As Dr. Evil would say "ONE, TRILLION, DOLLARS!"

That is the amount the Australian Household debt is likely to hit this year. Despite three interest rate rises by the Reserve Bank last year, which temporarily dented consumer confidence and slowed the growth in consumer debt, the rate in growth in credit for households and business was 1.4% last month - the fastest it's been in four years. This could trigger another rate rise at the Reserve Bank Board's monthly meeting next Tuesday, but many economists expect them to wait until they get the latest quarterly inflation figures next month. Borrowing for housing made up 86 per cent of the household debt figure ($840 billion) and the remaining $137 billion is personal debt (including credit card borrowing and personal loans).



Enough Wealth

It's not a trick question. I was just wondering today what is the ultimate effect of adding $1000 to my "family fortune". As I think I'm on track to have enough to live off by the time I retire, additions to my net worth over the next 20 or so years should end up increasing the size of my estate. Of course one has to make a lot of assumptions to model this. My assumptions are:
* my kids and descendants either make their own way, or at least live off the income of the "family fortune" rather than blow the lot. A big assumption, but at least I won't be around to find out if I'm wrong
* the "estate" will be invested tax effectively and in a sensible asset allocation that provides a reasonable "real" return - say 4%. This could be conservative, if the assets are mainly "high growth" ones such as stocks, real estate, and some bonds. But, looking at the long term there is the risk on entire markets doing very poorly, hyperinflation, and so on. Imagine if your family fortune had been entirely invested in Russia, Germany or Argentina 100 years ago. So there is probably a need to diversify between markets and also to spread the actual holdings to several different countries to minimise sovereign risk. This is likely to diminish to overall returns achieved.

So, what might $1000 be worth? It could provide a weekly income of around 77 cents per week on an indefinite basis. Not as much as you might have thought.

Enough Wealth

My company provided free 'flu shots to any employee that wanted one today, so I got one. Unfortunately I had caught a cold yesterday, so that combined with the effects of the 'flu vaccine made me feel pretty poorly. Hopefully I get over the cold tomorrow.

Enough Wealth

I collected DWs mobile phone today - I'm glad the repair report showed that a short-circuit in the speaker had been found and the speaker replaced. There's nothing worse than dropping in electrical equipment that has an intermittent fault, only to get it returned a few days later with the dreaded "no fault found" message. The warranty doesn't run out 'til next monday, so it didn't cost anything to have it repaired. Hopefully both our phones will last for several years.

The dentist didn't have a vacancy until next Tuesday, so it's lucky that my molar with a large chunk of tooth missing isn't hurting. Upon reflection maybe this shouldn't be a surprise, as this is the tooth that previously had root canal -- so there won't be any live nerve left in that tooth? Dental costs aren't covered by medicare, so, unless you have a comprehensive private health insurance plan (we just have basic hospital cover to avoid the extra medicare levy) it is normally an out of pocket expense. It does count towards our total non-reimbursed medical expenses for the year - anything over the threshold (around $1500 I think) gets a tax rebate (of around 30%). If you can't afford to pay, and don't have private insurance, there is free public dental care available from the State government. But it's got a limited budget, so there are very long waiting lists for anything except emergency dental work.

The bathroom plumbing has been playing up - taking a long time for the bath and toilet to drain sometimes, and making strange "blup, blup" sounds. DW arranged for the plumber to drop by and clear out the waste water pipes with an 'electric eel'. Unfortunately this is a different pipe to the one he cleared out last year, and he couldn't find the access point. The drainage diagram that was attached to the documentation we got when we bought the house doesn't show much detail - and I think it shows the original plans, without some additions that were added to the house later on. The plumber had to leave to locate some more detailed plans - hopefully he'll be back tomorrow and the total bill won't be too high. I have a new flush valve assembly to install in the toilet - I'll have a go at doing that myself, but I draw the line at clearing out blocked sewer lines. I'm quite happy to spend my money for someone else to do THAT job!

While I was collecting the wife's mobile phone at lunchtime I dropped into the Aldi store closest to my workplace. They had a USB high-definition DVB-T received on sale this week for $79. Hopefully I can just plug it in to my laptop and watch TV - I'm not 100% sure it will work as the specs say it requires a 64MB Video card, so it may not work on the laptop. I'm also not sure if we have any reception of terrestial digital TV signals where we live (it's in a bit of a valley). Sigh -- another $79 that would probably have been better spent going into my retirement fund, or one of my kids retirement accounts ;0

The market was up 39 points today, which approximates to about $3,500 profit "on paper". I ignore such ups and downs in my daily net worth figure (although I like to plot the chart) - if I let how my investments were going affect my day-to-day outlook on spending I'd alternate between days of buying big-screen TVs and days of eating leaves and water. I find it relatively easy to stick to my "budget" for spending, and just treat by investment performance as an intellectual curiosity. I find that doing this also helps me to stick to my long-term asset allocation when, for example, the market crashes or is in a prolonged slump.

Enough Wealth

I've been posting updates of my Australian and US stock portfolios each month, so I may as well post a monthly snapshot of my mutual fund holdings. I've excluded my shares in the Commonwealth Diversified Share Fund (CDF) as it is an exchange traded fund (ETF) and already appears in my stock portfolio posts.

After investing in several actively managed funds in my early days as an investor (in those days a monthly $50 or $100 savings plan was more in line with my available savings than buying blocks of stock), I've slowly moved away from funds, aside from low-cost index funds and some "hedge" funds. I found that, apart from often poor performance relative to the index they were bench-marked against, there were often problems with funds being "wound up" if they were performing badly.

