Enoughwealth's Personal Finance Blog

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

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

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

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

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

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

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

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

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

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

PORTFOLIO PERFORMANCE:

I'm currently ahead by 10.62% ($2,642.21) after deducting $65 for selling costs per stock. After deducting approx. $349.00 for interest paid on the loan to date (this portfolio is 100% geared) my total return is currently $2,293.21.



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

personal finance, investing, stocks

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

Take the Quiz

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

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


personal finance, investing, risk

1. Start when you are 20

2. Earn an extra $3 each and every day

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

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

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

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

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

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

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

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

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

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

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

retirement

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

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

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

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

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


personal finance, real estate

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

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

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

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

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

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

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

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

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

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

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

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

Blogger Age Net Worth $ Change % Change
Accumulating Money 2x $40,409.46 $2,284.37 6.0%
Consumerism Commentary 30 $63,922.06 $4,808.43 8.1%
Enough Wealth 44 $991,006.00 $43,435.00 4.6%
Financial Freedom 30 no Oct data no Oct data N/A
It's Just Money 32 $150,515.49 $2,101.65 1.4%
Make love, not debt ?? -$76,811.85 $2,201.65 N/A
Making Our Way 37 $608,465.24 $8,575.47 1.4%
Map Girl 32 $34,523.00 $701.00 2.1%
Money and Values 24 no Oct data no Oct data N/A
My Money Blog 28 $113,984.00 $4,123.00 3.8%
My Money Path 29 $100,260.00 $7,816.00 8.5%
My Open Wallet 37 $305,058.00 $7,058.00 2.4%
New Age Personal Finance 31 $133,184.27 $8,337.58 6.7%
Savvy Saver 27 $213,319.00 $4,507.00 2.2%
nb. Some ages have been adjusted as follows:
exact age provided = listed as given
"20's" = listed as 2x
"early 20's" = listed as 22
"mid-late 20's" = listed as 27
and so on.

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

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

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

money

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

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

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

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

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

*OK, this is actually two words

jargon

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

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

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

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

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

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

jargon

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

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

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

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

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

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

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

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

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

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

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

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

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

You can read the full story at SMH.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

wealth

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

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

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

There are no guarantees that your loan will be repaid.

and

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

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

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

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

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

But, as Prosper says:

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