and had been resting comfortably all day and not causing Grandma too much trouble. So all seemed OK for DS2 to stay with Grandma tomorrow as usual (DW is working 2 days a week now). Then, at 9pm my Dad phoned to say than Mum had hurt her hand and then fainted while walking to the bedroom to lie down for a rest... Unfortunately she apparently hit her head when she passed out, and hurt her nose and some teeth. Last I heard Dad was going to take Mum to the ER for treatment and will phone with a progress report in the morning...

So I'll be taking a day off work tomorrow to look after DS2 (and check up on Mum's condition). I may need to take Mondays and Tuesdays off work for a couple of weeks if Mum isn't up to baby-sitting for a while.

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In an ideal world my investment asset allocation would be done in the following manner:
1. Determine what initial amount to invest and ongoing savings plan
2. Determine my risk tolerance and any constraints regarding what investment types I choose to invest in (eg. ethical funds, hedge funds etc)
3. Decide my timeframe and investment targets (eg. final amount for retirement, target ROI or whatever)
4. Select an appropriate asset allocation to meet my investment return target with minimal risk (ie. aim for the efficient frontier)
5. Select individual investments to meet my overall asset allocation with consideration of fees, diversification.
6. Rebalance the investments periodically (eg. every year) or when the actual asset allocation differs too much from the target allocation - either by selling investments and reinvesting, or by adjusting what assets new savings are directed into. Bearing in mind transaction costs and capital gains tax effects.

In reality I have a ROI target of 5%-15% for my total networth, excluding annual savings of around $30K. Assuming a CPI of 2%-3% this would mean a real return of around 2% - 12%. But I don't have an overall asset allocation target as I have a large chunk of my net worth tied up in real estate via our home and our rental property, despite preferring to be largely invested in Australian and international shares. The rental property investment was mainly chosen because DW wanted to invest in the property market, and the house - well we both prefer to own our own home rather than rent. I therefore tend to only manage asset allocations within our superannuation account and by having the remainder of my investible assets in stock investments plus some alternative investments (hedge funds, agricultural investments, coins, bullion etc). Given that I have a much larger proportion of my assets in real estate than I would prefer, you'd expect that any additional investments would have been directed towards additional stock purchases, or perhaps some alternative investments. In reality although my personal savings have been directed towards direct stock investments or into my superannuation fund, until recently we had actually been increasing the proportion of our networth tied up in real estate due to our home loan payments reducing the property loan principal over time. We've now got both our home loan and rental property loan setup as "interest only", mainly because DW can't afford her half of the normal P+I loan payments while working part-time, so this will shift our asset allocation
more towards stocks over time.

As you can see, my overall asset allocation is therefore a pretty hit-and-miss affair. So for that reason worrying about fine-tuning asset allocation by rebalancing is a moot point.

Copyright [url=http://enoughwealth.comlEnough Wealth[/url] 2007

DS1 is an avid reader - so much so that it would be uneconomical to buy him novels to read. I have bought some encyclopaedia's, dictionaries and reference books, but for novels we tend to just borrow books from the local library. He has enjoyed the Enid Blyton series "Secret Seven" and "Famous Five", even though they are very old fashioned. I remember reading a "Tom Swift" novel when I was around his age (7), so I did a search on the Gutenberg.org site to see if these books were now out of copyright. Sure enough, you can download the series for free. One thing I did notice was that the language in some of the

Tom Swift stories seems very *ist by modern standards, so you might want to either edit the text or use the books as a starting point for discussing how racial and cultural stereotypes are inaccuate and offensive...

Copyright Enough Wealth 2007

I admit to being a big kid when it comes to taste in entertainment* - I enjoy TV shows like Dr Who, Hyperdrive, Torchwood, Lost, Stargate, Star Wars... in fact anything with little green men and some flashing blinking lights (which reminds me of Flying High 2). I also enjoy reading SF and fantasy novels, so I've enjoyed reading the Harry Potter series so far, but I'm too stingy to pay for a hardcover copy when they are first released. The latest book in the HP series went on sale this morning, so I did my usual trick of standing around the book section of the local department store and read the first 88 pages of Deathly Hallows while DW took DS1 to the clothing section to buy him some school socks. I'll probably take about a week to get through the whole book, reading it for half an hour in various book shops and department stores during lunch hour and on the weekend. I don't feel too guilty about not buying the books - I have bought the DVDs of the movies as they have gone ex-rental, as the whole family enjoys watching them several times. I'll probably buy a boxed set of the entire series in paperback in a couple of years - by which time DS1 will be old enough to enjoy reading them.

The different approaches to selling the Potter book taken by various booksellers is quite interesting too. The Dymocks book store always takes pre-orders, sells the new release at full RRP (around A$44) and ran out of stock by lunchtime (there's a note in the window saying that more stock will arrive next week). I'm amazed that anyone buys the book from them - the Big W department store has lots of copies in stock, as does the Myer department store, and both are selling the same book for under $30. I'm also amazed that Dymocks ran out of stock this morning - the same thing happened when the sixth HP novel was released. I can only imagine that head office controls how many copies they can get hold of.

* I also like medieval wind ensembles and illuminated manuscripts, so I can pretend to have posh tastes if needs be.

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