My current Managed Fund investments are:
St George Margin Loan;
Code Fund Name Price Qty Value Margin
FSGSF Col First State Geared Share Fund $4.9418 4,427 $21,879.71 70%
OMIP320 OM-IP 320 Diversified Limited $1.8899 5,000 $9,449.50 65%
OMIPSL OM-IP Strategic Limited $2.2971 5,000 $11,485.50 60%
OMS1220 Series 1 OM-IP 220 Limited $4.1063 5,000 $20,531.50 70%
VIISF Vanguard Index International Share Fund $1.1462 13,046 $14,954.28 70%
VLHGF Vanguard LifeStrategy High Growth Fund $1.7237 18,453 $31,807.49 70%

Comsec Margin Loan;
FSF0169AU CFS Geared Global Share Fund $0.777 8,241 $6,403.47 50%

Enough Wealth

A strange mix of events today. I finally got around to taking DWs mobile phone to be repaired under warranty. It's had an intermittent problem with the sound sometimes not working, and then starting to work OK again (it's amazing how useless a mobile phone that doesn't ring is!). The warranty expires on the 31st March, so it was now or never. Hopefully they'll have it fixed (or replaced) by Thursday and it will then work OK. We have two identical mobile phones on a combined $18 a month plan, which is enough credit to cover all our normal phone calls. If the mobile is working reliably I'll think about getting rid of our land line - it costs over $30 a month and we hardly use it at all. The only downside of getting rid of the land line is that I've had the same phone number for 40 years! (I had it transferred to our new house when I moved).

A couple of packs of information arrived today regarding some of my shares. A 2 for 15 entitlement offer from Suncorp (at $15.15 a share). The share price is currently $20.40, but if everyone takes up their entitlement the dilution should (theoretically) drop the share price a bit:

expected new price = (15*20.40 + 2*15.50) /17 = $19.82

In practice the price probably wouldn't drop that much, as some people won't take up the entitlement, so the dilution won't be as great.

The second info pack that arrived was from the US regarding a proposed merger (takeover) of PW Eagle for USD$33.50 per share (cash only). The pricing seems a bit mediocre, as PWEI was trading as high as $36-$37in January. I bought these shares at USD$33.29 last October, so I wouldn't make any significant gain.

Finally, a piece of a molar that had had root canal therapy and a large filling a couple of years ago broke off this evening. Hopefully it can just be filled and won't cost too much. It doesn't hurt, so I'm hoping I don't need any more root canal work (it costs around $1,000 each time!). I thought there might be further trouble with this tooth when the dentist completed the last lot of root canal work and replaced the temporary filling with a permanent filling - there was a distinct cracking sound while she was working on the filling...

Anyhow, lots things that have potential to impact on my finances occurred today, but not much actual cashflow (yet).

Enough Wealth

I'm always fascinated to read studies on income, wealth, savings patterns etc. for different countries and demographic groups. But there are some key variables that always seem to be missing from such studies:

1. Correlation of Net Worth and IQ
- yes I know that there are lots of studies showing that higher education leads to higher income, but the link to higher wealth isn't so strong. There are even indications that education isn't much help in getting rich - lots of self-made millionaires built up a business without a college degree. But, this doesn't mean that these people weren't intelligent. Forrest Gump not withstanding.

2. Correlation of Net Worth and religion.
- you'd think that some religions would be more compatible than others with accumulating wealth. And within a religious grouping you'd expect a correlation with how "strictly" religious someone is and their net worth. After all, you'd expect Christians that don't tithe 10% of their income to end up with greater net worth. But this relationship might be skewed by a small number of high net worth tele-evangelists!

Then again, such studies would not be PC.

Enough Wealth

Having done a rough risk estimate on Friday night as to whether or not Qantas shares were worth a punt at $5.06, and concluding that they were. I proceeded to second guess myself this morning when I checked the share price half an hour after the market had opened. QAN was trading down at around $5.03, while the general market had shot up at the open. This of course meant that either QAN was an even better buy, or that, with QAN continuing to head south while the market was trending up, I'd misread the prospects for the QAN share price. As I lack the "killer instinct" a successful trader requires (the same instinct that also made Leason loose 827 million pounds), I proceeded to dither and decided against placing an BUY order with a $5.00 limit.



Of course, after dipping briefly below $5.00, QAN shares ended the day up 1.8% from there at $5.09. If I buy some tomorrow the market is certain to drop a bit, and QAN shares will dip back below $5.00. And if I do nothing, they'll continue upwards and eventually they'll exceed the takeover price of $5.45...

This indecision is why I'm tending more towards geared investments in the market index. And, as many wiser investors than I have said before me, I hate losing money more than I enjoy making it.

Enough Wealth

I haven't posted an update of my Australian Stock Portfolio for a while. I don't have much turnover in my Australian stock portfolio as I generally follow a "buy and hold" strategy.

I'm tending more towards index investing these days, although at the same time I've started experimenting with direct stock picking for my US stock portfolio. My excuse for the US portfolio is that it gives me something interesting to do, and, once I'm fully invested with 18 US stocks it will be pretty well diversified and track the index reasonably well anyhow - I'm just hoping for some outperformance.

I've been sorting through my old records to get my transaction logs up to date for calculating how much capital gains tax I'd be liable for if I sold off my stock holding so I could invest my money in a tax-sheltered superannuation account (SMSF). It's interesting to be reminded of what "might have been" when going through these old transactions

- the purchase of Southern Pacific Petroleum as a long-term oil-price play, which ended up being worthless when the company went broke and sold off all the oil shale assets to a texas oil billionaire! If only they'd raised some more capital from the existing shareholders and hung on for another year or two the spike in oil prices would have made the stock skyrocket!

- the purchase of CSL stock at $2.50 which I sold off at $3.40 less than a year later for a quick 40% profit. I was quite pleased with that trade. Unfortunately the company has continued to appreciate over the years and is now worth $83.70 a share!

Current holdings:
Leveraged Equities Account (loan balance $155,620.68, value $307,620.68)
stock qty price mkt value margin
AAN 295 $14.15 $4,174.25 70%
AEO 1,405 $2.00 $2,810.00 65%
AGK 510 $15.80 $8,058.00 70%
AMP 720 $10.37 $7,466.40 75%
ANN 480 $11.51 $5,524.80 70%
ANZ 1,107 $29.52 $32,678.64 75%
BHP 748 $29.18 $21,826.64 75%
BSL 781 $9.94 $7,763.14 70%
CDF 6,943 $1.85 $12,844.55 70%
CHB 118 $50.00 $5,900.00 65%
DJS 2,000 $4.68 $9,360.00 65%
FGL 3,751 $6.66 $24,981.66 75%
LLC 481 $19.76 $9,504.56 70%
NAB 316 $40.54 $12,810.64 75%
QAN 2,175 $5.06 $11,005.50 70%
QBE 966 $31.95 $30,863.70 75%
SGM 830 $22.89 $18,998.70 70%
SUN 850 $20.65 $17,552.50 75%
SYB 2,848 $3.70 $10,537.60 70%
TLS 5,000 $4.47 $22,350.00 80%
TLSCA 3,000 $3.02 $9,060.00 80%
VRL 1,500 $3.25 $4,875.00 60%
WDC 783 $21.23 $16,623.09 75%

Comsec Account (loan balance $106,302.53, value $219,712.40)
stock qty price mkt value margin
AGK 240 $15.80 $3,792.00 70%
AAN 139 $14.15 $1,966.85 70%
APA 4,644 $4.19 $19,458.36 70%
ASX 200 $42.90 $8,580.00 70%
CBA 130 $50.27 $6,535.10 75%
CDF 43,997 $1.92 $84,474.24 70%
IPEO 54,000 $0.048 $2,592.00 0%
IPE 8,000 $0.985 $7,880.00 60%
IFL 1,300 $10.10 $13,130.00 60%
LDW 1,350 $7.70 $10,395.00 0%
NCM 300 $23.56 $7,068.00 60%
OST 2,000 $5.08 $10,160.00 70%
QBE 607 $31.95 $19,393.65 75%
RIO 60 $76.85 $4,611.00 75%
THG 4,000 $0.925 $3,700.00 50%
WBC 300 $26.15 $7,845.00 75%
WPL 220 $36.96 $8,131.20 75%


Enough Wealth

A funny thing has been happening with the new Credit Cards that I obtained just to make use of the 0% balance transfer offers that were available. Many of the issuers are now sending offers to increase my credit limit! Apparently having a balance on the card and making the minimum payment each month makes me a model consumer, and the credit card companies are falling over themselves offering increased credit limits. I can only assume that either the system they use to decide who should be offered more credit only looks at the repayment history, and doesn't care about the interest rate being charged. Or perhaps they are just hopeful that once the 0% period expires I'll just keep making the minimum payment each month, rather than pay it off in a lump sum. Anyhow, there's not really any downside to accepting the increased credit limits from my point of view - we don't have a "credit score" as such in Australia, so I may as well have a large line of credit available in case of emergencies (it lets me keep all my funds invested according to my asset allocation, rather than keeping an "emergency fund" invested at call at somewhere).

For US readers taking out new cards and accepting higher credit limits may adversely affect your FICO score temporarily - but after a while it may still be a positive as an increased credit limit will mean that the amount of debt on your cards (for 0% balance transfers) would be a lower % of the total available credit.

Enough Wealth

Well, State Elections are on today in NSW. As voting is compulsory here, we'll drop by the local highschool sometime today to cast our ballots. I'm not impressed by either the Labour (left) or Liberal (right) parties - Labour has been in office for 12 years and, as can be expected, has spent a lot of money on increasing the size of the public service, and increasing their wages. I don't mind spending extra taxes on boosting the numbers and pay of police, teachers and nurses, but there also tends to be a bloating of pretty useless "administration" staff in the public service under Labour. At the same time the State's infrastructure has been allowed to run down - insufficient spending on public transport (trains, roads, buses, ferries) and public utilities (water). Unfortunately the opposition Liberal party seems to be full of fools - the leader is uninspiring and has made some bad gaffes during campaigning, and we've hardly heard a peep from any of the other Liberal "shadow ministers". As neither of the major parties has much support it probably means that the minor parties (Greens and Democrats) will do better, and a lot if local "independent" members will probably also be elected. This is not a bad thing in terms of local representation, but it does mean that if there's a "hung parliament" (no party having an absolute majority) with the independents or minor parties having the "balance of power", we won't really have any idea of what policies will actually be implemented during the next term of parliament. Most of the independents are "one issue" candidates and will make deals to vote on other issues on a case-by-case basis. This is a bit "anti-democratic" as it means the voters didn't get to elect a party with a clearly outlined platform, but will get policy decided by "deals" made with various independents.

Ah well, a least we'll get a break from campaigning after today - until the Federal election later this year ;(

Enough Wealth

As a shareholder in Qantas, I've yet to decide whether or not to accept the $5.45 takeover offer by APA (Airline Partners Australia). When the stock was up near the offer price I was thinking of selling the stock on the market to lock in a tidy profit (my average cost is around $4.00) - I was leery of accepting the offer, mainly because it is conditional of receiving 90% acceptance and thus becoming compulsory. Unfortunately the stock drifted down below the offer price, and then dropped due the general market correction. Since then it has failed to get back up near the offer price as there was speculation that APA wouldn't reach the 90% acceptance level.

Today a major stockholder (with around 4% stake) announced that they defintely wouldn't be accepting the offer, so it looks likely that the APA offer will lapse, even though they've extended the offer until late in April.

I'm now toying with the idea of buying some MORE Qantas shares at their current price of around $5.06. This is 7.3% below the offer price, and, presumably the Qantas shares are thought to be worth at least this amount, otherwise the takeover would be accepted by shareholders. I'm thinking that if I buy at $5.06 there's three chances out of four of getting a good outcome. Either
1. the takeover succeeds, in which case I'd make a quick 5%+ return
2. the offer fails and a new, higher offer emerges - say $5.70
3. the offer fails and Qantas shares go higher than $5.45 in the medium term - say $5.80
4. the offer fails and Qantas shares drop back to their pre-offer level of around $4.20 - say $4.40

As the outlook for Qantas has improved since the takeover offer was announced, I doubt that the share price will drop back to $4.20 even if the takeover fails and no new offers emerge. I'd thus make a very rough estimate of my risk analysis as:

cost price = $5.09 (with brokerage costs)

expected outcome = [25% x $5.45] + [25% x $5.70] + [25% x $5.80] + [25% x $4.20]
= $5.34

ie. Expected outcome is 5.1% return in a couple of months.

Hmmmm, decisions, decisions

Enough Wealth

One of the things financial planners will always review is your life insurance cover. Not everyone needs life insurance of course - and not everyone is able to get the amount of cover they need at a reasonable cost. In Australia life insurance is often best value when the policy is taken out within your superannuation (retirement) account, as the premiums will be paid from money that has been concessionally taxed (usually at 15%), rather than at your marginal tax rate (of up to 40% or more). Another benefit of getting your coverage through your superannuation fund can be cheaper rates - if you are part of your employer's superannuation plan, the life insurance is often at cheaper "group" rates than you could obtain outside of super. Often the maximum cover available without having to have a medical exam is quite generous too. I have $400K of death and "total and permanent" disability cover (there are several different types of cover possible). Its basically term insurance, guaranteed renewable until age 65, with the premiums based on sex and whether or not you're a smoker. The premium increases each year with age, and with generally rises in insurance costs (although the amount of cover remains fixed, companies will increase premiums across the board as life expectancies increase).

One consideration for me when starting up a self-managed superannuation fund (SMSF) will be whether it's worth keeping my existing employer's superannuation fund account open with a small balance, just so I can retain my existing insurance. Although the management fees are proportional to the balance (and thus won't be an issue), there is a small monthly account keeping fee which would add to the cost of retaining my existing insurance cover. I'll probably keep my existing cover while I get my new fund setup, and not close it until I have got quotes for a new insurance policy with the same benefits, and had my application accepted (it will probably require a medical exam). It would probably be worth keeping the existing super account open just for the insurance if I can't get a new policy - the annual account is only around $50, and I should be able to save at least $1000 pa in reduced fees by moving the bulk of my superannuation into a SMSF.

I mainly have life insurance to provide for my family if I die. As the death benefit will be added to my retirement fund balance and other investments, the amount of cover needed should decrease over time - so I can probably keep the cost of insurance fairly constant by decreasing the amount of cover as I approach retirement age.

In addition to Death and TPD insurance, I also have a "loss of income" policy that will pay 85% of my salary until 65 if I am disabled. It differs from TPD insurance in that there is a "waiting period" that applies before you start being paid a benefit if you are disabled. The premium is less for longer waiting periods, so I choose a 2-year waiting period in order to minimse the cost. I have significant annual and sick leave accumulated, plus enough assets to see my through this period without any income. This type of insurance is tax-deductible if obtained outside of super, so it's usually best to obtain these policies outside of super (ie. paying the premium with your after-tax dollars).

Online comparison tools are very useful for comparing rates available from different providers for different policy types and conditions. It's very important to consider the strength and reputation of the provider, and the "fine print" of the cover, when comparing prices, to ensure you are comparing apples with apples. One site available for comparing life insurance policies in the US is Life Quote Centre.

sponsored

CNN has an article outlining some unusual investments. Not ones that I'd recommend as a good basis for your retirement fund, but fun to browse through:
* Buying real estate in exotic locales.
* Buying rights to wind and solar sites.
* Investing in unknown artists.
* Commodity indexes.
* Franchising.

Enough Wealth

The login details finally arrived by email from CMC Markets today. After sending in another email to setup the initial password I was ready to install the MarketMaker software. The installation went well, with no hick-ups installing it under Windows XP. It took about 5 minutes to download and install. One annoying feature (which also happened when I installed Comsecs ProfessionalTrader software) is that the first time you run the installed application it checks for any updates - and finds heaps. Installing all the "updates" to the installed application took longer than the initial installation. It seems as though once a version is rolled out, it gets used as the installation version for ages. All subsequent updates are just cobbled together as they arise over time, so if you install the application a fair while after its been released there's a huge amount of outdated code to be replaced. A more customer friendly approach would be to keep the "installation" version always updated with the latest updates, so that new users wouldn't have to go through a lengthy update of their newly installed application.


Once it was finally ready to go, I started to have a play around. I doesn't have an intuitively obvious interface, but that's probably due to it providing heaps of functionality and trying to keep the default layout clean and simple. I had a quick read through the online manual, and I'll have to read it all the way through before starting to use the application to its full potential. CMC Markets has a "free 1 day course" available to new clients. I'm sure it will mainly be a lot of "how to easily make huge returns with absolutely safety" bumpf, but it might provide enough training on how to use the software efficiently to make it worthwhile taking a day off work to attend.

My first daily account update arrived by email from CMC Markets today. Nice to see the $1,000.00 balance with no fees taken out. There is an online account funding option available within the trading application, but you can only make payment by credit card and they charge a $1.50 fee per transfer. I'll do any funds transfers by BPay instead and save the cost. I still have to fill in and mail by bank account details to CMC Markets so I can get funds paid back out again.

Hopefully I'll have worked out everything by the start of next month when I'm scheduled to make my next monthly US stock purchase to add to my "Little Book" portfolio. I'll do a normal $5000 stock purchase through Comsec-Pershing, and at the same time duplicate the transaction trading a long CFD in the same stock via CMC Markets. As the US CFDs trade on a 5% margin, the extra cost will only be around $500, but it will, of course, be doubling my exposure to any rises and falls in the stocks I purchase. I'll do the dual trades for 18 months and compare the costs of both trading systems.

Enough Wealth

Yes, I know, that isn't news to anyone. But my annual notice from my health fund arrived today letting me know exactly how much my premium is rising this year. After announcing that they paid a record amount in claims last year (up 8.5%) they got down to the nitty gritty and let me know that my monthly premium for basic family hospital cover is going up to $151.45 per month (including the 30% Federal Government Rebate). This is only an increase of 2.0% from last years $148.40 a month. BUT, there's also a change in how the 'excess bonus feature' works. Instead of getting a $100 cash refund at the end of each year if you haven't made any claims, this is now being replaced by up to two excess free same-day or overnight admissions per year. Although the benefit seems similar, it's actually not much of a benefit to us as we've any made one claim in the past five years. Instead of getting $500 worth of refunds, under the new rules we'd have just saved $100 for one excess payment. Adding in the loss of the $100 refund each year, the actual "out of pocket" increase in premium is 8.1%.

If we didn't have private hospital cover we would have to pay a 1% medicare levy surcharge when our combined taxable income (with 2 dependants) iss above the $101,500 threshold for any year. We would probably have been under the threshold this year as DW spent a large part of the financial year on unpaid maternity leave, but most years our combined income would be over the threshold, so we'd end up paying at least $1000 in extra tax. The net cost of having the private hospital cover is therefore only around $68 a month, so it's probably still worth it in case any of us ever need 'elective' surgery - which is available in the public system, but can have very long waiting lists.

Enough Wealth

An article in the Sydney Morning Herald discusses the possible impact of probable sea-level rises (caused by apparent climate change that may be due to increasing C02 levels, the "greenhouse effect"). While I doubt many houses will actually be lost in NSW due to rising sea levels (after all, most a several metres above sea level, and would install sea walls rather than just let their foundations wash away), there is likely to be an impact on beach formation and disappearance.

This is actually of possible relevance to me as my parents own a 25 acre "hobby farm" on the inland shore of Lake Wallis on the NSW mid-north coast. The Lake is formed by a large sand bar running south more than 10 km from Forster. The southern end of this bar actually washed through in the early 1900s, so a rise in sea levels of 0.5-1.5 m could easily erode this barrier and open the Lake to the ocean. Eventually my parents farm could become prime ocean-front real estate due to Global Warming! Based on prices for nearby sea front house blocks, the value of my parents property would increase ten-fold if it became an ocean frontage and was sub-divided for housing. As the farm is on a hillside and has a fairly steep slope down to the lake front, sea level rises would not encroach far into their property.

Of course this is unlikely to happen for at least 50 years, so it would be of more interest to my children, assuming the farm stays in the family that long. I also think that if Global Warming does eventually cause sea levels to rise by up to 1.5m the general economic and social downside (think Bangladesh) is likely to swamp any potential benefits.

Just as well I didn't believe the CMC Markets Rep on Friday when he said that if I transferred the initial $1000 into my new account that day, an "automated" email with my login details would arrive on Monday... we'll see if the account email arrives tomorrow. I won't make an intial CFD trade until next month, but I'd like to install and "play" with the trading software asap.

Meanwhile some dividends were deposited into my account today, $442 from SUN, $144.60 from ASX, and $326.25 from QAN.

And I finally got around to setting up the automated payments of the minimum monthly amounts due on the HSBC and BankWest Credit Card accounts that I've taken 0% balance transfers from. I set up the minimum amounts ($300 for BankWest on a $12,500 balance transfer, and $270 for HSBC on a $10,000 balance transfer) to happen a few days before the due date each month to allow for when the due date falls on a public holiday or weekend. I'll still double check each months statement to make sure the payment will happen before it's due - I've previously had experience of a CC company changing the monthly due date without notice!

Aside from this I'm making slow progress sorting 2,000 rows of portfolio transaction data from my old Quicken backup into a capital gains transaction log. I'm 75% done so I should be able to finish it off tonight and merge it with my CGT spreadsheet I'd already setup with transactions since 2000. Hopefully the calculated final stock holdings will mostly reconcile with my current CHESS and margin loan account statements, so I won't have to go fishing through filing cabinets to verify 20 year old broker statements.

If I get everything reconciled by the weekend I'll be in a position to evaluate a few pending decisions around stock buy-backs, selling stocks and realising capital gains so I can move the funds into a SMSF, and what end-of-financial year arrangements I'll need to make regarding tax deductible loan pre-payments etc. in order to manage my taxable income and hence Capital Gains tax rates for this year.

Enough Wealth

Although there are plenty of figures around to calculate depreciation rates for appliances regarding tax deductions for rental property investments, when it comes to working out how much you actually need to budget for replacement of common household appliances the figures can be harder to work out. CNNmoney.com has published some data by Bank of America Home Equity and conducted by the National Association of Home Builders that gives real world estimates of the life expectancy of a variety of home components. To save you flicking through the 13 pictures on the CNN site, here is a summary of the life expectancy of common household appliances:
Applicance Expected Life
Gas Range 15+ years
Refrigerator 13 years
Dishwasher 9 years
Cabinets 50 years
Concrete &
Masonary 100+ years
Counter tops 20+ years*
Wood decks 20+ years
Electricals 10+ years*
Plumbing 15 to 50 years
Flooring 25 to 100 years*
Roofing 20 to 50 years*
Siding 20 to 50 years*
Windows 15 to 30 years*

* depends on quality/material
If you divide the purchase cost by the life expectancy that should give you a guide as to how much "depreciation" to save up each towards the items eventual replacement. Scaling up the amount each year to allow for inflation would also be a wise move.

Enough Wealth

When I started out investing in stocks I could only afford to purchase relatively small amounts ($2000 at a time) - and it took me several months to save up enough to make another purchase. I'd have bought a more diversified portfolio of stocks and in smaller amounts, but in those days there were no online brokers and "full service" brokerage often had a minimum fee of $50, which made trades of less than $2000 uneconomic. One way to avoid the cost of brokerage while adding to my stock holdings was to participate in the Dividend Reinvestment Plan (DRP) available from many companies. Aside from the benefit of not having to pay any brokerage, in those days many of the DRPs issued new shares at a discount to the prevailing market stock price of 2%-5%. These days the discount has been reduced or eliminated completely, which makes these DRPs less attractive. [BTW - it pays to read the "fine print" of all available DRPs if you are a small shareholder. Most plans issue whole numbers of shares at the applicable price, and rollover any surplus dividend amount in a DRP account until the next dividend date. However, a few plans "round up" the number of shares being issued to the next whole number. This can boost dividend rates significantly if you have a small share holding and end up being issued, say, 5 shares instead of 4.53)

However, these days I tend to get all dividend paid out as cash, and simply use the dividends to help pay the interest on my stock margin loans. Looking back at the DRP share purchases from my early days as a stock investor I'm amazed at the tiny dividend amounts and corresponding stock purchases that I was accumulating. Now I'm left with a major headache going back through all the trading records and DRP statements to work out the "cost base" for my current stock holdings if they include DRP stock purchases. If I didn't spend the time doing these calculations myself and instead paid an accountant to do my tax returns the extra cost would definitely outweigh the price discount and brokerage benefits of using a DRP. For example,
Woolworths
Cumulative Totals
Date Tran QTY PRICE FEE TOTAL Cost QTY
15/06/1993 BUY 1,200 $2.45 $- $2,940.00 $2,940.00 1200
20/07/1993 SELL -400 $2.45 $- -$980.00 $1,960.00 800
30/11/1993 DRP 16 $2.95 $- $47.22 $2,007.22 816
29/04/1994 DRP 17 $2.89 $0.01 $49.06 $2,056.28 833
30/11/1994 DRP 19 $2.61 $- $49.49 $2,105.77 852
28/04/1995 DRP 19 $2.72 $- $51.72 $2,157.49 871
17/11/1995 DRP 24 $2.90 $0.01 $69.50 $2,226.99 895
26/04/1996 DRP 22 $2.87 $- $63.03 $2,290.02 917
12/11/1996 SELL -900 $2.91 $64.05 -$2,554.95 -$264.93 17
12/11/1996 DRP 28 $2.58 $0.01 $72.33 -$192.60 45
24/04/1997 DRP 1 $3.22 $- $3.22 -$189.38 46
15/10/1997 DRP 1 $3.94 $- $3.94 -$185.44 47


Just how hard it can get keeping track of all the DRP transactions is shown by the Sale on 12 Nov 1996. I'd gathered together all the share certificates and taken them to my broker to sell my entire holding. Unfortunately I didn't realise that I'd mislaid one DRP stock certificate, and ended up with a small residual stock holding which was worth less than the brokerage would have cost to sell them! These days with electronic stock records (CHESS) having replaced certificated holdings in Australia, this is less of an issue.

It's also slightly easier to calculate the CGT cost basis for stock holdings under the current rule of taking the (sale proceeds - issue cost) as the capital gain, and applying a 50% discount when calculating the Capital Gains tax using your marginal income tax rate for stocks held more than 12 months before sale. Under the previous CGT regime you have to work out an adjusted cost basis for each stock lot individually based on the CPI index at the time of purchase and the CPI index at the time of sale!

A final draw-back of using DRPs is that each DRP stock purchase has to be taken into account as an additional investment if you ever want to work out your overall portfolio rate of return. This is one of the reasons I've never done to sort of detailed analysis of my investment performance the Moomin Valley has been posting about. At best I've made rough estimates of my annual portfolio ROI based on starting and final valuations and an approximation of how much additional money I've contributed during the year in terms of stock purchase, retirement account contributions and interest payments on my stock and real estate investment loans. I'm sure if I ever tried to calculate the try ROI over the past 10 or 20 years I'd stuff it up and miscalculate like the Beardstown Ladies Investment Club!

After faxing in a copy of my driver's licence and a rates notice confirming my residential address setup of my new CFD trading account was completed on Friday. They require a minimum initial balance of $1000 to start trading, which I sent electronically from my bank account using BPay on Friday. Once the funds hit their system on Monday morning I should automatically be emailed my account number and initial password and could start trading that evening (trading US stocks will be available from 1:30 am - 8am AEST). I thought it was a bit strange that the account details aren't sent as soon as the account is opened, rather than waiting until receipt of a funds transfer, but it doesn't really make much difference in the end. I found a pdf file listing the 500 or so US stocks that can be traded using CMC Markets CFDs, and most of the ones I've bought so far for my little book portfolio were listed. The few ones that were missing are the smaller, more speculative stocks such as OVTI and CRYP. This will mean an additional filter when picking new stocks to purchase for my US Stock portfolio over the next 18 months.

I plan on buying a CFD for the same value of stocks that I actually purchase each month using my Comsec-Pershing broker account. After 18 months when the stock holding and corresponding CFD are sold I'll be able to compare the costs and realised gain or loss made using each system and decide whether I'll continue purchasing US stocks or just trade CFDs for US stocks in the long term. With CFD trading there's the extra risk of losing the money I've paid for the CFDs if CMC Markets went out of business, but as there is only a 5% margin required to trade US stocks this risk should not outweigh the benefit of significant savings in brokerage in the long term.

Over the past two years, AMP and the National Centre for Social and Economic Modelling (NATSEM)have producted a series of reports that open windows on Australian society, the way they live and work – and their financial and personal aspirations.

The reports focus on the distribution of income and wealth as key factors that differentiate generations and segments of Australian society.

Well worth a look as the reports are well written and easy to digest, pulling together heaps of detailed statistical information that would otherwise be hard to track down and analyse.

Both BHP-Billiton and Foster's Group have sent out the paperwork for an off-market share buy-back. It's a bit hard to calculate the exact benefit of taking up these offers as
* the number of shares accepted may be scaled back, leaving me with a smaller parcel of shares in the company
* the final buy-back price will be determined in the tender proces, and will be at a discount to the market price of between 10%-14% (BHP) and 5%-14% (FGL)
* the amount of the buy-back price subject to capital gains tax will depend on the final buy-back price, as the "capital component" PLUS an "excess tax value" equal to the difference between the "tax value" of the shares at the time of the buy-back (as determined by the ATO) and the final buy-back price
* the amount of the buy-back price assessed as a fully franked dividend will be the difference between the final buy-back price and the "capital component"

As I'll probably have a marginal tax rate of 30% this year (it depends what tax deductions I arrange through pre-payment of 12 months of my margin loan interest) the franking credit of 30% with offset the tax due on the "franked dividend component" of the buy-back. This will mean that I only have to pay 15% CGT on the amount by which the capital component and excess tax value exceeds the orginal purchase price of my shares. As I haven't got all the old paperwork sorted for my BHP and FGL share purchases I don't really know if I'll likely make a net capital gain or capital loss on these buy-backs, but in any case it will be a much lower CGT liability than if I sold these shares for full market price. Exactly how beneficial the buy-back is compared to selling the shares for full market price will depend on the popularity of the buy-back, and hence what the final tender price discount is.

I'll have to sort out the cost base my BHP and FGL shares this weekend so I can decide whether or not to accept the buy-back offers before the tender period closes (23 March for BHP, 5 April for FGL).

If the after tax proceeds of the buy-back look better than selling the shares on market I'll probably take up the offer for all my shares (3,751 FGL and 748 BHP) as I was planning on liquidating my stock portfolio of the next few years and reinvesting the funds in a DIY retirement fund (SMSF). I also have to do some estimates of how beneficial it will be to sell and reinvest the after CGT funds in stocks within a SMSF compared to retaining my current geared portfolio outside super and selling it off during my retirement when I should be able to restrict capital gains tax rate to around 10% anyhow.

Today's dilbert is worth a look, even if you don't normally read this strip.

nb. This link will only work for a few weeks before the online cartoon goes into a pay-per-view archive.

Oh, the joys of being a landlord! Aside from having to accept a lower rent in order to find a tenant for our rental property last year ($400 a week, rather than the $410 we'd been getting from the previous tenant or the $420 a week I thought we should be able to ask based on average rent rises for this suburb over the past few years), after spending a couple of thousand dollars getting new carpet and lino laid, the new tenant had a couple of plumbing repair requests immediately after moving in, and then last month wanted the TV antenna fixed. I hadn't been expecting the TV costs as the previous two tenants hadn't complained, and the last one even had a large screen TV - perhaps he only watched DVDs? Anyhow, an inspection from the TV antenna service apparently found that not only was the cabling damaged but the existing antenna wasn't really suitable for the location (I have to take his word for it as it's not feasible to get several quotes for a job that should only cost a couple of hundred dollars max), which accounted for the poor reception the tenant was reporting. Long story short, a new digital/analogue antenna, cable run, sockets and a couple of hours work resulted in a bill for $395 - just about 1 weeks rent!

As I earn a higher salary than DW, I pay all the rates, repairs, land tax etc. on the investment property which we share equal interest in, and DW just makes half the loan repayments. So all these extra costs are starting to be a pain in my hip pocket. With the DW on maternity leave since last August, we're already having to redraw the loan payments we had made in advance over the past five years to meet the fortnightly payments (actually, I could afford to make the loan payments myself, but I'd rather use the redraw facility so we are still sharing the loan costs 50/50). Hopefully there are no more repair bills in the immediate future.

One brighter note is that after a couple of years of flat to declining house prices, the latest monthly average prices for the suburb have gone up 2.9%! There's a fair amount of "noise" in the monthly average sale data due to the mix of properies being sold, but at least it offers some hope that we may be getting back towards the long-term trend rate of around 6% pa growth in house prices for this area. We certainly need some capital gains on this property in the long term, as the rental yield is only 1.44% (before expenses), and the current interest rate on the investment loan is over 7% - although we only owe $238,000 on the property.

I've been building up a portfolio of US stocks (my "Little Book" portfolio) since the middle of last year. One of the problems of trading US stocks from Australia has been the relatively high brokerage costs - using Comsec-Pershing it costs AUD$65.00 per trade. E*Trade Australia charges even more, and I haven't been able to find any Australian brokers that will trade US stocks more cheaply. Some readers have recommended US-based brokers which are cheaper, but before I take that route (with the associated hassles around transferring funds in USD to a US brokerage before making trades) I've decided to experiment with using Contracts for Difference (CFDs). These are quite a popular tool for day traders, as you can gain market exposure with low costs per trade (as little as $1) and trading CFDs has a built-in gearing effect (usually the trades are based on a margin of between 5% and 20% of the stock value being traded). I don't intend to try day trading (I think it's a zero sum game, which generally just transfers wealth from the casual day trader to commercial traders), but it looks like it may offer a cheaper method to implement by US stock portfolio strategy.

I applied online for an account with CMC Markets on Friday, and today their representative phoned to request a fax of some identification (drivers licence and a rates notice) to finalise opening my account. As soon as this is processed I'll be sent a login and can transfer the initial $1000 required to begin trading. Although there is a normally a monthly fee of around $40 to use their trading software with live stock price data from the ASX, as I only intend to trade US stocks this data isn't needed and I won't have to pay any monthly fee.

Trades of US stocks are generally on a margin of 5%, so I should be able to buy a CFD to gain equivalent exposure to a US stock as my Comsec-Pershing $5000 trade for only $250. The minimum fee of $10 is high as a percentage of the trade value (4%), but is very reasonable compared to the underlying stock exposure (0.2% of $5000). I'm not sure that all the US stocks I've picked for my "Little Book" portfolio would be available as CFDs - only 541 "constituents" of the US market are available from CMC markets.

There's also a fundamental difference between buying stocks and trading CFDs - in the case of CFDs you are basically buying a promise from the issuing company, in this case CMC Markets. The CFDs issued by CMC Markets are not tradeable by any other CFD company, and if CMC Markets went out of business my investment in their CFDs would be worthless.

Anyhow, to replicate my actual US stock trades with Comsec-Pershing over the next 12 months (US$60K worth) will only cost me around US$3K to buy the equivalent CFDs, so it's not going to be a hugely expensive experiment whatever happens. If it works out I could save US$600 a year in trading costs, which would add directly to the ROI of my "Little Book" portfolio.

The Aussie market was up 58 points, or a nice round 1.0% today. All told I've recovered around 2/3 of the loss experienced since the market peaked at the end of February. It will be interesting to see if the market is really resuming it's bull run, or if this is a "correction trap" (I just made that up ;0 ). If the market does keep going up for most of '07 I'll be looking to buy a few more Index Dec-20 5,500 Put Option Contracts so that I've got some insurance against any nasty surprises. I'm still collecting the old paperwork for my stock portfolio so I can work out how much capital gains tax I'd be liable for if I liquidate my holdings and reinvest the funds into a tax-sheltered superannuation account in the new tax year.

Enough Wealth

I just couldn't resist a link to this research that shows that money can buy you happiness (or at least some "Subjective Well-Being (SWB)").

Adrian White, an analytic social psychologist at the University's School of Psychology, has found that "a nation's level of happiness was most closely associated with health levels (correlation of .62), followed by wealth (.52), and then provision of education (.51).
The three predictor variables of health, wealth and education were also very closely associated with each other, illustrating the interdependence of these factors.
There is a belief that capitalism leads to unhappy people. However, when people are asked if they are happy with their lives, people in countries with good healthcare, a higher GDP per capita, and access to education were much more likely to report being happy."



This is consistent with previous research that shows that household happiness had a positive correlation with household income.



Australia doesn't rank in the top 20, but I'd guess it's close to the USA (ranked 23). One reason I think that people generally have the opinion that "money can't buy you happiness" is that people expect too much - they think that if they just got a 10% payrise, or won $20,000 on the lottery, all their problems would be solved.

Enough Wealth

Here's the latest round-up on how the various PF (Personal Finance) bloggers who post their Net Worth each month are progressing.
Monthly Net Worth of PF Bloggers for FEB 2007:

Blogger Age Net Worth $ Change % Change
Accumulating Money 2x $49,081.15 -$206.56 -0.4%
Blogging Away Debt 2x -$36,102.00 $2,080.00 5.4%
Blunt Money 2x $232,315.28 -$165.97 -0.1%
Consumerism Commentary 30 $77,994.25 $2,751.93 3.6%
Crazy Money 27 $240,642.00 -$6,658.00 -2.7%
Enough Wealth 45 $1,066,778.00 $8,406.00 0.8%
Financial Freedom 30 no Feb data no Feb data N/A
Financial ladder xx $143,519.20 $2,921.96 2.1%
Finance Journey 25 $151,627.00 -$1,657.00 -1.1%
I'm a Saver 6x $1,470,081.00 $18,553.00 1.4%
It's Just Money 32 $159,240.44 $2,227.44 1.4%
Lazy Man and Money 2x $167,140.00 -$17,209.00 -9.3%
Make love, not debt 2x no Feb data no Feb data N/A
Making Our Way 37 $664,418.81 $21,778.32 3.4%
Mapgirl 3x $38,983.00 $2,800.00 7.7%
Moomin Valley 4x $389,704.00 $12,301.00 3.2%
Money Blog Site 25 -$21,064.32 $12,974.52 N/A
My Money Blog 28 $126,525.00 $3,036.00 2.5%
My Open Wallet 37 no Feb data no Feb data N/A
New Age Personal Finance 31 no Feb data no Feb data N/A
Savvy Saver 27 no Feb data no Feb data N/A
Seeking Wealth xx $16,952.83 N/A N/A
Tired But Happy xx $139,877.00 $3,565.00 2.6%

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.

Enough Wealth

Gold is traditionally a hedge against inflation, so with the possibility of the inflation ticking up and the stock market taking a breather it could be time to look a adding gold to a portfolio as an inflation hedge and part of an overall asset allocation to reduce volatility. Direct investment in gold bullion has drawbacks in terms of storage costs and the fact that it doesn't offer any income, only (potential) capital gains. Gold stocks are therefore more usually selected where some gold exposure if desired within a portfolio. I have some gold stocks in my Australian stock portfolio (NCM), and I've just read about a US-based gold mining stock General Metals Corporation(GNLM). As a small mining company reliant on the redevlopment of one old gold mine the prospects of this company would be greatly affected by fluctuations in the price of gold. Their recent press release outlines the details of their gold mining interests:

Press Release:

Gold Expected to Dominate the Investment Horizon, Experts Advise Early Stock Purchases (Reno, NV – March 5, 2007) Traditionally, gold has had an inverse relationship with the stock market. When stocks go up, the price of gold usually falls; when stocks flounder, the price of gold usually skyrockets. Some experts believe it could mean a lot for investors in 2007, because gold is once again catching the eye of the investor. For General Metals Corporation, the news couldn’t come at a better time. “With our plans to begin drilling at Independence Mine, we’re more than thrilled to hear gold is making a comeback,” states company CEO Stephen Parent. “We’re even more excited with our location; it’s a proven producer.” General Metals acquired the Independence Mine in northern Nevada and became a public company last year, trading under the symbol GNLM. Predominantly a silver mine from 1938 to 1987, the Independence Mine is estimated to contain over two million ounces of gold, as well as over two million ounces of additional un-mined silver. As the Independence Mine is essentially an island within Newmont Mining’s Phoenix Mine, the area is already a proven producer. According to Parent, they plan to remove the precious metals in two phases. “Phase one includes our ‘shallow’ targets,” says Parent. “The shallow targets contain less gold, but they’re easily and quickly accessible, which will encourage early cash flow. Phase two is where the majority of our gold will come from. It’s deep mining, but we expect it to produce 1.4 to 2 million ounces of gold.” They expect to produce 20,000 ounces of gold in the first year, 60,000 ounces in the second year and 70,000 ounces in the third year -- approximately $101 million from early estimates. The company also anticipates an additional $1.36 billion to be gained from phase two production. In an effort to increase their mining production, General Metals has recently acquired the Nyinahin Mining Concession in Ghana. Located in one of the most active exploratory areas in the world, this concession shares borders with several major mining companies, including Newmont Mining, Napoli Gold and Dunkwa Continental Goldfields. “Financial experts are predicting gold to play a key role in investor’s profiles during 2007,” adds Parent. “But due to the timely nature, potential investors will need to act quickly in order to maximize their gains.”


One thing to check out in researching small mining companies is the cost of production - you wouldn't want to invest in a company that is only profitable at the current gold price.



Enough Wealth